Panda Express Still Faces Suit Over Ties to Rezko

(CN) - Panda Express must face allegations that its owners' business decisions were clouded by their friendship with Tony Rezko, the real-estate mogul who was convicted of running a pay-to-play political influence scheme, a federal judge ruled.

The Chinese take-out chain entered into a partnership in 1993 with Rezko-Citadel, a company owned by Antoin "Tony" Rezko, a close associate of former Illinois Gov. Rod Blagojevich.

The partnership aimed to open 80 Panda Express restaurants in the Chicago area and across the Midwest, under the entity Panda Express Chicago.

But Rezko-Citadel failed to meet this goal, in part because it attempted to operate a number of Papa John's restaurants at the same time. "The Papa John's restaurants always lost money and distracted Rezko from the profitable Panda Express business," U.S. District Judge Matthew Kennelly summarized last week.

To prop up these failing enterprises, Rezko transferred over $6 million from Panda Express Chicago to fund the failing pizza businesses. When his financial difficulties and his unrelated legal problems came to light, the owners of Panda Express and longtime friends of Rezko, Andrew and Peggy Cherng, knew they needed to distance their brand from Rezko.

However, "Andrew wanted to help Rezko if he could, and the Cherngs knew that he needed money." With the Cherngs' approval, Panda Express bought out the partnership's 50 percent interest in Rezko-Citadel. The sale contract included provisions "that made no sense because they defeated the purpose of dissociating from Rezko," according to the judgment.

Rezko was convicted in 2008 on 16 charges of public corruption, which involved demanding kickbacks from companies that wanted to do business with the state.

The same year, a former investor in Rezko's companies and the current majority owner of PE Chicago, Semir Sirazi, sued Panda Express and the Cherngs for fraud, unjust enrichment and breach of fiduciary duty. He claimed that they paid an unfair price for the partnership's interest and that Panda Express deliberately failed to inform him of the sale.

Sirazi previously sued Rezko over the sale of Panda Express Chicago "at a price many times less than the fair value."

Judge Kennelly last week threw out several fraud claims, as well as conspiracy to defraud and breach of contract. Other counts will move forward.

"A reasonable jury could conclude that the Cherngs knowingly participated in fraudulently hiding the sale of PE Chicago's interest from Sirazi and other investors," especially given that Andrew Cherng and Rezko were old friends, the decision states.

Peggy Cherng once expressed that "we want to take care of Tony," according to the judgment. Additionally, "Panda Express knew that Rezko wanted to receive cash from the sale so that he could protect his house from foreclosure by paying off business loans."

Sirazi cannot allege that Panda Express paid below fair-market value for the partnership's interest. "Fair market value was defined in the agreement as 'the cash price that a willing buyer would pay to a willing seller when neither is acting under compulsion and when both have reasonable knowledge of the facts," Kennelly wrote.

"Panda Express could not have breached a fiduciary duty by offering PE Chicago a low price or by taking advantage of Rezko's financial distress to obtain a low price."

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