The state of California on Tuesday ordered Burgerim to pay nearly $4 million in fines and refund the franchise fees paid by more than 1,500 people after finding that the company violated numerous state franchise regulations.
The state Department of Financial Protection and Innovation’s administrative order, coming more than a year after Restaurant Business detailed the fast-casual burger chain’s collapse, said that Burgerim sold franchises to 1,550 people who paid $57.7 million in franchise fees between 2015 and 2019.
The order also says that a successor company, which it says was set up to hide assets from franchisees, collected almost $400,000 in rebates from third-party vendors through August 2020—long after Burgerim founder Oren Loni closed up shop and all but shut down the franchise’s operations.
The state has ordered Burgerim to offer to franchisees to rescind their franchise agreements—which includes an offer “to financially place the franchisees in the position they were in before they entered into the franchise agreements.” It also ordered the company to refund the franchise fee of any operator who requests it within 30 days of the request.
“Many franchisees drained their savings and retirement accounts to pay Burgerim’s initial franchise fee,” the order says. “Some used their credit card to finance the fee, based on Burgerinm’s promise of quick profitability, and a no-hassle refund. To date, many franchisees have not received the promised refund and are struggling to make ends meet.”
Burgerim in 2018 and early 2019 was one the fastest growing restaurant chains in the U.S. But by the fall of 2019, with the company’s problems worsening, Loni stopped paying employees, closed up headquarters and fled the country. After weeks of going without hearing from the company, franchisees received a letter indicating the company planned to file for bankruptcy—shortly before operators’ Internet accounts were lost when the company stopped paying internet service.
The company was set up as a franchise boiler room, selling the dream of ownership to hundreds of people, most of whom had no experience in the restaurant business and had little money outside of their ability to pay the franchise fee. The vast majority could not even open a restaurant.
Those who did get a restaurant open usually struggled to remain open. Most of the chain’s restaurants have closed.
According to the complaint, Burgerim offered refunds to franchisees as a way to get people to sign onto the franchise. The state says that Burgerim concealed a “staggering number of annual cancellations and refunds—some 287 franchisees received refunds between 2017 and 2019 of more than $8 million.
The company was “inundated with cancellation requests,” leading Loni to create a cancellation department. Ultimately, however, theh company stopped providing those refunds. The state also said the company failed too keep initial franchise fees safe in an escrow, instead using the fees to fund operating expenses.
The complaint also said that post-dated checks to franchisees in 2019 began to routinely bounce.
The complaint says that Burgerim also paid more than $305,000 to Jonathan Cheban, also known as FoodGod, who signed an endorsement agreement in 2018.
In June 2019, the complaint says, Burgerim created a new corporate entity called Burgerim Group, with Michael Bohbot as co-signatory on the account. After Loni left, Burgerim Group under Bohbot tried enforcing royalty payments “without adequately explaining” its authority to do so.
The state says that Burgerim Group “was formed for the purpose of perpetrating a fraud on, and shielding assets from, Burgerim franchisees.”
The complaint also notes that Loni in July last year tried to obtain a $261,200 Paycheck Protection Program from a California bank. That request was denied.