Unpaid taxes, abruptly closed locations, and employee rebellions: Inside the 6-year downfall of Michael Avenatti's coffee chain

Atilgan Ozdil/Anadolu Agency/Getty ImagesMichael Avenatti.
  • Michael Avenatti, together with the actor Patrick Dempsey, acquired Tully’s, a coffee chain based in Seattle, for $US9 million in 2013. Dempsey left the partnership soon after.
  • Over the next six years, Tully’s parent company, Global Baristas, faced dozens of lawsuits over unpaid rent and taxes.
  • In March, federal prosecutors said Avenatti faced federal charges of bank fraud and wire fraud connected to his business dealings, including Tully’s.
  • Avenatti said in October that he sold the coffee company for “nearly $US28 million a long time ago.” Federal prosecutors say that this statement appears to be false.
  • “Myself and God knows how many other people have been waiting for this day for a long time,” Robert Sifuentez, a former Tully’s manager, told Business Insider.

Michael Avenatti’s 2013 purchase of a struggling coffee chain is coming back to haunt the celebrity attorney.

A federal grand jury indicted Avenatti on 36 counts of perjury, fraud, failure to pay taxes, embezzlement, and other financial crimes, according to an indictment that was unsealed on Thursday. If convicted, Avenatti could face up to 335 years in prison.

The grand jury said these schemes were connected with Avenatti’s business dealings, including his attempts to keep Tully’s, a coffee chain based in Seattle, afloat.

Avenatti purchased Tully’s out of bankruptcy in 2013, in partnership with the actor Patrick Dempsey. Last March, as Avenatti’s star was rising as Stormy Daniels’ lawyer, the chain abruptly closed all remaining locations. In late October, a Chapter 7 involuntary-bankruptcy petition was filed against Tully’s parent company, Global Baristas.

“Myself and God knows how many other people have been waiting for this day for a long time,” Robert Sifuentez, a former Tully’s manager, told Business Insider in late March, when a criminal complaint against Avenatti was first unsealed.

Here’s how Avenatti went from being Tully’s saviour to being linked to the coffee chain’s downfall by the federal government.

Tully’s search for a saviour

Tully’s was founded by Tom O’Keefe in Washington in 1992. The chain grew quickly – including through a 2006 franchisee deal in Japan – and attempted to brand itself as an independent, scrappy rival to Starbucks. But while Starbucks thrived, Tully’s struggled to become profitable.

In 2012, Tully’s filed for Chapter 11 bankruptcy protection, with more than $US3 million in debt.

The chain never managed to truly compete with Starbucks, another Seattle-based chain whose thousands of locations dwarfed the 131 Tully’s operated globally at the time. Keurig’s parent company, Keurig Dr. Pepper, which was then called Green Mountain Coffee Roasters, had purchased the chain’s wholesale business for $US40 million in 2009. The purchase turned it into Tully’s supplier, and the chain struggled to find the necessary money to pay for its coffee.

Then Dempsey swooped in, in an apparent effort to valiantly save the Seattle coffee chain – the perfect role for an actor best known for his part as Derek “McDreamy” Shepherd in “Grey’s Anatomy,” a TV show based in Seattle.

In January 2013, Dempsey was the public face of Global Baristas LLC when the company beat out Starbucks and five other bidders with a $US9.15 million offer to buy Tully’s more than 40 locations in Washington state.

“We met the green monster, looked her in the eye, and … SHE BLINKED! We got it! Thank you Seattle!” Dempsey tweeted, alluding to Starbucks.

Yet while the media focused on Dempsey, “McDreamy” was working with Avenatti – who had promised to fund the entire project, a complaint filed by Dempsey against Avenatti in August 2013 alleged.

‘McDreamy’ deal gone sour

Mike avenattiSportscar365/YouTubeAvenatti (right).

By the time he entered the coffee business, Avenatti had already worked on several high-profile cases, including a $US10 million defamation case involving Paris Hilton and an $US80.5 million class-action lawsuit against the Jewish cemetery Eden Memorial Park.

Meanwhile, Avenatti was also racing as a professional driver. It was likely on the racetrack that his path first crossed with Dempsey, a fellow race-car driver.

It didn’t take long for Avenatti and Dempsey’s business partnership to fall apart. The Tully’s deal closed in late June 2013; by August, Dempsey was suing Avenatti.

Avenatti was originally the sole owner and manager of Global Baristas before Dempsey joined as a partner, Dempsey’s complaint said. Dempsey said in the complaint that Avenatti had promised to provide all funding for the deal.

But Dempsey said Avenatti didn’t actually have the funds to buy Tully’s. In the suit, Dempsey said his business adviser found out through an internet search that Avenatti had borrowed $US2 million with an “exorbitant interest rate” of 15% to fund the deal, sparking Dempsey’s decision to sue his way out of the partnership.

“Avenatti concealed the Loan and the Security Agreement from Dempsey,” the complaint said. “He provided no advance notice that he was going to cause Global Baristas to borrow two million dollars, pay an exorbitant interest rate, and secure repayment in borrowed funds by pledging all or substantially all of the company’s assets and future income.”

The case was settled out of court, with Dempsey dissolving his relationship with Avenatti and cutting ties with Tully’s. In a statement, Dempsey said that he wished “the Company and Michael all the best” and that he was “happy to have been a part of the effort that brought awareness to Tully’s brand.”

Employees claim Avenatti went from saviour to accomplice in killing the chain

Avenatti apparently had big plans for Tully’s. A company representative, Suzy Quinn, told Bloomberg in 2013 that the brand had planned to open more than 25 stores in the US and 200 in China.

However, according to six former workers who spoke with Business Insider in 2018, it soon became clear that Tully’s was dealing with significant financial struggles. These former employees shared different stories from their individual coffee shops of experiences including the chain having trouble making payments – some to suppliers, some to landlords, and even some to employees.

“Corporate always postured that we were in good financial straits, but the feeling with myself and other managers was that we had been struggling for years,” a manager who worked at the chain for three years said. “All of the locations I worked at were in disrepair, with inadequate maintenance on equipment, furniture, counters, signage, etc. I don’t think we ever purchased new equipment, just recycled old units.”

One former employee, who held various roles at Tully’s over 3 1/2 years, started working for the company soon after Avenatti acquired the chain.

“It was really exciting,” she said. “And then we started to realise that nothing was happening.”

According to the employee, workers would wait weeks for items to be repaired, and she would typically have to fix things herself. Once, she said, a neglected shop in Mercer Island, Washington, was forced to close when its drive-thru roof collapsed after the corporate office failed to find the money to fix a leak.

The employee said workers were forced to wait to get Avenatti’s explicit approval to drop off the check for the week’s supply of coffee beans from Dillanos Coffee Roasters every Friday. The worker, who had firsthand knowledge of the situation, said Avenatti would often wait until the last minute to give his OK because otherwise the check might bounce. Avenatti denied the claim when Business Insider asked for comment in June.

Three employees told Business Insider that at times managers or the corporate home office would ask them to wait until a certain time of day to attempt to cash paychecks.

The federal criminal complaint against Avenatti, which was filed in February and unsealed in March, highlighted similar concerns, with employees telling a federal agent that payroll time was stressful because “cash was always tight.”

The complaint described a former employee, identified by the initials B.H., as saying that “Avenatti did not reinvest into the company and the stores were failing.”

“B.H. said that there was a ‘steady bleeding'” of Global Baristas, the complaint said, and that “Avenatti placed ‘band aids’ on it.”

Read more:
Former employees reveal what it was like to work at the mysterious coffee chain once owned by Stormy Daniels’ lawyer – including running out of coffee and questions about getting paid

Legal problems

As Tully’s struggled, Global Baristas was alleged to have failed to pay taxes, landlords, and rent.

According to the federal grand jury indictment, Global Baristas failed to pay federal payroll taxes for years under Avenatti’s control. From September 2015 to October 2017, Global Baristas failed to pay the IRS at least $US3.2 million in federal payroll taxes, according to the indictment unsealed on Thursday. That is in addition to thousands of dollars in state taxes the company failed to pay over the years, according to more than 20 state tax liens filed in California and Washington.

Avenatti allegedly obstructed the collection of taxes by the IRS by changing bank account information, lying to an IRS agent, and instructing Tully’s employees to deposit cash receipts in the bank account linked to Avenatti’s auto racing business.

At the same time, the indictment alleges, Avenatti transferred millions of dollars of funds from Global Baristas’ bank accounts into his own accounts and accounts associated with his law firms.

From September 2015 to December 2017, Avenatti allegedly caused roughly $US2.5 million to be transferred from Global Baristas accounts to accounts associated with his law firms. Avenatti used the funds for things such as rent, paying clients of his law firms, and – in one case – paying back $US8,459 he owed Neiman Marcus.

Read more:
Michael Avenatti’s coffee chain reportedly failed to pay $US3 million in taxes, as the lawyer used the company’s funds to pay his rent, shop at Neiman Marcus, and more

According to employees, the company also frequently failed to pay vendors. A former barista who worked at the chain for roughly six months in 2017 said that suppliers twice quit delivering products to her store, citing a lack of payment.

“The first time it occurred it was handled really quickly,” the former worker said. “The second time we were concerned about running out of coffee, and the stores ran out of espresso yet continued serving espresso-based drinks … The upper-level management came by and suggested how to blend the coffee we had to fake espresso.”

Global Baristas was also hit by lawsuits over rents from landlords, with at least 14 unlawful-detainer cases filed since the beginning of 2017. And in January 2018, Keurig Dr. Pepper, which owns the Tully’s brand and wholesale business, demanded that Global Baristas stop using the brand, alleging the company failed to pay $US500,000 in licensing fees for 2016 and 2017.

Tully’s demise

In March 2018, Tully’s abruptly closed all remaining locations.

“Dozens of people showed up for work on that March morning to find they were without a job,” an employee who worked at Tully’s for eight years told Business Insider in June.

“Many are college students that needed to work to help lighten the financial burden on their parents, to reduce as much as possible any future student loans, and to cover their day-to-day cash needs,” he continued. “Many are single mums that seriously depended on their income to support their families.”

Less than a week later, Quinn – Tully’s head of communications, who transitioned to work as Stormy Daniels’ head of media relations in 2018 – told The Associated Press that the company was “rebranding,” an effort that could take months.

In late September, Global Baristas agreed to never again operate a coffee chain or any other food or beverage business under the Tully’s name, as part of a permanent injunction with Keurig Dr. Pepper, which will continue to sell Tully’s-branded coffee.

Read more:
The coffee chain once purchased by Michael Avenatti and Patrick Dempsey is finally, truly dead

In late October, a Chapter 7 involuntary-bankruptcy petition was filed against Global Baristas.

Avenatti’s role

Since stores closed last March, Avenatti has publicly maintained that he sold his stake in the company and serves only as an outside attorney. Avenatti did not respond to Business Insider’s requests for comment.

However, employees who spoke with Business Insider and federal agents said that Avenatti both owned the company and had the final say on financial decisions.

“He was barking orders via phone calls and emails right up until he ghosted everyone last year,” Sifuentez said on Monday. “And as I’ve said before, every single paycheck I ever got from 2013 to the end in March 2018 had his signature on it.”

Employees who spoke with federal agents shared similar experiences – and scepticism of Avenatti’s statements otherwise.

The criminal complaint unsealed in March said that on March 8, 2018, a Tully’s employee identified as M.G. “sent Avenatti a text message confronting him” over statements that he was not Global Baristas’ owner, asking who she should go to for business decisions if he wasn’t.

“Avenatti responded everything still went through him,” the complaint said.

An employee who handled the company’s accounting transactions until September and was cited in the federal complaint said that Avenatti earned $US250,000 a year as the CEO and chairman.

In several interviews with Business Insider throughout 2018, Avenatti said he was no longer the owner or CEO of Global Baristas. Most recently, in October, he said he “sold the company for nearly $US28 million a long time ago.”

“To date, the government has been unable to locate any information confirming that Avenatti has sold Global Baristas LLC or Global Baristas US,” the complaint said. “To the contrary, based on the information available to the government, it appears these statements are false.”

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