WATERTOWN — A federal judge ruled Friday that any Jreck Sub franchisee that has stated its intention not to continue or renew its franchise agreement with a new franchisor is ineligible to bid during an upcoming auction of the sandwich chain’s franchise rights.
The U.S. Marshals Service has been operating the chain since the previous principal of Jreck, Christopher M. Swartz, was sentenced in U.S. District Court, Utica, in July 2017 to 12½ years in prison for federal wire fraud and tax evasion convictions. As part of a plea agreement in the criminal case, Mr. Swartz agreed to forfeit his interests in Jreck.
Marshals are now in the process of auctioning off Jreck’s franchise rights by Nov. 8. The first step was for interested bidders to complete registration requirements by Oct. 7, including submitting $100,000 deposits. According to a letter filed Wednesday in district court by Assistant U.S. Attorney Tamara B. Thompson, the government received bidder registration packets from 11 interested parties.
The auction process is now in the midst of a two-week due diligence period which will allow approved bidders the opportunity to review key financial and contract information associated with Jreck’s assets.
However, on Oct. 11, an attorney representing the franchisees of seven Jreck locations filed notice with the court stating that the franchisees’ franchise agreement with Jreck has ended and the franchisees “do not intend to renew or otherwise extend their business relationship with the Jreck Subs franchisor.”
The letter was sent on behalf of Joseph E. Sullivan & Sons Inc., JDM Corporation, Twin Bridges Inc., and River Development Inc., which collectively represent Jreck locations in Ogdensburg, Canton, Potsdam, Malone, Massena, Gouverneur and a Jreck Express in Ogdensburg.
This letter prompted an Oct. 14 response from Orienta Investors LLC, which contends it has an ownership claim in the Jreck franchise because of money it previously invested in the chain. Orienta’s attorney, Scott M. Kessler, wrote that the filing of the departing franchisees letter was “intended to and actually will depress the value of the assets, resulting in a lower sales price” at auction. Because of this, he asked Judge David N. Hurd to not allow any departing franchisees to bid on Jreck’s assets to ensure that the departing franchisees “do not get to benefit from their actions.”
“Moreover, allowing the very entities and individuals that depressed the sales price of the Assets to bid on the very same assets, would create the appearance of impropriety and an unfair bidding system,” Mr. Kessler wrote.
The government supported Orienta’s position, with Ms. Thompson’s letter stating that “one of the 11 registered bidders is also a Departing Franchisee” without identifying the franchisee. She wrote that the U.S. Marshals Service “believes that it is obligated to provide this information to all registered bidders and to take steps to protect the integrity of the Auction.” She joined Orienta’s request that Judge Hurd bar all departing franchisees from bidding on Jreck’s franchise system and its assets.
In his decision Friday, Judge Hurd agreed with Orienta’s and the U.S. Marshals Service’s stance.
“Upon review of Orienta’s request, the Government’s responsive submission, and the record of the prior proceedings in this matter, the Court concludes that permitting the Departing Franchisees to participate in the auction would undermine the integrity of the bidding process,” Judge Hurd wrote.
A sealed bid auction is scheduled to take place Oct. 24 to Oct. 31. Following that initial round, the top four bidders will be invited to submit best-and-final bids Nov. 4 to Nov. 8. It is expected that the winning bidder will be notified by 5 p.m. Nov. 8. and will be required to close the transaction by Nov. 21.