Krispy Kreme and doughnut sludge…

From the earliest days of footnoted, we’ve had something of a soft spot for Krispy Kreme (KKD). Since that post in September 2003, the stock has dropped over 90%. Given this, we tend to pay a bit closer attention to their filings.

So when they filed their 10-Q earlier this week, we took a bit closer of a read than we normally would for a small cap stock and were delighted to find a new disclosure about doughnut sludge. Actually, the words doughnut sludge never appear in the filing, but after reading the disclosure, it’s the first thing we thought about. Here’s a snip:

Since 2004, the Company has operated a commissary in the Gunston Commerce Center in Fairfax County, Virginia (the —County). The County has investigated alleged damage to its sewer system near the commissary. On May 8, 2009, the County filed a lawsuit in Fairfax County Circuit Court alleging that the Company caused damage to the sewer system and violated the County’s Sewer Use Ordinance and the Company’s Wastewater Discharge Permit. The County sought from the Company repair and replacement costs of approximately $2 million and civil penalties of approximately $18 million.

A quick look at the tenants at the Gunston Center shows that Krispy Kreme is still there, despite whatever sewage problems might have existed. And, happier still, especially for Krispy Kreme? The lawsuit was settled for just $750,000 — a far cry from the $20 million the county was looking for. Of course, given that the lawsuit is five years old, the attorney’s fees were probably higher than the actual settlement. (Correction: the lawsuit was filed in May 2009. The plant has been open since 2004).

UPDATE: We didn’t catch this earlier, but the Washington Post reported on this settlement earlier this week.