Partners in McHenry D.C. Cobb’s restaurant spar in court over $100,000 withdrawal, licensing fees amid COVID-19 pandemic

The partners behind the McHenry D.C. Cobb’s restaurant are in the middle of a court battle in McHenry County over whether one of the owners properly withdrew $100,000 from the business bank account and used it to start a pizza joint in Arizona.

Court records show one of the owners, Dan Hart, was trying to be cautious as the colder seasons approached during the COVID-19 pandemic, pushing back against the other owner, Josh Carstens, who sought to withdraw funds from the company’s account. As the push-and-pull dragged on, Carstens was also in the midst of opening another restaurant in Arizona.

A hearing in the case was continued to May 17 earlier this week.

The lawsuit started last year, when Carstens filed a civil complaint accusing Hart of wrongly forcing him into a franchise agreement that would have him pay licensing fees to Hart, a former Woodstock City Council member, court documents show.

The suit involves only the McHenry D.C. Cobb’s location that opened in February 2018, not the Woodstock location.

Carstens alleged in the March complaint that Hart did not comply with the Illinois Franchise Disclosure Act when he asked Carstens to sign the licensing agreement in 2019, because it was not labeled as an agreement involving a registered franchise.

But Hart said he did nothing wrong and made a counterclaim that Carstens, without the proper permission, took $100,000 out of the bank account for McHenry Cobbs, the business entity that owns the McHenry restaurant that is equally owned by Carstens and Hart in 50% shares, according to court documents.

A judge in September dismissed without prejudice Carstens’ claims of being deceived into signing a franchise agreement, court records indicate.

Carstens wanted that deal to be nullified. Exhibits in the lawsuit show the McHenry Cobbs entity would have to pay 3% of gross monthly restaurant sales to 222 North Main, an entity controlled by Hart, according to state records, if Hart were ever to own less than 50% of McHenry Cobbs.

Court records also detail how Hart and Carstens paid themselves out of the $227,000 total the business received from the Paycheck Protection Program started in response to the COVID-19 pandemic.

Once the restaurant account received the funds, the partners agreed to pay themselves a little more than $15,000 from the financing program initially geared toward covering eight weeks of payroll. It is unclear from the court records whether they split one salary, or each received the $15,000 payment.

Troy Owens, who became Carsten’s attorney in the case after Sean Sullivan of the Downers Grove-based SBK Law Group withdrew late last year, declined to comment. Rob Hanlon, who became Hart’s attorney in January after Jennifer Gibson stopped representing Hart in the case, did not return a voicemail requesting comment.

Neither Gibson nor Sullivan made comments, and attempts to reach Hart and Carstens were unsuccessful.

But not all payments to the partners were agreed on.

After the $15,000 payment, Carstens in June asked through his attorney Sullivan for an additional $50,000 from the business’s bank account for himself, and said Hart should take $50,000, too.

Hart declined that request, but in July, Carstens’ attorney told Hart that he would be taking $100,000 instead, which Hart also never agreed to. A judge in September ordered Carstens to hold in escrow any funds remaining from that $100,000.

Carstens said in a September asked for more time to comply with the order, saying he could not follow it right away because the money has “all been spent upon necessary and reasonable expenses” and said he intended to provide a full accounting.

The judge also ordered Carstens to return $5,000 he paid in an attorney retainer from the McHenry Cobbs account, which he did.

Carstens said it has been standard for each partner to take money from the account without formal permission from the other when the account held more than six figures. He further pointed to Hart paying more than $13,000 for what Carstens said was a personal vehicle without formal consent.

“The well-established precedent throughout the history of [McHenry Cobbs] is that when funds in the operating account have reached a balance in excess of both $100,000, Josh and Dan were awarded distributions,” Carstens said in court filings.

He further alleged Hart locked him out of McHenry Cobbs’ email accounts and blocked his access to company financial records while he was out of state last year.

Last September, Carstens said more than $592,000 was in the McHenry Cobbs account – and even after accounting for the $227,000 in Paycheck Protection Program loans that the partners thought they may have to pay back, there still was $365,000 – which Carstens argued meant there were sufficient reserves to take his withdrawal, plus for Hart to take $100,000 himself to match.

But Hart wanted to be careful entering the restaurant’s slow season as summer was ending, especially in light of the pandemic’s hit on bars and eatery traffic, and did not want to take $100,000 for himself to leave the restaurant account with $265,000 in reserves.

Hart’s court filings also show Carstens asked to take an additional $100,000, and suggested Hart could also take another $100,000 to match.

“Third grade math dictates that the corporation would be left with $65,000. This is unacceptable,” Hart said in a court filing.

Hart denied cutting off his partner’s involvement in the business, and said Carstens was out of state and left Hart to run the day-to-day operations of the establishment by choice. He also said the vehicle payment referred to by Carstens was for a car wrapped in a D.C. Cobb’s logo and it is a business tool meant for marketing.

“Carstens was not kicked out of Cobbs. Carstens left for Arizona on vacation, never returning, and took Cobbs corporate funds to open a Buddyz in Arizona,” Hart said in a court filing in October. Buddyz is a pizza chain with four Arizona locations and stores in McHenry and Fort Myers, Florida.

The Buddyz website indicates Carstens has helped manage the McHenry location, directly across the Fox River from D.C. Cobbs, and became involved with the pizza joint’s San Tan Valley location. It was scheduled to open September 2020, according to the website, and has since opened.

“Josh is largely dependent upon these funds as [McHenry Cobbs] is still his primary source of income,” Carstens said in a court filing. “Josh is seeking relief from the court as it is futile that Dan will agree to any distribution as Dan has refused several previous requests to distribute funds in accordance with well established prior precedent between the parties.”