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Originally published January 11, 2013 at 5:26 PM | Page modified February 21, 2013 at 1:41 PM

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Judge upholds Dempsey group's bid for Tully's

A bankruptcy court judge reviews Tully’s decision to sell its stores to an investment group led by actor Patrick Dempsey.

Seattle Times business reporter

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Score one for the employees and gift card holders. Not everyday, the average Joe wins. MORE
My god, is Starbucks insufferable or what? Best of luck to Dempsey and his partners. MORE
Seems to me Starbucks was the cry baby... MORE

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A group of investors led by actor Patrick Dempsey can buy Tully's Coffee out of bankruptcy, a federal judge said Friday.

The decision came after Dempsey's group, coffee giant Starbucks and other bidders sparred before U.S. Bankruptcy Court Judge Karen Overstreet for the 47-shop chain.

"We have a lot to accomplish over the next few months and years and I am excited to now call Seattle my second home," Dempsey said in an emailed statement.

The deal is expected to close by Jan. 26.

Bidders in court Friday had participated in a private auction for beleaguered Tully's last week, when the chain's management and creditors chose the Dempsey group's $9.15 million bid. Starbucks and a Filipino company called AgriNurture cried foul, saying their combined bids of $10.56 million should have been selected.

The judge sided with Dempsey's group. While other bidders may feel the result to be unfair, she said, "It is what it is, and we do the best we can."

Tully's CEO Scott Pearson said he's glad the judge supported their choice.

"The important thing is that we got to the end of this process before we had to do something that may have been tragic to Tully's brand, shops and employees," Pearson said.

Although Dempsey, best known as "McDreamy" from TV's "Grey's Anatomy," which is set in a fictional Seattle hospital, was on a set and not in court Friday, the hearing had plenty of drama.

Two lawyers likened the losing bidders' complaints to Monday-morning quarterbacking. Another called it whining.

Last week's auction was compared to the TV show "Survivor," and Judge Overstreet agreed that it was "not your typical Chapter 11."

Larry Ream, an attorney who spoke for the committee of unsecured creditors, reminded the judge that "the patient is dying."

In making her ruling, Overstreet noted that Tully's has been operating "from interim operating agreement to interim operating agreement" since it filed for bankruptcy protection in October. The most recent financing, the judge said, would run out this month.

In contesting the selection of Dempsey's group, Starbucks and AgriNurture argued that their bids were not chosen because of concerns about whether Green Mountain Coffee Roasters, which owns Tully's naming rights, would work with AgriNurture if it bought only some Tully's shops.

Starbucks wanted 25 Tully's sites, which generate about 70 percent of its sales, including 12 Boeing sites. AgriNurture bid for the rest of the shops.

Green Mountain, which does business with Starbucks, subsequently said that it would work with AgriNurture or Dempsey's group.

However, other factors played into the selection of Dempsey's group: It promised to retain Tully's about 480 employees, whereas Starbucks promised only to consider their applications.

Dempsey's investors also agreed to assume Tully's prepaid coffee-card obligations, whereas Starbucks would not, even for the Boeing sites. Boeing has a payroll-deduction program for Tully's cards, and about 40 percent of card activity occurs at those shops.

Although a lawyer for Starbucks said it would look after customers, the unsecured creditors' Ream said Starbucks "could give them a $100 card, and they could still file a complaint against this estate."

After Friday's ruling, Starbucks spokesman Jim Olson said, "We respect Judge Overstreet's decision and appreciate the time she spent hearing our point of view."

With the Dempsey deal, creditors are repaid with interest, and employees and leases are kept. Even some shareholders might receive money, which in bankruptcy cases is rare.

Overstreet went a step further in her comments: "Was it (the auction) complicated? Yes. Did it produce a fantastic result in this case? Yes, it did."

She explained in detail why she found the auction to be fair, saying it is not her job to second guess Tully's and its creditors' decision, but to make sure they followed correct procedures.

But to founder Tom O'Keefe's filing, which requested that the auction be reopened, she said such a move might make sense for a shareholder like him to get more money: "So why not roll the dice? Mr. O'Keefe does not stand to lose his job."

But hundreds of employees could have if the process took too long and Tully's could not stay open.

"I cannot gamble a sure result," Overstreet said.

O'Keefe said in a tweet after the hearing Friday: "The judge did a thoughtful job. Gave it all for the shareholders & I'm at peace! Congrats Patrick!"

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

On Twitter @AllisonSeattle.

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