An early investor in Top Pot Doughnuts has filed suit, claiming the owners defrauded her of her stake in the company. Jan Johnson, who owns the Panama Hotel in the International District, and the well-known tea house on its ground floor, claims she gave Top Pot's founders $100,000 to open their first store on Capitol Hill. In exchange, she says, she got a 20 percent stake in the company. Her suit claims that through a series of "fraudulent" business moves, Top Pot founders Mark and Michael Klebeck and Joel Radin, managed to shrink her share. By the time they inked a deal with Starbucks in 2005, the complaint says, she unknowingly owned only a tiny percentage.
Now she's entitled to a only a small chunk of any money the business makes and on February 24, she sued the Klebeck brothers and Radin for fraud. "[The Top Pot founders] took steps to expand the business calculated to improperly dilute Johnson's interest in the Top Pot business," the suit says.The Klebecks and Radin got to know Johnson, an artist, when they opened one of their Zeitgeist coffee houses on the same block as her hotel, which she bought in 1986. The rooms are now used primarily for low-income housing. In 2000 she decided to add a tea and coffee shop and gallery on the street level. The Klebecks, Radin and their business partner Bryan Yeck helped her design the space.
Basically what happened next is this, according to Johnson's claims in King County Superior Court: In 2001, she agreed to invest $100,000 in their plan to open a donut shop on Capitol Hill. The store was successful, so the Klebecks and Radin decided to open another location on Fifth Ave. downtown. In court records, Johnson states she continued providing financial support, pushing her investment over $150,000 and buying them a commercial mixer for $2,500. Her ownership in Top Pot, Inc., the company formed to open the Capitol Hill store, increased to 25 percent.
During that time, she says, the founders would ask her opinion on things related to the downtown store and called her their partner in the project. What she didn't know, she claims, is that they actually opened that store as a different company: Top Pot Doughnuts Fifth Avenue, Inc.
Then in 2005, Starbucks approached the Klebecks about selling Top Pot donuts in stores nationwide. Johnson's attorney John Du Wors says that based on his review of his client's case, it appears the Klebecks decided to merge all their assets into one giant company, Doughnut Corporation of America. In order to complete the merger, Johnson had to sign off. She says in court records that the Klebecks brought her a merger agreement, assured her she was still a partner in the business and told her she needed to sign. Johnson says she asked to have more time to let a business advisor review the agreement, but the Klebecks said she needed to sign immediately, and she did.
Du Wors says his 65-year-old client is "uneducated, unsophisticated" and didn't understand what she was signing. Because of the merger, her large stake in the original company is now only a tiny percentage of Doughnut Corporation. Accordingly, she is entitled to a much smaller percentage of any profit generated by the Starbucks deal or any other money generated as part of the much larger Top Pot business. Top Pot has since opened stores in Wedgwood, Queen Anne and Bellevue.
Du Wors says his client has been in more than one car accident since 2005 and a potential conflict of interest arose with Johnson's first attorney. That all put potential litigation on hold for a time, he says. But on Feb. 24, she filed the suit seeking unspecified damages.
Another couple settled with the company in a similar claim. Nothing was filed in court at the time and Terry Thomson, the attorney representing the other investors, says he is bound by a strict confidentiality agreement and can't discuss it.
Mark Klebeck declined to discuss the specifics of the suit, as did his attorney Josh Brower. "Top Pot Doughnuts has always worked really hard to maintain positive relationships with its investors," Brower says, adding that his client "looks forward to resolving this as quickly as possible."
Du Wors says what happened to Johnson isn't unheard of in small business ventures. People are so desperate for money up front that they're willing to give investors a large percentage of their company. But once they're successful, they look for ways to reduce the percentage held by those initial investors. "They have buyer's remorse about the giving away so much of their successful company," he says.
Working on this post gave me a serious hankering for a Top Pot apple fritter. Just picked up a warm one and holy crap is it good.