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Former business partner will seek new trial in $2.5 million defamation suit against Sugar Shack founder

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A former business partner of Sugar Shack founder and CEO Ian Kelley says he plans to seek a new trial in his $2.5 million malicious prosecution and defamation lawsuit against Kelley after the first trial ended with a hung jury.

Dustin Smith, an investor and former board member of Sugar Shack Donuts, said this week he and his attorney will try once again to convince a jury of the merits of his complaint.

The judge in the first proceeding declared a mistrial after jurors could not reach a unanimous decision. The trial was held over three days in Richmond Circuit Court, ending Aug. 31.

Smith’s lawsuit also names Kelley’s uncle, Michael Pinson, as a defendant. Smith, who co-owned the chain’s now-shuttered Florida locations and a percentage of the Richmond-based stores, originally filed his complaint in 2019.

Seven jurors had been selected to hear the case in August, but one of them contracted COVID-19, and the parties elected to proceed with six jurors.

The jurors were not polled in the courtroom on how they voted. But one juror contacted by the Richmond Times-Dispatch said the panel had voted 5-1 in favor of a judgment against Kelley.

The lawsuit stems from a rift between the business partners that centered on Smith’s felony arrest in January 2019 after Kelley alleged he’d taken $5,000 from the company. Court records show that Kelley swore out a warrant with a magistrate in Chesterfield on Jan. 12, 2019, alleging felony embezzlement.

Sugar Shack Donuts

The original Sugar Shack Donuts opened at 1001 N. Lombardy St. in Richmond in 2013. An expansion of multiple stores followed.

The charges were sought after Smith and eight board members for Sugar Shack voted to “eliminate two corporate positions awarded to Kelley’s family members” and turn over financial control of the company to Smith, according to Smith’s complaint. Kelley was the only board member to vote no.

Chesterfield County prosecutors withdrew the charge against Smith in March 2019, citing insufficient evidence to proceed. Smith alleges the defendants knowingly fabricated the charge.

“All five of us eventually agreed that Dustin proved both malicious prosecution and defamation,” said Abby Groetsch, a legal assistant for the Virginia Indigent Defense Commission, who served on last month’s jury. “Sugar Shack’s business structure is extremely confusing, so we all agreed that it was reasonable to believe that Dustin [Smith] thought that he had legal authorization to move money to new business accounts.”

Groetsch said the evidence also showed Smith had returned the money and tried to discuss things with Kelley, but Kelley “ignored him” and took out the arrest warrants two days “after everything was resolved.”

“We also got to review the warrants and saw that Ian’s [Kelley’s] testimony during the trial didn’t match what he had written on the warrants,” Groetsch said. “For the defamation, we were able to conclude that some of the statements made by Ian were lies, and he knew that they were false when he spread them.”

That included one statement she said Kelley made that Smith didn’t return the money after being asked. “But there was ample evidence showing that he did return it and that he let Ian know that it had been returned,” Groetsch said.

Groetsch said there also was no evidence showing that Smith planned to use the money he was accused of embezzling, “so, based on that, there was no reason to have taken out the criminal charges in the first place. The five of us had a few small disagreements but were eventually able to resolve them, but the sixth juror’s opinion was immovable, leading to the hung jury.”

Kelley’s attorney, Neill Bradley, declined to comment.

With the first trial ending without a decision, it’s up to Smith and his attorney, Steven Biss, to bring the case back for retrial and ask the court for a new trial date. As of Wednesday, no date has been set.

The suit follows years of trouble and shuttered restaurants for the embattled Sugar Shack owner.

Last year, Kelley settled a sexual harassment and discrimination complaint with former employee Virginia Williams out of court. The suit alleged that Kelly promoted Williams, then an 18-year-old part-time employee, to the position of store manager and used that promotion as leverage to start a sexual relationship with her.

In the current lawsuit, 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,” according to the suit.

The lawsuit also seeks $350,000 in punitive damages per defendant and $20,000 in attorney’s fees.