In a federal court filing last Friday, Madison-based food delivery company EatStreet said it can no longer pay $1.2 million to settle a lawsuit brought by workers, and is likely headed for insolvency and foreclosure.
Workers’ attorneys question that claim.
The court filing marks the latest development in a years-long class action lawsuit brought by EatStreet drivers, who allege that the company violated the federal Fair Labor Standards Act and Wisconsin state wage laws by using tips to offset the required minimum wage, and by failing to pay for workers’ vehicle and mileage expenses.
In December 2021, EatStreet agreed to settle the case for a total of $1.24 million. That amount, just 27% of the $4.54 million the workers’ attorneys calculated to be their “maximum potential recovery,” was selected in part because EatStreet presented financial information indicating it would not be able to pay a larger settlement, according to court records.
In August, U.S. District Judge James D. Peterson of the Western District of Wisconsin rejected that deal because it didn’t explain why it created two separate funds. Attorneys for both sides agreed to a revised deal, which the judge accepted as “fair and adequate” earlier this month.
“It’s evident … that this case presents contested and unsettled issues about the application of federal and state labor laws to the ‘gig economy,’” Peterson wrote.
But on Friday, EatStreet notified the court that it would no longer be able to fulfill the terms of the settlement.
“Unfortunately, over the last three months, EatStreet’s financial circumstances have deteriorated rapidly due to multiple factors,” wrote their attorneys Paul E. Benson, Benjamin T. Johnson and Emi M. Passini of Chicago law firm Michael Best & Friedrich.
Among those factors, the company said, is that it defaulted on a loan with its “primary secured creditor” in September, though the company has negotiated an agreement that allows it to continue operating.
The company applied for an Employee Retention Credit with the IRS, for which it anticipated receiving a “substantial, eight-figure payment.” The IRS sent the company a preliminary denial in August. The company has appealed but has not yet received a response, it said in the filing.
EatStreet has also been looking for buyers or new investors, but the search has proven unsuccessful. “Throughout August, September, and October of 2022, EatStreet continued to engage in discussions with a national entity that expressed interest in purchasing or funding EatStreet,” the company wrote, explaining that fulfilling the settlement agreement would be part of any such deal.
By last Friday, the company said, “the potential transaction has not materialized and now, no longer appears likely.”
Then last week, the company said, its creditor indicated it plans to foreclose on EatStreet’s remaining assets. “EatStreet remains in negotiations with its lender, but given the dire financial situation at this stage, EatStreet’s lender is likely to initiate a foreclosure action (or some other insolvency proceeding) by the end of the year,” the company said.
EatStreet, through its attorneys, declined to comment. The company is requesting that the court extend the deadline by which it must notify workers of the class-action settlement from Dec. 15 to Feb. 13 or later.
Plaintiffs question financial claims
Attorneys for the plaintiffs, meanwhile, filed a motion Wednesday asking the court to deny that request and require that the company notify workers immediately, as previously ordered.
EatStreet has not presented any evidence to substantiate its claims about its finances, they say, adding that the company made no mention of these issues when working with plaintiff’s attorneys in recent weeks to move ahead with the settlement process.
“Defendants’ conduct over the preceding months suggests that Defendants’ Motion is brought for the improper purpose of delaying this matter and should be met with intense scrutiny,” wrote Summer Murshid, Larry A. Johnson and Timothy Maynard of Milwaukee law firm Hawks & Quindel.
Specifically, they say, “despite vague suggestions of insolvency,” the company remains in operation and in talks with potential buyers. It has not filed for bankruptcy or indicated plans to do so, they say.
“Defendants have provided no evidentiary support — either in the form of authenticated documents or sworn testimony – that in any way provide the Court or Plaintiffs to evaluate Defendants’ request for relief,” they write in the filing.
The potential beneficiaries of the settlement “stand to gain nothing from continued delays in this matter,” the plaintiff’s attorneys wrote. “There is no reason that Notice cannot be sent out immediately while Defendants wait and see whether they obtain the ERC payment or other financing.”
EatStreet was founded in Madison in 2010 and is headquartered at 316 W. Washington Ave. According to its website, the company serves more than 250 cities and 15,000 restaurants, making it “one of the largest independent online and mobile food ordering and delivery services in the U.S.”
During the COVID-19 pandemic, the company expanded its services, opening two “ghost kitchens,” or commercial spaces that provide takeout and delivery food only, in conjunction with The Great Dane Pub and Brewing Company.
In late 2021, it launched three more ghost kitchens of its own, along with a small virtual grocery store (Forkful Market) out of a storefront at 420 State St. Called HungerHub, it operated as its own LLC with two additional sites on Madison’s east and west sides.
Less than a year later, HungerHub suddenly closed, the Wisconsin State Journal reported in October. The company did not respond to the State Journal’s requests for comment at the time, but Friday’s court filing explains that the move was due to HungerHub’s “continued inability to generate a profit.”
In April 2020, EatStreet received more than $3.6 million in forgivable loans through the federal Paycheck Protection Program, according to a database created by investigative reporting nonprofit ProPublica. By June 2021, those loans were forgiven.