Garces announces sale of restaurant company, enters bankruptcy. Investors to fight back

Famed Philadelphia chef Jose Garces filed for Chapter 11 bankruptcy protection Wednesday, on the same day in which he said he was selling his multi-restaurant operation to a Louisiana hospitality company for $5 million.

Garces said that his restaurants would operate as usual and that he expected few, if any, reductions in his 750-member workforce once Ballard Brands takes ownership. Garces has scheduled a meeting with employees for Thursday morning to boost confidence. Garces' representatives said he would remain with the company as a "full partner" though his exact role was not immediately clear.

But Garces' early investors, who have a filed a flurry of suits against him in recent months, are expected to fight back soon with a legal filing aimed at blocking him from going into bankruptcy.

They are expected to demand that the federal court give primacy to their rival motion, brought Monday, demanding that a Common Pleas judge in Philadelphia oust Garces and appoint a receiver to run his restaurants.

Garces may believe that federal bankruptcy court is a better forum for him to reach a deal with major secured creditors.  Perhaps the key such creditor is M&T Bank, based in Buffalo, which has placed at least $7 million in liens on Garces' home in Center City and his farm in Bucks County.

>> Read more: Jose Garces, a chef inside a financial pressure cooker

By the same token, the unsecured creditors, such as early investors Tom and Maria Spinner and James Sorkin, may believe that they would fare better in Common Pleas Court.

The bankruptcy filing showed assets of $1 million to $10 million and liabilities in the same, broad range. Garces checked a box declaring that creditors numbered between 200 and 1000.

Under the rules for such bankruptcy pleadings, Garces had to list the 30 largest unsecured creditors who were not also insiders in his operation. Thus, the ruling provided no information about debts owed the Spinners or Sorkin or M&T Bank. It said the largest unsecured creditor was a Boston woodworking company, owed $387,000, followed by Pittsburgh's Reed Smith law firm, owed $336,000. The listed included many food purveyors, including three of the companies that have sued him in recent months.

The suit is part of a rash of litigation brought against Garces since last fall, charging him with shorting food suppliers on their bills, a Center City landlord for rent, and investors for unfulfilled promises of cash to be generated by his restaurants.

Garces,  in a statement Tuesday, said he was finalizing plans to fix "financial challenges." He did not detail his fiscal issues or his solution beyond the partnership announcement and bankruptcy filing.

"Our ratings and reviews remain as strong as ever, as has our overall commitment to a quality experience for our guests.  Those guests continue to be loyal and our revenues are consistent," Garces said. "Our business issues are not having, and will not have, any impact on the level of service we provide to our customers."

Garces, 45, has opened or managed about 30 restaurants since 2005, serving Spanish, Mexican/Latin, American and Japanese cuisine. Of those, he is still operating about half, including 10 in Philadelphia.

In interviews, he has blamed his financial problems on the unexpected closing of the Revel casino in Atlantic City, where he was operating four restaurants, and on heavy losses on an Amada location he opened in New York City.

He also said: "I'm not a financier. I don't have a master's in business … I'm not an accountant. I've hired people to do those things for me. I'm a chef. I'm a visionary. I'm the brand ambassador."

He added: "In my mind, I hired some good folks. Looking back, maybe they weren't the best choices to make. Maybe they were not the best fit for our situation. I acknowledge that and I take full responsibility for their actions."

In his statement Wednesday, Garces said the deal with Ballard Foods is expected to close in 45 to 60 days, he said.

"The last couple of years have been challenging, there is no doubt," Garces said in the release. "This step allows us to build on our solid reputation and performance to bring new concepts to life with a fresh start. To our employees, our patrons and so many of our partners — we want you to know that we are open for business and thank you for sticking with us."

Ballard owns the PJ's Coffee franchise and has a restaurant portfolio mostly in the U.S. Southeast.

Garces said his company last August retained CohnReznick Capital Markets Securities, a firm with offices in New York, Baltimore and San Francisco, to market the sale of Garces Groups' assets.  The filing Wednesday says Garces wants to keep working with CohnReznick, as well as with as the New Jersey law firm of Porzio Bromberg & Newman and the EisnerAmper firm, of Philadelphia, as a financial adviser.

The filing with federal bankruptcy court in Camden — Garces' enterprises includes New Jersey restaurants — includes a "unanimous written consent" to filing a Chapter 11 petition. The consent form bears only one signature: Garces'.

It lists him as the sole member of 11 businesses entities, but pointedly excludes the ones that include the other investors fighting him. Those entities were created in 2005 and 2006 to cover his early restaurants — places that remains great hits — Amada in Old City, and, later, Tinto and Village Whiskey, at 20th and Sansom Streets.

Those early agreements, copies of which were provided to the Inquirer and Daily News, explicitly say that a majority of the three investors — Garces, Sorkin, and the Spinner family partnership — must approve a bankruptcy filing.

"Under the operating agreement, it appears that he needs the consent of other partners in order to file a [bankruptcy] petition," Lawrence McMichael, a veteran corporate and bankruptcy lawyer who does not have a client in the Garces-related litigation, said Wednesday. He reviewed the pact at the newspapers' request.

Garces' representative said: "We disagree with the assertion being presented by the other parties and we will present as such in court."

McMichael, with the Dilworth Paxson firm in Philadelphia, also cautioned all sides in the fight — the bank, the investors, and others — to be careful about any bid to remove Garces.

He said the chef provided the artistic spark that drove the entire enterprise. Frequently, according to McMichael, the appointment of a receiver can jeopardize the value of a business for all concerned. Too often, he said, they are outsiders unfamiliar with key aspects of the enterprise business at issue.

Staff writer Michele Tranquilli contributed to this article.