Family feud over fate of Kirlins Hallmark retail empire lands in federal court; $20M at stake

By Scott Holland | Nov 11, 2016

Brother has been pitted against brothers in a $20 million federal lawsuit over the future of a company that once owned the largest number of Hallmark stores in the country. 

Donald W. Kirlin, of Colorado, filed the complaint Nov. 9 in Chicago against his brothers, Dale T. Kirlin Jr. and Gary F. Kirlin, both of Illinois, as well as attorney James A. Rapp and the firms of Schmeideskamp, Robertson, Neu & Mitchell and Hutmacher & Rapp. Also included as a plaintiff is D’Kids Partners, which Donald Kirlin formed Feb. 2, 1999, and presently owns a third of the common voting stock of Kirlins Inc. 

According to Donald Kirlin’s filing, the family owned “a once great and successful greeting card and gift shop company … which has been looted and decimated by the rapacious greed, dishonesty and malfeasance of two brothers to the great detriment of their younger brother, Donald. … The siblings’ parents spent 50 years building this business with the intent to provide for future generations; Dale and Gary Kirlin have spent 20 years tearing it down.” 

He further alleged Rapp “enabled the two older brothers,” while ignoring “palpable and obvious conflicts of interest.” 

Rapp served as legal and general counsel for Kirlins Inc., as well as for Donald Kirlin. He is currently a partner in the Schmeideskamp firm and also was a partner in the Hutmacher firm, which is dissolved. 

The complaint said Dale Kirlin, as CEO, and Gary Kirlin, as president, each extracted $20 million from the business, while Donald, who is a pilot, “received a small fraction” despite owning nearly a third of the company. A third sibling, daughter Barbara Kirlin, left Illinois for California in 1965 before settling in Houston. Their mother, Marion Kirlin, died in 1989 at 72; father Dale Kirlin Sr. died in 2009 at 94. When the parents retired, Kirlins operated more than 115 Hallmark stores in 10 states with 2,000 employees and revenues exceeding $120 million. 

Donald Kirlin said his brothers “proceeded to ransack, raid, and loot Kirlins Inc. … with self-dealing, conflicts of interest, disguised dividends, exorbitant salaries, bonuses, distributions, tax evasions, financial engineering and redemptions” and also “failed to cultivate all strategic business options or exercise options for the benefit of stockholders.” 

The complaint said Donald Kirlin encouraged his brothers to retire and hire professional managers and consultants. At the end of 2015, the company was down to 60 stores in seven states, with 1,250 employees and revenues close to $60 million. It also detailed a system under which the company paid bonuses to the father and four children, who then would lend some or all the money back to the business in exchange for demand notes, thereby disguising dividends and reducing the company’s taxable income. 

Donald Kirlin said his brothers and their families each got demand notes of more than $10 million under this system, while he has gotten $8 million by redeeming demand notes. He detailed the discrepancies in outstanding demand notes and said the figures constitute an unequal and thereby illegal distribution of dividends across shareholders in the same class of common stock. He further said that although Rapp served as his attorney, Rapp never told him he was getting less money than his brothers or advised him of his rights as a minority shareholder. 

The complaint also alleged Gary and Dale Kirlin transferred $16 million in retirement assets to a brokerage firm Dale’s son, Bradford, managed without consulting the board, and transferred the company’s health insurance account to the management of Dale’s son-in-law, Jeffrey Kennedy, also without board consent. It said Rapp was involved with both decisions, but never informed Donald Kirlin he had standing to raise an objection. The brothers also purchased a private airplane for corporate use, though Donald Kirlin said he objected and alleged it was primarily used for personal travel, even as the business was struggling and closing stores. 

The full complaint included 10 counts, including civil racketeering charges, oppression of a minority shareholder, breach of fiduciary duty, unjust enrichment, conversion, fraudulent concealment, equitable accounting, constructive trust, interference with prospective economic advantage and legal malpractice. In addition to a jury trial, Donald Kirlin seeks at least $20 million in damages and interest, as well as other compensatory damages and legal fees. He also wants the court to remove his brothers from company leadership and force a full accounting of corporate finances. 

Representing Donald Kirlin in the matter are attorneys from SmithAmundsen, of Chicago.

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