After the owners of the Tilted Kilt Pub & Eatery restaurant brand accused them of misleading potential franchise operators into expecting big paydays, the company Tilted Kilt has used to develop franchise restaurant locations in and around Chicago has returned legal fire, accusing Tilted Kilt of mismanaging its franchise system, undercutting its franchisees and developers at many turns, and scheming to cut the franchise development company loose years before its deal is up.

On Jan. 19, Rolling Meadows-based 1220 LLC, owned by brothers Robert, Emil, Anthony and Peter Baroud, filed suit in Chicago federal court against Tilted Kilt Franchise Operating LLC, a Wyoming corporation based in Tempe, Az., alleging Tilted Kilt breached its contract and is violating the law in seeking to terminate its deal with 1220 LLC without good cause before the deal’s scheduled expiration. 1220 LLC said Tilted Kilt’s actions have the potential to cost it as much as $22 million.

For those alleged actions, among others, the Baroud brothers and 1220 LLC asked the federal court to appoint a receiver to “take control over the Tilted Kilt franchise system,” in addition to ordering Tilted Kilt to pay them “actual and consequential damages … in amounts to be proven at trial.”

The Barouds and 1220 LLC are represented in the action by attorney Carmen D. Caruso and others of the Carmen D. Caruso Law Firm, of Chicago.

The most recent court filing closely mirrors a counterclaim the Baroud brothers filed six days earlier on Jan. 13, also through Caruso, against TKFO in response to Tilted Kilt’s November lawsuit against 1220 LLC.

In that lawsuit, docketed 1:15-cv-10377 in the U.S. District Court for the Northern District of Illinois, TKFO accused 1220 LLC and the Barouds of violating the terms of its so-called “area developer agreement” by allegedly providing financial projections to potential franchisees considering opening or purchasing franchised Tilted Kilt restaurants in Vernon Hills, Gurnee and Kenosha, Wis.

Tilted Kilt said the Barouds’ alleged actions violated federal and state laws, opened TKFO up to liability and threatened Tilted Kilt’s reputation.

According to the TKFO-initiated lawsuit, Tilted Kilt became aware of the Barouds alleged actions when those franchisees, after sustaining heavy losses in 2013, wrote to TKFO in March 2014 demanding TKFO refund their franchise fees and release them from their franchise agreement, because the restaurants did not produce the kind of income the Barouds had allegedly told the franchisees they would.

According to court documents, Tilted Kilt and 1220 LLC have had a business relationship since 2005, when TKFO gave the Barouds the rights for 25 years to develop Tilted Kilt franchises in northern Illinois, southern Wisconsin and northwest Indiana.

However, according to their counterclaim and subsequent breach of contract complaint, the Barouds said Tilted Kilt’s lawsuit is just the latest step in a years-long “scheme … to find a way to terminate 1220 as an area developer.” They alleged “TKFO has coveted for itself the revenue stream that 1220 is entitled to receive under its (area developer) Agreement.”

In furtherance of that alleged “scheme,” 1220 LLC alleged TKFO has repeatedly undercut the Barouds in a number of ways. Specifically, 1220 LLC’s counterclaim alleged TKFO has required franchisees to make “grossly unreasonable” purchases of equipment, supplies and products, cutting franchisees net income; negotiating agreements with beer and liquor vendors that place franchisees “at a severe competitive disadvantage,” and denying franchisees and area developers from negotiating more favorable arrangements; failing to develop good marketing plans and ignoring requests from the Chicago area franchisees for marketing assistance; failing to develop a better food and drink menu; allowing some franchisees to pay less than the full amount of required royalties or divert money that should be required to go to marketing and advertising; and not taking action to “recover liquidated damages” from closed Tilted Kilt restaurants in at least five Chicago area locations.

The Barouds said the level of alleged mismanagement by TKFO requires the court to appoint a receiver to take management of the Tilted Kilt system to protect the remaining value of 1220 LLC’s franchises and those of other area developers and franchisees.

“The ongoing and purposeful dereliction of duty by this franchisor knows no bounds,” the Barouds said. “In the absence of drastic equitable relief, irreparable injury will be inflicted not only on 1220 but on every other franchisee and area developer in the system.”

Tilted Kilt has been represented in the action by the firm of Cheng Cohen LLC, of Chicago.

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Carmen D. Caruso Law Firm Cheng Cohen

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