Salon trio triggers lawsuits

Beauty buisness veterans open another salon despite troubles

A blackboard near the reception counter still announces a huge sale.

Hair and body products line shelves, magazines lay scattered on a table, barber chairs sit empty and computers remain on desks. Downstairs, laundry is piled in a dryer and a can of wax sits open near a massage table. Photos, magazine clippings and other paperwork are still pinned to walls throughout what used to be 1609 Salon & Spa.

The ill-fated salon, which shared its name with its West Lake Street location, looks as though it's ready for business. But 1609's doors have been locked since August, when it went bankrupt and its owner, Joan Droher, opened a new salon called Lou Lou's across the street.

Droher, her brother Tom Schmidt and his partner Jeffrey Lillemoe are no strangers to starting anew in the salon business. They have collectively operated six salons in Uptown since 2004: Schmidty's, Tommy's on Lake, Urban Retreat, 1609, Pagoda Spa and Lou Lou's. Of those, Tommy's and Lou Lou's are the only salons still open.

Urban Retreat, Schmidty's and 1609 filed for chapter 7 bankruptcy, which requires a court-appointed trustee to reduce all assets to cash and distribute the funds to creditors. Pagoda closed when Schmidt and Lillemoe's former landlord and business partner John Johannson sued them alleging unpaid rent and failure to pay an equipment loan.

The trio now faces two other lawsuits: one from Johannson against Schmidt and Lillemoe and another from John Stoebner, the trustee of the 1609 estate, brought against all three salon operators. Both lawsuits question the legitimacy of past bankruptcies and allege that the salon operators have hidden and moved the true value of their closed businesses to avoid paying creditors, who are out more than $1 million altogether.

Johannson's most recent lawsuit has concluded, but no judgement has been made yet. Stoebner's case will go to U.S. Bankruptcy Court within the next six months. He is seeking $675,000 for the value of assets transferred from 1609 to Lou Lou's and a judgement based on the amount of gross revenue former 1609 employees have earned for the new salon.

Droher, Schmidt and Lillemoe declined to talk about their business practices and financial situations, but their attorneys said their actions have been legit and their financial troubles are real. Frustrated employees and upset creditors are offering little sympathy.

From top to bottom

Tom Schmidt was a mogul in the salon industry for decades.

Urban Retreat, which he opened in the 1609 space in 1979 and eventually co-owned with Lillemoe, was one of the most successful salons in Minneapolis for much of its life and raked in several million dollars annually at its peak. Schmidt and Lillemoe decided to build on their success in 2002, when they opened Schmidty's, which operated across the street from 1609 and in a Downtown location.

Schmidt and Lillemoe's trouble began in 2003 when they sought to open Pagoda in the old Walker Library building at 2901 Hennepin Ave. They opened the business with the help of real estate developer Johannson, but it closed after just six months, when Johannson filed his lawsuit.

Johannson was successful in court. A $1 million judgment was ordered against Schmidt and Lillemoe in 2005. Johannson said he hasn't received any payment of the judgement from Schmidt or Lillemoe because they found a way to escape it.

&#8220Their way to avoid it was by filing bankruptcy,” he said.

Anticipating the judgment, Schmidty's and Urban Retreat filed chapter 7 bankruptcy, as did Schmidt and Lillemoe personally. The assets of their stores were sold to Droher, who created two new salons in the locations: Tommy's replaced Schmidty's and 1609 replaced Urban Retreat. Schmidt and Lillemoe weren't owners anymore, but were involved in salon operations.

By filing chapter 7 bankruptcy, Schmidt and Lillemoe were no longer liable for most of their debt, according to U.S. bankruptcy law.

Johannson's company, Brooklyn 55 LLC, has since brought another lawsuit against Schmidt and Lillemoe seeking to hold them liable for their debt.

The lawsuit alleged that the transfer of employees, client lists and other assets to Droher was intended to &#8220hinder, delay or defraud creditors and for inadequate value.”

Johannson said the value of Schmidty's and Urban retreat would have been much greater had they been properly handed over to a bankruptcy trustee as operational businesses. Instead, creditors were cheated when Schmidt and Lillemoe transferred assets to Droher, who used them to start new businesses, he said.

Stoebner contends that the bankruptcy of 1609 and Droher's creation of Lou Lou's Salon & Spa next door to Tommy's was a similar type of scenario.

&#8220With the threat of fraudulent transfer action against (1609) by the trustee for Urban Retreat, Schmidt and Lillemoe, acting through Droher and with her complicity, closed (Droher's) business, took all (her) employees and customers across the street to (Tommy's) and the newly formed Lucky Lucy.

&#8220Schmidt, Lillemoe and now Droher have become adept at quickly transferring assets, employees and customers in an effort to avoid paying creditors,” according to the complaint.

The business value of 1609, which generated $1,168,327 in gross revenue during the seven months it operated, was moved to Lou Lou's and Tommy's in the form of employees and client lists, Stoebner's complaint states. The move violated non-compete agreements signed by employees and reduced the value of the 1609 estate to nothing more than the cost of its furniture and leftover products, according to the complaint.

Had Stoebner received 1609 in an operational state with its employees and customers intact, it would have been more valuable and the debt owed to creditors might have been easier to repay.

Droher's attorney, James Reichert, denied many of Stoebner's allegations and said Droher once offered the entire 1609 estate as an operating business to Lindquist in an attempt to make peace, but was turned down. He said Lou Lou's, located in a space Droher was already leasing, is a smaller operation that does not employ nearly the same size staff 1609 did. Though some of the employees at Lou Lou's once worked at 1609, he said their change in employment was legit.

He said Droher was paying $15,000 a month in rent at 1609 while trying to pay employees and creditors. When her bank stopped loaning her money to cover payroll, she had to close. She's at Lou Lou's trying to recoup her losses, Reichert said.

&#8220This is a single mom with three kids trying to make a living,” he said.

Burnt bridges

Droher, Schmidt and Lillemoe have racked up hefty debts with several parties.

Philip Bamford, owner of the 1609 property, said he is out more than $1 million in unpaid rent and future rent from Droher's breach of a 10-year lease. Releasing the building will cost him an additional $100,000 in marketing and Realtor fees, he said.

Bamford said he sympathized with the salon owners when Urban Retreat closed and breached its lease and he was glad to work out a deal for 1609, but he regrets it now.

&#8220I was taken advantage of,” Bamford said. &#8220Not only once but twice.”

Bamford said he also spent $3,000 on plumbers in an attempt to locate the sewer problem his tenants complained about, but nothing was found.

Jay Miller, creative director of Imagehaus, a small Downtown branding firm, said projects for Urban Retreat, Pagoda and Schmidty's almost put his company out of business. Imagehaus is still recovering from more than $50,000 worth of unpaid services to the salons.

&#8220It put a bit of a bind on us and our constituents for about a year and a half,” Miller said. &#8220We had a really bad year largely because of that in 2005.”

Miller said he won't be doing business with the salon owners anytime soon, but he might consider another project if they achieve good financial standing.

Not all creditors are so forgiving. Burnt bridges with suppliers of certain beauty products forced the salons to change products multiple times. Bamford said the salons changed products at least three times during the past few years.

A former Urban Retreat, Schmidty's and Lou Lou's employee who wished to remain anonymous to avoid harassment from Schmidt, Lillemoe and Droher said changing the product line was difficult because it confused customers. Some of the new products were inferior, and employees had to lie about the quality and reason for switching, said the individual, who now works as a stylist at Winston's Barber Shop in Macy's Downtown.

Customers also frequently asked about the salon closures and name changes, things employees were not well informed about, the stylist said.

&#8220We were all pretty frustrated,” the stylist said. &#8220Having to defend (Schmidt, Lillemoe and Droher) all the time.

Clients started leaving Tommy's because of the changes and misinformation, said the stylist, who left for the same reason.

&#8220It was always circle talk and lies,” the individual said.

Jon Charles, a former business partner of Schmidt and Lillemoe and owner of Jon Charles Salon, said he believes changing salons and products has contributed largely to the couple's and Droher's troubles. Charles, who said he wishes his former colleagues success, said he got out of business with them when they decided to open Pagoda because he didn't think it was financially viable.

&#8220In this business, the only way to build clientele is to get in a place and stay there,” he said.

A new salon is planning to move into the 1609 space, Bamford said, but he wasn't ready to release the name of the company yet.

Jake Weyer can be reached at 436-4367 and [email protected].