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Originally published Friday, January 22, 2010 at 12:32 PM

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Taco Del Mar files for bankruptcy protection

Taco Del Mar, a Seattle-based franchiser of 225 Mexican fast-food restaurants, filed for Chapter 11 bankruptcy protection Friday after several unprofitable years.

Seattle Times business reporter

Taco Del Mar Franchising, a Seattle-based chain of Mexican fast-food restaurants, filed for Chapter 11 bankruptcy protection on Friday, saying it owes creditors between $1 million and $10 million.

The chain's roughly 225 stores in the U.S., Canada and Guam will continue to operate, and individual Taco Del Mar franchisees are not in bankruptcy.

Larry Destro, who has been CEO since May, said he expects to slow growth at the company, which lost $2.8 million between 2006 and 2008.

Founded in 1992 by brothers James and John Schmidt, Taco Del Mar grew to about 70 stores by 2002, most of them in Seattle.

It then embarked on an expansion spree, signing up contractors known as "master developers" who paid for the right to find franchisees and spot new locations. In exchange, the developers receive half of the franchisee's initial fees and ongoing royalties.

The number of restaurants mushroomed to 270 by autumn 2008, Destro said.

Revenue also exploded, from $950,000 in 2002 to $5.4 million in 2005. But expenses climbed faster — including more headquarters employees and payments to master developers, he said.

After peaking at nearly 40 employees, Taco Del Mar has slimmed down its West Seattle headquarters to 16 workers, Destro said.

The bankruptcy process "offers an opportunity to grow without the constraints imposed by the current debt burden and threats of litigation," he said. "We're really going to focus on where the core market successes have occurred, in five or six key markets, and carefully consider how to expand rather than aggressively pursuing growth throughout whole U.S. immediately."

The holding company that owns Taco Del Mar, Conrad & Barry Investments, also filed for bankruptcy protection on Friday. Its debts include $448,632 to Banner Bank.

George Treperinas, an attorney at Seattle law firm Karr Tuttle Campbell who is representing both companies in bankruptcy court, said the company's debts include money owed to former landlords of failed franchisees. The company used to guarantee leases, but no longer does, Destro said.

The largest liability listed in Taco Del Mar's preliminary filing in U.S. Bankruptcy Court in Seattle is for $500,000. That's the amount that a Maryland franchisee seeks in a pending lawsuit against the company. The chain disputes that liability.

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Among the company's 20 largest unsecured creditors is David Huether, who stepped down as president of the chain in 2007, when he still owned a large portion of the company. Taco Del Mar owes him $86,875 that it borrowed for operating capital, and it owes $56,761 to co-founder James Schmidt.

Taco Del Mar stopped paying business and occupation taxes to King County in June 2006, according to the filing. It owes back taxes of $95,290 to the county, $81,182 to the Internal Revenue Service and $105,325 to the Canada Revenue Agency.

Other creditors include the Frye Museum Trust, which is owed $68,112 for past-due rent and other liabilities, and several parties for settlement agreements involving franchisees.

Taco Del Mar Franchising has about 40 shareholders, including the founding brothers.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com

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