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http://www.watertowndailytimes.com/article/20101222/NEWS03/312229976

Alteri parent companies file lawsuit claiming Jreck violated agreement
2002 PACT: Bakery seeks to be reinstated as exclusive supplier of rolls
By BRIAN KELLY
TIMES STAFF WRITER
WEDNESDAY, DECEMBER 22, 2010
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The parent companies of Alteri Bakery Inc. claim in a lawsuit that Jreck Subs Inc. is in violation of an agreement requiring the sandwich maker's franchisees to buy all of their rolls from the Watertown business.

Seaway Valley Capital Corp. and North Country Operating Corp., both of Sackets Harbor, filed state Supreme Court action Tuesday at the Jefferson County clerk's office against Jreck, Watertown, New York Bakery Inc., Syracuse, and three Jreck officers, Christopher M. Swartz, Daniel R. Patterson and Gary P. Baker.

According to court documents, in order to provide a consistent roll to all of its franchisees, Jreck entered into an agreement in April 2002 with Pastry Product Producers LLC to supply rolls to all Jreck shops within the state for 30 years. Alteri's is the successor to Pastry Product Producers and therefore is the beneficiary of the contract.

The action claims that Mr. Swartz has a controlling interest in Jreck and that at one point, either personally or through companies he controlled, he had an ownership stake in Alteri's until Seaway Valley Capital's subsidiary, North Country Operating, bought the bakery in 2008.


Seaway Valley Capital, whose CEO is Thomas W. Scozzafava, claims that Mr. Swartz "specifically represented" that the 2002 supply agreement was the operating agreement for Jreck franchises in the state.

Mr. Patterson, who is Mr. Swartz's father-in-law, became an Alteri's employee in July 2007. In March, he announced he had resigned as an officer of Alteri's and had become president of Jreck. In May, Jreck allegedly stopped ordering rolls from Alteri, instead using New York Bakery, a vendor with which it had a longtime relationship.

Seaway Valley Capital claims Alteri's operated under the supply agreement from 2007 until May without incident. When it sent a letter to Jreck opposing the vendor change, it is alleged that Mr. Swartz said there was a 2004 "cross-licensing" agreement made with other entities that superseded the 2002 supply agreement.

Seaway Capital Corp. claims that the 2004 agreement was never disclosed and that it never learned of the second agreement until it received a letter from Jreck attorneys Dec. 8. Mr. Scozzafava said he certainly would recall a second agreement that could jeopardize about 40 percent of Alteri's business.

"We didn't know about it," Mr. Scozzafava said. "If that one superseded the one he did give me, why did he give me the first one? Why would we have ever pursued a lawsuit if I knew there was another agreement?"

Mr. Swartz claims the agreement was included in all closing documents on the transaction and referred to in several other documents. He said the transaction was conducted using securities attorneys with "all specific disclosures made."

"Everybody knew about the '04 agreement, and to say they didn't know about it is blatantly not true," Mr. Swartz said. "It certainly should not be a surprise to anybody and, if it is, they should have done their due diligence and not been surprised."

Seaway Valley Capital maintains that representations made in 2007 and 2008 by Mr. Swartz and Jreck regarding the supply agreement were "essential" to the Alteri's purchase, as well as various other businesses owned by Mr. Swartz. Seaway Valley Capital claims that if it had known of the 2004 agreement, it never would have acquired Alteri's. It estimates Alteri's has lost more than $200,000 in profit because of the change in vendors.

Mr. Swartz said Alteri's is still an "approved" vendor for Jreck and Jreck still buys about 50 percent of its rolls from Alteri's, but the company began looking for alternative vendors because it became "concerned about the financial viability of Alteri's" and wanted to ensure itself of "a consistent flow of product" for its 40 restaurants.

"We don't want to hurt the bakery itself or its people, but we have a fiduciary responsibility to our franchisees," he said. "We have to have additional approved suppliers."

Mr. Scozzafava counters that Mr. Swartz is "trying to kill off Alteri's" by telling Jreck franchisees that the bakery "is going under."

"He's clearly trying to create a self-fulfilling prophecy," Mr. Scozzafava said. "He ratcheted up the liabilities of Alteri's Bakery before he left and now he's trying to ratchet down the revenues."

Mr. Swartz said Alteri's owes Jreck money and Jreck did everything it could to improve the business's financial situation.

"We still continue to try to help them," he said.

Seaway Valley Capital is asking for injunctive relief ordering Jreck to direct its franchisees again to buy rolls exclusively from Alteri's while the legal action is pending. It also asks that if the 2004 agreement is found to be valid, then damages be awarded to it for the loss of sales and profits and the assumption of "significant" debts, which it claims were incurred when Alteri's was being operated by Mr. Swartz, Mr. Patterson and Mr. Baker, a longtime Jreck employee.