A dispute with one of its largest franchisees has led to the closure of all but one of Del Taco’s restaurants in Colorado.
The franchisee, Newport Ventures, abruptly closed 18 locations in Denver and Colorado Springs on Thursday morning after losing the financial support of its lender, according to court documents.
The closures, which leave Del Taco with just one location in the state, follow Newport Ventures’ October bankruptcy after the franchisor terminated its franchise agreements.
And it’s all over an unpaid, $125,000 fee for 10 restaurants that have yet to be built.
Del Taco described the closures as “temporary” and said the restaurants would reopen “as soon as possible.”
“At this time, our Denver and Colorado Springs franchise locations are temporarily closed,” the San Diego-based chain said in a statement. “We will re-open these locations as soon as possible and will share updates as they become available.” One location, in Grand Junction, is owned by a different operator and remains open, the company said.
Still, the closures come at an increasingly difficult time for Del Taco, which has seen its sales struggle recently as consumers cut back on fast-food. Same-store sales declined 4.5% last quarter and executives with parent company Jack in the Box said those declines have continued this quarter.
Newport Ventures acquired 18 restaurants in 2023 for $14.1 million, according to court documents. The operator borrowed $11.8 million, $8 million of which was to fund the acquisition and another $3 million was for remodels.
In the process, Newport also agreed to develop another 10 locations.
But the operator said realized shortly after the acquisition that the restaurants needed greater repairs, maintenance and replacements than expected. It also cited “labor issues related to the franchisor.”
The “poor condition of the assets” led Newport to spend more cash than expected, draining cash reserves. The franchisee also cited “software issues related to the franchisor” for financial problems that led it to fall behind on payments to the vendor.
But in October, just one year after the acquisition, Del Taco declared Newport in default on that $125,000 development fee and ultimately terminated the franchise agreements.
That termination led Newport to file for bankruptcy.
“Thus, in a case where the debtor is generating over $25 million in annual gross revenue as well as $2.8 million in annual net income, and the secured lender is owed approximately $11.6 million and unsecured creditors are owed $1.3 million, the franchisor seeks to effect a forfeiture of not only the significant investment of the debtor’s principals but also the rights of all other creditors of the debtor based on the debtor’s failure to pay the $125,000 future development fee note for 10 new development stores,” Newport Ventures said in court documents.
Newport Ventures was allowed to keep operating the restaurants during bankruptcy through a chief restructuring officer (CRO), which was appointed in January.
The lender, National Bank Holdings, cited multiple technical defaults on the loans before the bankruptcy filing, including failure to pay sales taxes in the Town of Castle Rock, Colorado and the franchisee’s use of the proceeds.
The lender asked for the CRO in part to prevent the franchisee’s “misuse and misappropriation” of company funds and remove Newport’s owner, Shavand Aryana, from control of the company, according to court documents.
Del Taco supported the move, accusing Newport of poor operations. In a court filing, the franchisor said there were five instances between Nov. 25 and Dec. 31 in which the stores were found to be below company standards.
Inspectors in late January also found what was described in legal filings as “serious health and safety failures.” One location was temporarily closed on Jan. 23 after the hot water heater broke, according to court filings.
The franchisor also accused the operator of moving food from the taco bar, where tacos are prepared, to the grill just before an inspection so the food would pass the inspector’s food temperature test, according to a court filing. Del Taco accused the franchisee of having a “cavalier approach to the health and safety of its customers.”
But at 3:01 a.m. on Thursday, the CRO, Allen Soong, sent an email to Del Taco and others informing them that National Bank Holdings would no longer fund the franchisee’s operations.
“I am left with no choice but to cease operations immediately,” Soong wrote, according to court documents.
The franchisee’s employees received their own email on Thursday, informing them that their positions have been eliminated.
“It is with our deepest regret that we must inform you that the company’s continued financial challenges have forced us to make the difficult decision to close the stores immediately,” the letter read.
UPDATE: This story has been updated to add information from court filings by the lender and by Del Taco.
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