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Published: Sunday, 1/16/2011

Tony Packo family fight laid bare by court filings

BY SHEENA HARRISON
BLADE BUSINESS WRITER

Robin Horvath sat inside a conference room at the Tony Packo's Inc. offices on Toledo's east side, waiting to meet with his uncle Tony Packo, Jr., and his cousin Tony Packo III — a meeting he already knew wasn't going to happen.

Sitting with Mr. Horvath that afternoon on July 14, 2010, were his lawyer, a court reporter, a soft briefcase filled with $100,000 in cash, and two armed guards who helped secure the large sum of cash from the bank. At stake was ownership of the family restaurant chain that was started nearly 80 years earlier by his and Mr. Packo III's grandfather, Tony Packo, Sr.

Mr. Horvath, who owns half of the business, had planned to buy the Packos' 50 percent stake in the company, claiming he had the right under the company's bylaws to do so for that price. But the Packos declined to meet. After a half-hour of waiting, Mr. Horvath left. Nine days later, he sued.

"I believe I own Tony Packo's," Mr. Horvath told The Blade this month. His relatives adamantly disagree.

The nonmeeting was one of the colorful snippets in the months-long conflict that has become a publicly aired family fight over the landmark East Toledo business. The intrigue ranges from a heart ailment to late-night records searches to an ongoing criminal investigation to a business version of Russian roulette.

Who will own and run one of Toledo's signature businesses, known for its Hungarian hot dogs and its secret sauce, remains at question.

The fate of Tony Packo's Inc., which has $8 million to $10 million in annual revenue, rests in the hands of a judge who could decide whether the firm should be sold to an investor group that includes the Packos as minority owners, potentially taking the restaurants out of family control for the first time since 1932. Mr. Horvath would no longer be a company shareholder, if that bid is approved.

Lucas County Common Pleas Judge Gary Cook, who was to decide on the pending bid, stepped down from the case Friday. Mr. Horvath's lawyers asked Judge Cook to recuse himself this month, alleging he was biased. The case is awaiting reassignment.

To explain why the family members, who have shared offices for many years on the second floor of Tony Packo's building at 1902 Front St., have become adversaries, The Blade sought interviews with the parties in the past two weeks. Mr. Horvath agreed, but Tony Packo III repeatedly declined and his father, Tony Packo, Jr., did not respond to repeated messages. The Packos' lawyer also declined to answer most questions, referring to filings in the court case initiated by Mr. Horvath.

The firm's finances

Interviews indicate that the family squabble began with Mr. Horvath's heart problem.

The company's chief operating officer, secretary, and treasurer passed out on an escalator at the downtown SeaGate Convention Centre in December, 2008. He awakened by the time he reached the next floor. His doctors determined that he had an abnormal heart rhythm.

After a week in a hospital, Mr. Horvath, 54, was sent home with medication to manage his condition. He said the heart ailment and the medicine's side effects slowed him down, and he spent two to three days a month out of the office.

Because of the downtime, he said, he let go of the company's financial duties "temporarily" in early 2009, trusting Controller Cathleen Dooley and Tony Packo III, the company's executive vice president, to look after the books.

Mr. Horvath said his doctor gave him a "clean bill of health" in December, 2009, after surgery fixed his heart condition. He returned to work full time, asking Ms. Dooley to provide him with the company's monthly 2009 financial statements. That's when the conflict started, Mr. Horvath said.

When he received the records in February, 2010, he said, he found "anomalies" that raised red flags for him on how the company finances were being managed.

In his lawsuit on July 23, 2010, Mr. Horvath said he "discovered and identified a number of questionable transactions" paid by the Tony Packo's company "in which Packo III, Dooley, and/or Packo, Jr., were the payees or beneficiaries." He also said in the filing that those transactions didn't appear to have "proper supporting documentation."

On March 1, according to court documents, Mr. Horvath met with the Packos, the company's then-corporate attorney, Thomas Killam of Marshall & Melhorn LLC, and Jack Simonetti, who is not a family member and was added to the company's board in 2002 as a tie-breaker in family disputes. At that meeting, Mr. Horvath said in court filings, he "had identified more than $100,000 in questionable transactions that had been paid to Packo III and/or Dooley."

Each of the opposing parties in the case denies the accusations. James Rogers, a lawyer who represents the Packos, said they "strongly disagree" with Mr. Horvath's allegations.

Mark Jacobs, a lawyer for Ms. Dooley, declined to comment on details of the case. Ms. Dooley has denied Mr. Horvath's allegations in court filings and is countersuing him for defamation of character, based on his claims in court filings.

Family issues

Contention between the family members has happened before.

In 2002, Nancy Packo Horvath, the founder's daughter, and Mr. Horvath, her son, sued the Packos for libel, breach of duty, and trying to force Mrs. Horvath out of the business. A week later, Tony Packo, Jr., and Tony Packo III countersued to dissolve the company, claiming it was no longer practical to carry on the business because the owners were at an impasse.

Three months later, the families reached an agreement, electing to add an impartial third person to the company's board, Mr. Simonetti.

At the time, Mrs. Horvath called the dispute with her younger brother and nephew "painful and uncomfortable." Part of the problem, family members said, was that the company previously didn't have procedures in place to resolve family conflicts.

Ira Bryck, director of the University of Massachusetts Family Business Center, said some family-owned businesses have an advantage because the relatives often have an incentive to support each other. However, there often are complicated interpersonal dynamics and feelings that can lead to squabbles.

"I've seen where family members would rather have the other person lose than they themselves win," Mr. Bryck said.

Company bylaws

Mrs. Horvath died in 2003, and her company shares were left to Mr. Horvath, who has been with the company for 34 years.

Included in the 2002 agreement were a new set of bylaws and an employment agreement. Copies of them are included in court filings. Two key provisions from those agreements are now being disputed in court.

One is the "deadlock-breaking mechanism," a provision for how the Packos and the Horvaths could buy out each other's shares. The bylaws say, in short, that one family group would need to notify the other family group that they intend to buy all of their shares and are appointing an appraiser to determine the shares' value. That's followed by a second notice specifying the price they're willing to pay for the other party's stock, based on the appraiser's valuation.

The second party has 90 days to consider the offer and either accept it or flip it and buy the first party's stock for the offered price. The payment must be handed over in cash at closing. Family members refer informally to this provision as the "Russian Roulette" clause.

The separate employment agreement drafted at the time of the 2002 resolution says employees can be terminated for "the misappropriation (or attempted misappropriation) of any of [Tony Packo's] funds or property."

If Mr. Horvath's case prevails and either Tony Packo, Jr., or Tony Packo III is terminated, the bylaws say that person's shares would be offered for sale — first to the remaining Packo and ultimately to Mr. Horvath.

After Mr. Horvath raised concerns in March about company funds, he said, Tony Packo III approached him in his office and told him that they couldn't continue to work together. Mr Horvath said he told his cousin to refer to the provision in the company bylaws for buying out shareholders.

On April 14, 2010, Mr. Horvath's lawyer was sent an e-mail from Thomas Killam, who was then the company's corporate attorney, offering Mr. Horvath $1.25 million to be paid over 12 years, including $100,000 in cash up front for his shares. The e-mail, filed in court documents, stated that the offer was not "intended to trigger the 'Deadlock Breaking Mechanism.'?"

Still, on June 14, Mr. Horvath's counsel invoked the "Russian Roulette" clause, indicating to the Packos' attorney that he intended to buy the Packos' company shares, with a closing scheduled for July 14, according to court filings.

The Packos' attorney responded, in an e-mail exhibit in court documents, to say they would not attend "any purported closing" and "will not be transferring any shares to your client." In a September court filing, the Packos said the Russian Roulette provision applies only to forced sales and doesn't prevent a voluntary acceptance of a buyout offer. Also, the same filing said the deadlock-breaking mechanism "must be followed with exactitude" in order to be enforced, and that they never intended to invoke the mechanism.

It was this series of communications that, Mr. Horvath said, should have given him full ownership of the company. In his suit filed nine days after the July 14 nonmeeting, Mr. Horvath asked the court to grant a forced sale of the Packos' shares and monetary damages to him of at least $200,000.

Mr. Horvath told The Blade that for months early last year, anxious about what he viewed as problems with the company financial records, he would return to the Tony Packo's building at about 9 p.m. each night after he would have expected that Ms. Dooley and the Packos had left for the day. He sometimes stayed until 1 a.m., poring over the records.

A sensitive subject

Misappropriation is a sensitive topic for Mr. Horvath. He said employee theft nearly ruined Tony Packo's in the 1960s and again in 1979.

He has taken personal responsibility for implementing the company's "one strike, you're out" theft policy, firing employees who have stolen from the company in the past. Security cameras placed around the businesses have caught workers taking everything from two hot dogs — employees have a lunch allowance, but are required to buy additional food at a discount — to cash out of the company's registers.

On his allegations against the Packos and Ms. Dooley, Mr. Horvath told The Blade that he is concerned about company payments that don't appear to have "hard receipts," which specify the product or service that was bought and the place where it was delivered. According to court filings, Mr. Horvath has said $400,000 of the company's money has been improperly spent over several years.

In their court-filed response in August to Mr. Horvath's lawsuit, the Packos claimed that Mr. Horvath had not been "involved in the 'day-to-day' operations of the business for quite some time" and argued that he "has little knowledge as to the operations of the business." Company resolutions from July 26, 2010, stated that the company's accountants and auditors found Mr. Horvath's allegations to be "unfounded and without merit," with the exception of two items.

The Packos say, in court filings, that "approximately $3,000 of alleged improper payments were discovered" during a review by Sobb Roberts Inc., the Toledo accounting firm that handled the business' tax filings. One included a June, 2009, roofing job worth $2,460 at the home of Tony Packo III's mother. The second transaction involved $640 for a glass shower door apparently installed at TonyPacko III's home in August, 2009.

In both cases, Mr. Simonetti and either Tony Packo, Jr., or Tony Packo III signed agreements on July 26, 2010 — three days after Mr. Horvath filed his suit — requiring Mr. Packo III to repay the company for those transactions.

The agreements also said Mr. Horvath was to "cease and desist from making unfounded allegations and creating dissension and confusion" among Tony Packo's employees. A Packos court filing says that the two disputed transactions were "promptly repaid."

Mr. Horvath refused to sign the agreements, in part, he said, because of the "cease and desist" statement, which he called a "death certificate" to his inquiry. He told The Blade that he has been blocked from having full access to company documents that would allow him to see the company's financial state.

Mr. Simonetti, who resigned from the Tony Packo's board July 27, could not be reached for comment.

Tony Packo's owes Tony Packo III about $124,000 from a personal loan that he took out to help the company in 2006, Mr. Horvath said. The company was in financial trouble at the time after Tony Packo's closed a Findlay restaurant it had opened about a year earlier. "We took a $1 million bath in there," Mr. Horvath said about the loss.

It's unclear whether Tony Packo III may have considered the roofing and glass transactions part of his repayment from the business.

Mr. Bryck of the Family Business Center in Massachusetts said it is a good idea for family companies to have an independent board of directors and a financial referee who can manage the company's money outside of any family issues.

"It's important to document all of that flow of money, and it's important to have a CFO who can impose the proper oversight on the family," he said.

In addition to filing the civil suit, Mr. Horvath told The Blade, he has turned over his records of Tony Packo's finances to the Lucas County prosecutor's office.

John Weglian, chief of the special units division of the Prosecutor's Office, confirmed last week that he met with Mr. Horvath twice and said an "active investigation" is pending.

He declined to identify the targets or the basis of the investigation.

Bid for ownership

How the family argument will play out for Tony Packo's five restaurants and 200 employees remains to be seen.

An auction bid that would give Tony Packo III and other investors control of the company is awaiting judicial approval.

The bid, submitted during a closed auction last month, would have Packo family members owning 2 percent of the business, the restaurant-owning Mancy family 49 percent, and former local bowling alley owner Darrell Ducat and Huntington Insurance executive Mario Procaccini the remaining 49 percent. Mr. Horvath would own none of it.

Under the terms of the bid, Tony Packo III would have the right to buy out Mr. Ducat and Mr. Procaccini's shares during the next five years and then would own a majority of the business.

The bid amount was not disclosed, but the investors agreed to take on $5 million in secured and unsecured debt for the business.

Skutch Co. Ltd. of Ottawa Hills, a court-appointed receiver in the case, has filed a motion for Judge Cook to approve the Packos bid.

Principal Steve Skutch declined to comment to The Blade on details of the case.

Mr. Horvath did not submit a bid in the auction but told The Blade that he secured financing. He disagreed that outside investors should have been able to bid on the company and said that the process should only have been open to "my checkbook plus my bank versus their checkbook and their bank."

Furthermore, Mr. Horvath claims that he, without having better information about the company's finances and dealings, can't bid fairly on the company, he told The Blade.

Attorneys for the Packos argue, in court records, that Mr. Horvath and his attorneys "overestimated [his] ability to obtain financing and/or raise the capital necessary to submit a bid."

In a filing this month, Mr. Skutch said that "it appears that Mr. Horvath made tactical errors in this litigation" and may have filed the recusal motion "in an effort to undermine proceedings associated with the sale of the entities in this litigation."

Battling on

Although Mr. Horvath told The Blade that bridges have been burned between him and Tony Packo III, he previously viewed his cousin as his exit plan from the company. "He was my retirement ticket," Mr. Horvath said, referring to turning over the reins to the next generation.

Mr. Horvath told The Blade he does not think his uncle has misappropriated funds from the company but said he named Tony Packo, Jr., in the suit because he "possibly facilitated or ordained" improper activity.

"I think he's just being a protective father," he said.

Mr. Horvath plans to appeal if a judge approves Tony Packo III's pending auction bid.

Despite everything, he said the company should be able to survive. He said he hopes some semblance of family ties can be maintained if he gains control of the firm.

"We'd have to resolve the issue of whether Tony, Jr., and I can work together again," Mr. Horvath said.

Contact Sheena Harrison at: sharrison@theblade.com or 419-724-6103.



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