Starbelly.com founders face flurry of lawsuits

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As Internet entrepreneurs Bradley Keywell and Eric Lefkofsky live out a new economy fantasy, their old economy past is dogging them like a recurring bad dream.

The pair scored big in January, when they agreed to sell Starbelly.com, their 13-month-old e-commerce company, to Ha-Lo Industries for $240 million in cash and Ha-Lo stock. With the deal came top executive positions at Ha-Lo for the young businessmen, who also became the largest shareholders of the promotional products company.

But as the pair orchestrated Starbelly's rise, an apparel business they bought in 1994, Brandon Apparel Group, was headed in the other direction, leaving in its wake a trail of debt, litigation and hard feelings.

COURT-ORDERED REPAYMENT

Brandon's troubles continue to haunt Mr. Keywell, 30, Ha-Lo's president, and Mr. Lefkofsky, 30, its chief operating officer. Earlier this month, a state court judge in Wisconsin ordered Brandon and the two men to pay Johnson Bank after the Racine, Wis.-based bank sued to collect on $11.3 million in loans, which Messrs. Keywell and Lefkofsky had personally guaranteed. The order came in the form of a default judgment after the judge ruled that the executives -- both of whom have law degrees -- failed to respond to the bank's suit in a timely manner.

PLANT CLOSED

Johnson Bank isn't the only creditor feeling burned by Brandon, which sold licensed athletic apparel before shutting down last year. The city of Columbus, Wis., loaned Brandon money in exchange for a promise of new jobs, but wound up writing off part of the debt after the company closed its plant there.

"It was an unpleasant experience," said Randall Leuders, the city's attorney. "They basically bailed out of Columbus, and that seems to be their ongoing tactic." Both National Football League Properties and Major League Baseball Properties are suing to collect money they say Brandon owes them. And Brandon's former owner has filed suit to collect on a $1 million note he accepted as part of the purchase price when he sold the business to the entrepreneurs.

Messrs. Keywell and Lefkofsky declined to comment on the allegations in the lawsuits or their dealings with Columbus. In a statement issued through his attorneys at Chicago law firm Kirkland & Ellis, Mr. Keywell said Brandon "continues to have active conversations" with Johnson Bank "and strives to find common ground to rectify this situation as expediently as possible."

STARBELLY UNAFFECTED

The statement also stressed that the suit has no connection to Starbelly.com or any impact on its acquisition by Ha-Lo.

Ha-Lo declined to comment on any matters relating to Brandon.

Messrs. Keywell and Lefkofsky made out well when Ha-Lo bought Starbelly, which sold promotional merchandise over the Internet. Through indirect ownership, Mr. Keywell is now Ha-Lo's largest investor, holding about 8.2% of the company's stock, worth about $25.4 million. Mr. Lefkofsky, now the company's second-largest investor, owns about 7.6% of Ha-Lo, also indirectly, worth about $23.6 million.

In a lawsuit it filed in March, Johnson Bank alleged that the two men defrauded creditors by setting up a complex system of trusts and other vehicles to protect their Starbelly stock from creditors like Johnson Bank. The suit also alleged that Messrs. Lefkofsky and Keywell used the resources of Brandon to nurture Starbelly, while neglecting Brandon.

Though the judge dismissed those claims on jurisdictional grounds, he barred Messrs. Lefkofsky and Keywell from selling or transferring any of the Ha-Lo stock they control unless the proceeds go to Johnson Bank.

Brandon Apparel plans to appeal the ruling, according to its attorney, David Zott.

"The ruling was based on technical and procedural grounds, and does not address the substantive claims in the case," Mr. Zott said.

In 1994, not long after graduating from the University of Michigan School of Law, Messrs. Keywell and Lefkofsky bought Brandon Apparel, then based in Columbus. To help finance the acquisition, they borrowed $1 million from Brandon's former owner, Cap Pearson.

MONEY FOR JOBS

The company also received a $750,000 development loan from the city of Columbus, promising in return to create 38 full-time jobs. Yet Brandon shifted production and jobs to a plant in Wausau, Wis., eventually closing the Columbus plant. The city agreed to forgive $86,000 of the loan in 1997.

Brandon is also involved in a protracted legal battle with Mr. Pearson. The company stopped making interest payments to Mr. Pearson last year, and he obtained a judgment against Brandon in July, said Donald Schott, Mr. Pearson's attorney. Now, Mr. Pearson is pursuing a $500,000 wage garnishment from Mr. Lefkofsky, who guaranteed half of the loan, Mr. Schott said.

Steven Lefkofsky, Eric Lefkofsky's brother and attorney, has filed an appeal in the case, which stems from a lawsuit in Wisconsin. He declined, however, to explain the basis for the appeal.

PROFESSIONAL SPORTS SUITS

Brandon faces other lawsuits as well. National Football League Properties filed a breach of contract suit in July that claims Brandon owes it $195,000. Major League Baseball Properties, which had a licensing agreement with Brandon, also is pursuing a trademark infringement suit alleging that Brandon owes it nearly $80,000.

Brandon's current status is unclear. Mr. Keywell said in his statement that the company decided to close the business "as a result of market conditions."

Mr. Gallun is a reporter at Crain's Chicago Business.

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