RICHMOND, Va. (WRIC) — Ian Kelley, the founder and CEO of Sugar Shack Donuts and Luther Burger, is facing a lawsuit from an investor in the companies who claims Kelley defamed him and had him falsely arrested for embezzlement.

That investor is now asking for $3.2 million in damages – just the latest blow to a company that’s been rocked by public scandals and store closures across the commonwealth.

But Kelley claims that the investor, Dustin W. Smith, actually improperly took cash from a Sugar Shack location that, due to a complex web of interlocking companies and investments, he and the board of Sugar Shack Donuts LLC had no authority over.

Cash in Hand

Smith first filed his claim on Oct. 8, 2019. In it, he writes that the root of the problem was Kelley’s refusal to give up control of the company, even as the board lost faith in him.

In late 2018, Smith writes, he and the other members of the board voted to remove Kelley as CEO of Sugar Shack, saying he had made “self-serving and irresponsible” financial decisions. Kelley’s uncle, Michael Pinson, who is a co-defendant in the suit, was acting at the time as Kelley’s representative to the board and was the sole vote against Kelley’s removal.

Smith said that following the vote, he was entrusted with taking over financial responsibility for the stores. When Kelley didn’t respond immediately to questions about how to transition the company to new bank accounts, another board member asked Smith to take custody of cash deposits from the stores until the bank deposits could be made.

As a result, Smith took the cash and placed it in a safe in his secretary’s office – one of the few points of agreement between the two sides.

Then, in January, Smith said he was notified by a detective in Chesterfield that Kelley was pressing charges of fraud against him. Emails provided to the court by both Kelley and Smith show that on Jan. 25, Pinson, who was by then apparently the only point of contact between the board and Kelley, told the board, “As you may have herd [sic], Mr. Dustin Smith has been arrested.”

“The state of VA charged him with two counts of Felony Theft,” he continued.

However, searching court records in Chesterfield (where the store and company were located) showed no record of such a charge. Additionally, both the plaintiff and defendant agreed in court filings that the Chesterfield charges had been for embezzlement – an entirely separate felony.

Smith claims he returned to Virginia from vacation to face those charges, turning over the cash immediately. Then, he says, the commonwealth’s attorney decided to drop the charges, with the prosecutor telling a judge that “there’s not sufficient probable cause to sustain the criminal charges.”

Now, Smith wants $3.2 million in damages from Pinson and Kelley – plus 6% interest dated back to the initial filing. The judge has already dismissed a motion by the defendants to drop the case entirely, so the suit will go to a three-day jury trial from Aug. 29-31.

The Other Side of the Story

In a 53-page response submitted in December 2019, Kelley and Pinson broadly denied Smith’s allegations, claiming they acted legally to stop Smith from taking cash he had no right to in the first place.

At the heart of their argument is a web of companies and investor agreements governing the scattered (and now largely shuttered) Sugar Shack stores in Virginia. According to Kelley, Smith was an investor in Sugar Shack Donuts, LLC — a company that managed only the two stores in Virginia Beach and Charlottesville.

The remainder, including locations in Chesterfield and Richmond, were managed by companies with names like “1931 Partners” and “LB Midlo” — both apparently controlled completely by Kelley.

It’s from the store at 1931 Huguenot Road that Kelley alleges Smith unlawfully took cash.

“At no time did Plaintiff have authority over cash deposits from either the Sugar Shack store or the Luther store,” the response reads. Essentially, Kelley argued that the warrants for Smith’s arrest were issued properly by a magistrate — and the fact that the commonwealth subsequently dropped the charges is irrelevant.

Kelley and Pinson also claimed that they couldn’t be held liable for defamation, because all of the statements sent by email were made by Pinson as Kelley’s proxy, and that Kelley, as CEO of the company, was only acting in that capacity, and couldn’t be made to pay personal damages.

What Comes Next?

Now, the suit will move to trial in Richmond Circuit Court, where witnesses will include the magistrate who issued the warrant for Smith’s arrest, a Sugar Shack store manager and the accountant who oversaw the company’s financials.

According to Kelley, the board was actually dissolved in January 2019 and no longer wields any decision-making power. Kelley is still listed as Sugar Shack’s registered agent by the Virginia State Corporation Commission, and Dustin Smith is still listed as Vice President of Sugar Shack on his LinkedIn profile.