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Walking into City Bakery on West 18th Street in Manhattan, it was hard to imagine the popular eatery with the best hot chocolate in New York and a famous pretzel croissant could ever crumble.

The roomy, bustling cafe brimmed with locals and tourists any day of the week. Things got even busier during the Hot Chocolate Festival in February.

But the Union Square bakery abruptly shuttered its doors over the weekend after nearly 30 years in business, citing “too much debt … which is like quicksand” in a goodbye Instagram post.

“This is not what we wanted. Not what we expected. It’s where a bad path has led,” the message read.

The owner of the famed bakery, Maury Rubin, did not respond to requests for comment.

But a review of court documents and public records shows City Bakery had been in financial danger for more than a year, damaged by mounting debts and a shaky expansion that placed outposts in SoHo, the Upper West Side and even Tokyo.

In his pursuit of funds, Rubin turned to high-cost and risky agreements to deliver a sizable portion of City Bakery’s revenues to financing firms.

City Bakery also carried the financial burden of a $75,000 legal settlement in a labor dispute earlier this year after a longtime employee alleged he was shortchanged overtime pay, federal court documents show.

In its final months, the bakery faced nearly $600,000 in claims from multiple creditors who’d begun pursuing judgments for nonpayment, court documents indicate.

No-Win Case

Last Tuesday, days before the cafe shuttered, one supplier of funds filed a claim in Manhattan state Supreme Court in a case that City Bakery had zero chance to win.

That’s because Rubin had already signed a “confession of judgment” in exchange for a financial lifeline, known as a merchant cash advance — a high-cost, high-risk type of transaction that is now the subject of multiple New York State investigations following a Bloomberg News expose.

Rubin obtained a $75,000 cash advance from a Financial District firm called Kalamata Capital Group. He signed a document promising to pay Kalamata back $105,000 — by automatically handing over 15% of the bakery’s bank deposits every day, amounting to an estimated $700 in transfers daily, until the full amount was met.

I can't believe The City Bakery has closed. My uncle's pretzel croissants and marshmallows and cookies brought so much joy to so many. I always admired his passion not only for food, but for building a community around what he loved. Raise a mug of hot chocolate in remembrance. — Mallory Rubin (@MalloryRubin) October 20, 2019

By signing the confession of judgment, Rubin effectively admitted ahead of time to wrongdoing if the business fell behind — wiping away the right “to have your day in court,” according to Renée Johnson of the small business advocacy group Main Street Alliance.

“They can basically take all of your money from any account that they have access to. They can basically bankrupt you,” she said. “And that’s exactly what happens to so many people.”

Kalamata first advanced City Bakery funds in June 2018. Rubin signed a more recent agreement, including the $700-a-day terms, on Aug. 7, 2019.

On Oct. 15, KCG went to court seeking to enforce the already-signed judgment, demanding $87,766.39. Four days later, the bakery shuttered.

In a statement, the chief operating officer of Kalamata Capital Group, Brandon Laks, said the company “is truly sorry City Bakery decided to close” and stressed that many Kalamata Capital Group employees loved the establishment.

He said KCG made amendments to the funding agreement as City Bakery struggled and “without KCG’s capital and amendments, City Bakery would have closed, and jobs would have been lost, much sooner.”

“Unfortunately, many small businesses close and it is a risk KCG takes when we help fund and support these businesses,” he said.

Debt for New Yorkers Only

Until this summer, New York was a national magnet for a booming “merchant cash advance” business, thanks to state law that allowed firms to file confessions of judgment in New York courts.

When Kalamata merged last year with another merchant cash advance company, Kings Cash Group, the new entity said it provided $300 million in capital to more than 5,000 small businesses.

Bloomberg News analyzed data last year on more than 350 lenders and found cash-advance companies have obtained more than 25,000 judgments since 2012 totalling about $1.5 billion — all in New York.

The biggest player was Jersey City-based Yellowstone Capital, responsible for a quarter of those judgments, Bloomberg found. The New York Attorney General subsequently launched an investigation of the industry and subpoenaed Yellowstone.

Fed up with county courthouses being inundated with cases seeking to enforce the judgments, New York State Chief Judge Janet DiFiore prevailed on the Legislature to pass a law that forbids confessions signed with out-of-state businesses from being enforced in New York courts. Gov. Andrew Cuomo signed the bill Aug. 30.

One of my favorite spots in Manhattan to work. Go-to order: coffee and a baker's muffin to pick at for hours. Our sons grew up on City Bakery hot chocolate and pretzel croissants. Thank you, Maury, for all the warm, sweet memories. pic.twitter.com/Y1yN2vaxZK — Nell Scovell (@NellSco) October 19, 2019

But the measure, sponsored by Sen. Brad Hoylman (D-Manhattan) and Assemblymember Jeff Dinowitz (D-The Bronx), preserved the right of New York businesses like City Bakery to continue to enter into confessions of judgment as “a legitimate tool that may facilitate commercial transactions.”

Chris Vatter, a member of the commercial and federal litigation sector for the New York State Bar Association, explained that confessions of judgment simplify the “procedure for obtaining a judgment if the debt is not timely repaid.”

“It also provides some security that the debt will be repaid and may limit the amount of legal fees and expenses incurred in resolving a dispute over the debt,” said Vatter, a partner at Long Island-based law firm Jaspan Schlesinger.

Kalamata Capital Group’s Lak said the company voluntarily stopped using confessions of judgment as Cuomo prepared to sign the state reforms this summer.

Johnson of the Main Street Alliance says the New York exemption for local businesses underscores the need for a comprehensive, federal-level law banning confession agreements. A bipartisan bill along those lines is making its way through the House now, and was up for discussion at the Financial Services Committee last month.

Fond Farewells

Any reforms, if they happen, will be too late for Manhattanites’ favorite hot chocolate spot, however.

At City Bakery on Monday, New Yorkers stepped up to the cafe’s big glass windows, shocked to see a sign with a poetic farewell.

“City Bakery is Now Closed. What A Time. What A World This Was. What A Loss. A Loss For All Of Us. We’ll Miss This Forever,” it read. “Thank you New York.”

City Bakery is closing after 30 yrs in business. Countless author and agent meetings over pudding-thick hot chocolate. Too many cookies shared with editor friends on tough days at the office. Plus, those croissants got me through a pregnancy. End of a sweet era. — Abby Ranger (@ranger_abby) October 21, 2019

On its message on Instagram, the bakery said it tried “for more than a year” to fix its debt situation, but found traditional financing impossible — even for “a two-generation New York favorite.”

“People believe rent is the ultimate New York retail killer, but worth saying that if a normal bank loan had been available to City Bakery a few years ago, we would not be anywhere near the danger we’re in today,” the message read.

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