New Folgarelli’s owners default on purchase terms, lawsuit says

TRAVERSE CITY – The new operator of Folgarelli's Market has defaulted on its payments for the gourmet grocery store, and previous owner Donna Folgarelli has sued to get access to its financial records and control of its assets.

In late November, the new owner, Newco 424 West Front Street LLC, missed a $5,200 installment on a promissory note held by former operator and current landlord Folgarelli's, Inc., the lawsuit says.

Newco also failed to make a $2,100 lease payment in early December, according to papers filed in the Grand Traverse Circuit Court. Newco has been "almost universally late" in making payments to Folgarelli and her company. It has also submitted some bad checks in payment, the documents also charged.

The financial difficulties and the default appear to have emerged relatively early in Newco's three-year payment plan with Folgarelli's, Inc.

The new ownership was announced with fanfare in mid-2006. The incoming owners said they would carry on the tradition of the wine store and import delicatessen – a fixture downtown for three decades.

But by late 2007, Newco was having trouble making the $5,100-a-month payments on its purchase. And a balloon payment of about $328,000 was still looming in late summer 2009.

The former owner is also suing two members of the limited liability corporation, Virginia Powell and Eileen Cochran. At press time, Powell and Cochran, who are sisters, were representing themselves in the lawsuit.

They have filed an answer to Folgarelli's complaint, mostly denying knowledge of the basis for the accusations and holding their accuser "to the strictest proofs" of their charges.

Kurt Bowden, a shareholder in Bowerman, Bowden, Ford, Clulo and Luyt, P.C. in Traverse City, is representing Donna Folgarelli. He said he could not yet say whether there is a basis for a settlement. So far, it seemed as though the case is proceeding, he said in a phone interview.

The suit excludes Folgarelli's own son, Darric Newman, as a defendant. He had teamed up with Powell and Cochran to buy the gourmet store operations in 2006, and he is one of the buyer's listed on the purchase agreement.

The new owners did have experience with the gourmet food business before taking over the store.

Cochran had run a gourmet grocery store in Miami before moving to Traverse City. Powell contributed experience with catering, and Newman had expertise in wines.

But the store's inventory levels have declined and the current owners have disposed of two refrigerated display cases in violation of the original loan security agreement between the parties, Donna Folgarelli's complaint also stated.

Newco bought the gourmet grocery's assets and liquor licenses for $550,000 in July 2006 and was already operating it that summer. But it was a highly leveraged operation from the start. The lawsuit has laid bare the details of that transaction, which have been kept confidential until now.

As part of the $550,000 purchase price, Newco put about $50,000 down, and had to pay another $75,000 as partial payment for the store's liquor licenses for wine sales and a tasting room, documents indicate.

But a full $425,000 of the payment was handled with a promissory note to Donna Folgarelli and Folgarelli's Inc. To discharge that debt, Newco agreed to make the payments of about $5,200 a month over 36 months plus the balloon payment at the end of the term.

Newco was about 15 months and $77,000 into the repayment process when it began defaulting, according to court documents.

The deal only involved the sale of the business assets. Donna Folgarelli has continued to own the premises and became the business' landlord. A total of $72,000 in payments was scheduled to be made over the lease's 36-month term.

She also continued her involvement in the business as a consultant after the purchase. Under the terms of a consulting agreement, she was to receive $200 a month over 84 months.

When Newco failed to make its November loan payment and December lease payment, Bowden sent a letter to Newco on Dec. 5, noting that "payments on your obligations to our clients have been almost universally late. More recently, you have made payments consistently with checks written on accounts with insufficient funds.

"Inspection of your business premises has revealed that you have gotten rid of at least two substantial items of equipment and that your inventory is dwindling," Bowden also wrote.

Besides access to the books and control of the business' equipment and inventory, Folgarelli's Inc. wants the court to grant it the right to sell the business' assets again if it wishes. Cochran, Powell and Newman could not be reached for comment. BN