Don Reynolds Jr. is not going down without a fight.

The founder of the Wilmington-based coffeehouse chain Port City Java strenuously denies allegations of fraud and misappropriation of company funds detailed in a civil lawsuit filed last month by Port City Java Inc., Reynolds’ lawyer Randolph M. James said.

Reynolds, who deferred comment to James, was escorted off the premises of the company’s Market Street headquarters on Dec. 23, the same day the civil action was filed in New Hanover County Superior Court, James said.
James said he will file a counterclaim alleging that company director of operations Steven Schnitzler and others conspired to deprive Reynolds of his “lawful ownership interest” in Port City Java.
Reynolds, his wife Denise and a company he formed called Don Reynolds Properties, LLC, are named as defendants in the lawsuit. Denise Reynolds served as Port City Java’s director of brand development.
Reynolds founded Port City Java in 1995. Since then, the company has grown to own or partner with nearly 60 franchisee operations in seven states and two foreign countries, according to the Port City Java Web site.
Business as usual
There are a number of Port City Java-related business entities, some with different owners and directors. Reynolds also operates several companies, including Don Reynolds Properties LLC, which is central to the lawsuit filed by Port City Java Inc.
Schnitzler, who is now chief
operating officer of Port City Java Ventures, LLC; and president of Port City Java Inc., said the lawsuit will not affect the ongoing operations of Port City Java Ventures, the company that owns, runs and franchises cafes.
He won’t discuss the lawsuit,
but emphasized Reynolds’ apparent ouster won’t impact day-to-day operations at one of region’s most recognizable businesses.
“The future of the company is just fine. It won’t negatively affect our ability to do business,” Schnitzler said. “It’s an unfortunate situation, and I don’t think anybody wants to go down this type of path and that’s what we’re doing. That’s what I’m doing.”
Port City Java Inc. holds an ownership interest in Port City Java Ventures. Schnitzler is one of the shareholders.
He declined to name the owners of Port City Java Inc., their interest in the company, or its stake in Port
City Java Ventures.
The lawsuit alleges Reynolds took company funds for personal use, and that he and his wife “secreted” Port City Java assets. It states that in March 2005, the defendants channeled at least $187,500 designated by the company for Schnitzler into Don Reynolds Properties LLC to purchase property in the Macon County community of Highlands.
Schnitzler and Port City Java are entitled to sell the land in the western section of the state to recover the funds, according to court documents.
The basis of the lawsuit centers on “accounting issues” and Reynolds’ failure to provide Schnitzler and other members of Port City Java Inc. with pertinent information about his activities, Port City Java Inc., lawyer Samuel Potter said.
“It was requested of Mr. Reynolds that he provide an accounting of certain funds that were designated for the corporation,” Potter said.
“Whether he was unwilling or unable, he failed to do so, so the company was left with no choice but to take the action and to remove him as president.”

Schnitzler and Reynolds worked together for 11 years.

“Essentially there was money that was supposed to go to (Port City Java) Inc. Mr. Reynolds endorsed a check that was supposed to go to Inc. and that never made it to Inc.,” Potter said. Instead, records exist showing that the Highlands property was purchased soon afterward, he said.

Trouble brewing

Reynolds has been the public face of Port City Java since 1995. James said the civil action came “completely out of left field” to Reynolds and his wife. The Winston-Salem lawyer said the lawsuit and resulting publicity has proven devastating to both.

“In a relatively small business community (like Wilmington), it sounds bad,” James said. “I think Don is maintaining contact with his business folks and communicating with them to say, ‘Please don’t prejudge me based on a one-sided presentation.’ ” James said on Dec. 19, Reynolds received notice of a meeting to take place on Dec. 23 at Port City Java headquarters.

“He could not attend the meeting because of a previously scheduled appointment,” James said.

“They didn’t say what the meeting was about. The purpose was to get him to the meeting to serve him with the lawsuit,” James said
Reynolds, a Wilmington native, commuted between his Macon County home and work at Port City Java several days a week.

Reynolds was escorted from company headquarters after he returned from lunch, James said.

“I characterized it earlier as a
corporate coup de tat on a closely held company,” James said. “It was a complete waste of energy.”

Reynolds and his wife “had absolutely no reason” to suspect a lawsuit was coming, James reiterated.

“He’s been unlawfully terminated from Port City Java Ventures and his wife has been unlawfully terminated. We believe there has been a conspiracy by the individual shareholders,” he said. Schnitzler and at least one other shareholder, James said, “orchestrated this to take over his shares.”

James filed a motion Jan. 8 in Superior Court to dissolve an order of attachment granted after the initial lawsuit was filed that effectively locks up Reynolds’ assets. The motion maintains the plaintiffs’ case is “based on conclusory allegations and statements” relating to loan proceeds distributed to Reynolds and Schnitzler in March 2005.

James’ motion maintains Reynolds continues to be “member and manager” of Port City Java Ventures LLC and that Schnitzler, not Reynolds, was terminated from employment on Dec. 23. James said Port City Java Ventures LLC is the entity that oversees operation of each café and that Reynolds was not an employee of Port City Java, Inc.

A court date is tentatively set for the week of Feb. 9.

Three managers are listed for Port City Java Ventures LLC in the limited liability company annual report filed for 2008 with the N.C. Secretary of State. They are Port City Java, Inc.; Harbor Coffee, LLC; and IMC PCJ Ventures Management, LLC. IMC, based in Raleigh, is the parent company of the Golden Corral restaurant chain. In February 2006, the company purchased a 16 percent share in Port City Java.

Richard Urquhart, IMC vice president, said the company will take no active role in the lawsuit. He said IMC’s investment is in Port City Java Ventures LLC, not Port City Java, Inc., “so as far as I know (IMC) has nothing to do with it.”

“We’re a 16 percent owner, so that doesn’t give us much say,” Urquhart said. “We want what’s best for the company and we’re not involved in the daily operations. I just hope that the outcome of this is the customers and the franchisees of the company will be treated well.”

As recently as Sept. 26 of last year, Reynolds was listed as president and Schnitzler as secretary of Port City Java, Inc., according to a business corporation filing with the N.C. Secretary of State.

Reynolds also founded a corporation called Don Reynolds Investments LLC in 2002, listing himself and Port City Ventures as organizers.

In an annual report filed with the state in April 2007, the most recent document available, Reynolds is listed as the sole member and organizer.

Land sale won’t affect PCJ

At the same time the lawsuit is pending, the property leasing the headquarters of Port City Java at 2101 Market St. is listed for sale by Intracoastal Realty Corp. The 1.85-acre property and 20,000-square foot building is listed at $2 million. The owner of the property is Inspiration of Wilmington, LLC, whose manager is John V. Sutton Jr. of Ocean Isle Beach. Sutton is also a shareholder in Port City Java Inc.

Schnitzler emphasized that Port City Java Ventures has a long-term commercial lease for the property and its possible sale won’t affect operations at the Market Street location, which includes corporate offices and two roasting operations.

“We have a lease and that lease will be honored no matter who the landlord is,” Schnitzler said. “Port City Java Ventures is not for sale.”

Schnitzler declined to disclose when the lease for the 2101 Market St. property expires.

As the lawsuit against Reynolds proceeds, more information about Sutton and Schnitzler will come to light, James said.

“We don’t believe that Mr. Sutton or Mr. Schnitzler have been completely candid,” James said.

Another New Hanover County Superior Court lawsuit naming Reynolds, Port City Java Ventures and other umbrella companies was tentatively settled recently when former employee Michael D. Brandson filed a notice of voluntary dismissal without prejudice of all claims filed in 2005. The settlement covers a countersuit filed in 2006 by Port City Java Inc., Schnitzler and others.

It excludes Reynolds, who was named as a defendant in Brandson’s lawsuit and as a plaintiff in the countersuit, Brandson’s lawyer Stephen D. Coggins said.

“Donald F. Reynolds Jr. is not a party to any of the settlements. All claims against Mr. Reynolds in those two lawsuits remain pending,” Coggins said.

Brandson, a six-year employee and shareholder, was secretary of the company when he left in January 2002, owning 270 shares in Port City Java Inc.

His lawsuit states that on Oct.17, 2002, Port City Java Inc., conveyed all its assets to Port City Java Ventures LLC. With a 60 percent stake in the company, it became a controlling owner of the membership interests of Port City Ventures.

Brandson’s lawsuit alleged a breach of fiduciary duty, unfair and deceptive trade practices and asked the court to compel an inspection of corporate records. Brandson further alleged that as he tried to determine the true value of his shares, he was routinely denied access to company business and financial records and information about the legal relationship of the various Port City Java companies.

Brandson was also kept in the dark about the “wide range of business transactions that have affected, and will continue to affect, the value of Port City Java Inc. shares,” the lawsuit states.

“There has been a settlement of all those claims between those parties in both lawsuits, so dismissals of these claims will be filed shortly,” Coggins said earlier this month.

“A meeting of the minds” was reached between Brandson, Port City Ventures and other companies named in the lawsuit, he said.

Those include Port City Java Ventures, LLC; Java Partners, LLC; Port City Java, Inc.; PCJ Franchising Co., LLC.; Port City Roasting Co., LLC; and PCJ Investments, LLC.

Brandson’s 270 shares in Port City Java Inc. represents “a significant enough percentage that it triggered his rights as a shareholder under North Carolina law,” Coggins said.

“The matter of the treatment of his shares is subject to the terms of the settlement, but the terms are
confidential,” he said.

Similar circumstances

Some of the financial information sought in the Brandson lawsuit dovetails with materials requested from Port City Java Inc., in the Dec. 23 civil action.

Had Reynolds earlier supplied documents requested by Brandson, “various aspects of the Port City Java lawsuit just filed would have come to light,” Coggins said.

Brandson was not available for an interview.

“Mr. Brandson believes that Port City Java is an excellent company with an excellent product and has every confidence that its present management will bring the company to new heights,” Coggins said.

Port City Java operates or franchises nearly 20 coffeehouses in the Wilmington region alone, and more than 30 statewide.
Many investors have put their faith in Port City Java, which was 31st on Entrepreneur Magazine’s 2008 list of new franchises.

Schnitzler said the sluggish economy has slowed the opening of new franchises for the time being, but he remains optimistic about the company’s long-term growth.

“The economy is affecting everybody. We’re weathering it well,” he said. “While we can’t claim our sales are up tremendously, they’re not down.”

The “lull” in business and new management structure at the company affords an opportunity to fine-tune some aspects of Port City Java, Schnitzler said.

“We’re going to take that time to further develop the concept,” he said. “I don’t see any major changes and I don’t see any wholesale changes on the retail side. (But) we are not going to sit on our laurels.”

James said Reynolds has no intentions of walking away quietly from the company he founded 14 years ago.

“It’s worth fighting for,” he said.