SUGAR SHACK

The original Sugar Shack Donuts location in Richmond, Va. on 1001 N Lombardy St. on Monday, Aug. 26, 2019.

An investor and former board member of Sugar Shack Donuts has filed a $2.5 million malicious prosecution and defamation lawsuit against the Richmond-based doughnut chain's founder and CEO, Ian Kelley.

Dustin Smith, who co-owned the chain’s now-shuttered Florida locations, filed the complaint against Kelley and Michael Pinson, Kelley’s uncle, Oct. 8 in Richmond Circuit Court.

The 22-page document details a rift between the business partners that centered on Smith’s felony arrest in January after Kelley alleged he’d taken $5,000 from the company. Chesterfield prosecutors withdrew the charge in March. The suit claims, among other things, that Kelley maliciously prosecuted Smith and defamed his reputation by falsely having him arrested for embezzlement. Court records show that Kelley swore out the warrant with a magistrate in Chesterfield County on Jan. 12 alleging felony embezzlement.

Kelley did not respond to multiple requests for comment this week.

Sugar Shack Donuts opened its flagship location on Lombardy Street in Richmond's Carver District in June 2013. There are now more than a dozen locations throughout Virginia and Washington that operate under various ownership structures, including three in Northern Virginia and one in Washington, co-owned and operated by former Del. K. Robert Krupicka Jr., D-Alexandria.

Smith invested in Sugar Shack in 2016, according to the suit.

Smith and the rest of the board members for Sugar Shack Donuts voted to "eliminate two corporate positions awarded to Kelley's family members" and to turn over financial control of the company to Smith, according to the complaint, which does not include a timeline for the decision.

"After two years of repeated examples of poor fiscal management, Dustin and eight other members of the Board of Members made a collective decision that the management and financial decisions made by Sugar Shack's CEO, Kelley, were self-serving and irresponsible," the lawsuit states. "The vote was almost unanimous," the suit said. "Kelley was the lone 'no' vote."

Following the meeting, the suit said, Smith's assistant held a cash deposit of nearly $5,500 from one of the Sugar Shack stores and put it in Smith's office while awaiting information about the new corporate bank accounts so she could deposit the money.

A timeline for the meeting and the cash pick up were not included in the lawsuit, but on Jan. 10, 2019, the suit says Smith received a voicemail from Chesterfield County police advising him that Kelley was pressing charges for felony embezzlement. Smith deposited the cash in Sugar Shack's existing accounts immediately, the suit said, and provided deposit receipts to Chesterfield police. Kelley obtained an arrest warrant for felony embezzlement in Chesterfield against Smith on Jan. 12. Smith was later arrested, the suit said.

Chesterfield police spokeswoman Elizabeth Caroon provided this account: "On Jan. 9, police received a report that a known employee of Sugar Shack directed another employee to remove approximately $5,000 in cash from safes at the location in the 1900 block of Huguenot Road. The cash was deposited into the business’ accounts. Warrants were advised, and the complainant, who is also an employee of the business, obtained two warrants for felony embezzlement for the suspect. The cash was deposited after the initial report on Jan. 9, but before the warrants were issued."

Smith appeared in Chesterfield  general district court on March 6, and Chesterfield prosecutors declined to move forward with the case.

"The Commonwealth made a motion to nolle prosequi...," Chesterfield Assistant Commonwealth’s attorney Reneen E. Hewlett said in an email. "We took the action because the evidence was insufficient to prosecute this matter."

Pinson, Kelley's uncle, is named in the suit for allegedly making and publishing "numerous false and defamatory statements of and concerning Dustin," among other things, the lawsuit states. The suit includes multiple emails, allegedly from Pinson to the board members, including one dated Jan. 11 in which Pinson, in his capacity as a former U.S. Army Military Police officer, advised the board that Smith and the board's removal of funds from stores is a "violation of the law."

The suit contains another email attributed to Pinson and dated Jan. 30, with the subject line "The current Sugar Shack Donuts, LLC Board is Immediately Replaced with a new Board of Directors."

Smith seeks damages for "pain and suffering, severe emotional distress and trauma, fear, apprehension, anguish, stress and anxiety, public ridicule, humiliation, embarrassment, indignity, damage to his reputation, lost wages and profits, costs, attorney's fees and other out-of pocket expenses," the suit said.

The lawsuit, filed by Charlottesville attorney Steven Biss, also seeks $350,000 in punitive damages, per defendant, and $20,000 in attorney's fees. It asks for a trial by jury. No court date has been set.

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kpeifer@richmond.com

(804) 649-6321

Twitter: @KarriPeifer

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