Fatburger owner Fat Brands is being sued over allegedly masking a cashflow problem. | Photo: Shutterstock.
A shareholder of the troubled restaurant chain operator Fat Brands is alleging that the company used short-term loans to mask a liquidity crunch even as it transferred cash to various insiders including CEO Andy Wiederhorn.
The lawsuit, filed in a Delaware state court, also alleges that the operator of Fazoli’s, Fatburger and several other chains took out as much as $15 million in merchant cash advance loans, or short-term, high-interest loans, to satisfy its need for cash.
In the lawsuit, shareholder Kevin Gordon is demanding the ability to inspect the restaurant chain collector’s books to investigate whether the company committed mismanagement with these moves.
The lawsuit comes as Fat Brands faces potential bankruptcy after the trustee overseeing the company’s securitized financing demanded immediate payment of more than $1.4 billion in debt. That came after Fat Brands did not have enough available liquidity to make a quarterly payment on that debt.
It also comes as Fat Brands reached a settlement on a pair of long-running shareholder lawsuits.
Fat Brands did not comment on the lawsuit. But it did refer to a different lawsuit that it had previously filed against Gordon’s company, an investment advisor named Alagna Advisors, which has bought millions in Fat Brand bonds. We detail that lawsuit further in the story.
In this case, the shareholder alleges that, starting in 2024, Fat Brands used “reckless, high-interest, short-term borrowing to artificially inflate its liquidity position” and that these loans were not properly accounted for in the company’s financial documents.
The shareholder also alleges that Fat Brands authorized cash management bonuses and large stock bonuses to Wiederhorn and his sons for consulting services following the spinoff of Twin Peaks. “Each of these post spinoff transactions raises serious questions regarding the conduct and motivation of Fat’s management and directors in connection with the spin-off transaction in the first place,” the lawsuit says.
The lawsuit notes that, in 2023, Fat Brands fired its board of directors and replaced them with non-independent directors, including Wiederhorn’s three children and father-in-law, each of whom hold positions at the company.
The lawsuit notes that Fat Brands has not responded to Gordon’s demand for access to the company’s books.
According to the lawsuit, Fat Brands entered into three transactions with Alagna Advisors, an investment advisory firm that held a number of the company’s bonds. Alagna would buy bonds from Fat Brands’ portfolio. Fat would then agree to buy back the bonds at a higher price. One of those deals collapsed, resulting in an ongoing legal battle between Fat Brands and Alagna.
In February, Alagna bought $16 million of bonds from Fat issued by Twin Peaks but Fat Brands later refused to buy the bonds back, according to the lawsuit, which calls these transactions “put option loans.”
The lawsuit notes that, in June, Wiederhorn told Alagna that it couldn’t buy the bonds back so it could preserve liquidity while it worked to refinance its debt. The lawsuit suggests that Fat Brands used the bond sale to generate cash but did not account for Alagna’s option to buy back the bonds as a liability on its financial documents.
The lawsuit alleges that there were at least two “secret” put option loans, worth $7 million apiece, that Fat Brands would later refuse to honor.
Yet, in July, Fat Brands sued Alagna over one, apparently failed bond trading transaction, in which Fat Brands would buy $6.4 million worth of bonds related to Fazoli’s that Alagna held. The investment advisor would then buy $6.4 million in bonds related to Fazoli’s that Fat Brands held. Fat Brands said that it was Alagna that had liquidity problems.
According to that lawsuit Fat Brands kept its part of the bargain and wired the advisor $6.4 million. But Alagna didn’t hold its end of the bargain. The investment advisor is seeking to dismiss that lawsuit, which was filed in a New York state court.
In that lawsuit, however, Fat Brands said that making that $6.4 million in payment, and not receiving funds back from Alagna, left it in “overdraft position” with its bank, and noted that the bank was charging the Fat Brands interest until the funds are returned.
Meanwhile, Fat Brands has taken out merchant cash advances (MCA) since March of this year, according to a lawsuit. Such advances come with high interest rates and can be “an early indicator of potential wrongdoing or mismanagement,” according to the lawsuit.
Barbeque Integrated Inc., the technical owner of the Fat Brands-owned Smokey Bones, sued one MCA company, Funders App, seeking a restraining order to keep it from collecting on more than $6 million in three separate loans made from May through July.
Those loans have an interest rate of about 100%, according to legal documents.
Fat Brands has apparently been entering into such deals for a while. According to the lawsuit, it borrowed $6.5 million in six different MCA transactions.
Fat Brands is facing challenges on multiple fronts. Franchisees of Hurricane Grill and Round Table Pizza have sued the company, accusing it of raiding their marketing funds. Round Table was left without advertising for months after Fat Brands missed a payment to a marketing company.
UPDATE: This story has been updated to add details of a lawsuit Fat Brands filed against the investment advisor.
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