A large lender to Fat Brands is suing the company to determine whether it should be allowed to use management fees and other cash to get it through the bankruptcy process.
352 Capital, which has been at odds with Fat Brands for several months, argued in a lawsuit last week that the restaurant chain operator has no right to use management fees paid through the company’s securitized lending structure to fund its reorganization.
If the hedge fund wins that lawsuit, the result could have significant implications for Fat Brands’ ability to fund its operations during the bankruptcy process. It comes as lenders and the company are in mediation during the bankruptcy process.
The lawsuit is the latest twist in the increasingly complex and controversial bankruptcy of Fat Brands, which sought Chapter 11 debt protection last month with nearly $1.5 billion secured debt.
The bulk of that debt was taken out through a series of securitized bond sales, using future company revenue to guarantee the debt. Fat Brands’ revenue generating assets were placed under a series of shell companies, which pay management fees to the company, which it then uses to pay salaries, rent and other expenses.
Fat Brands has argued in its bankruptcy filing that those management fees were not enough to fund operations, contributing to bankruptcy. A group of the company’s bondholders have disputed that assertion, largely laying the blame for the financial problems at the feet of the company’s founder and CEO, Andy Wiederhorn.
In its lawsuit, 352 argued that cash generated by Fat Brands’ restaurant chains belongs to those shell companies, including the management fees. And that would make those fees subject to a lien that bondholders have placed on those shell companies’ assets.
That would mean that Fat Brands would not be able to use those management fees to fund its reorganization.
Fat Brands last year defaulted on its debt after it did not have enough cash in its accounts to make a regular debt payment, which prompted negotiations over that debt and ultimately the bankruptcy.
352 is the same hedge fund that, shortly before the Chapter 11 filing, sued Fat Brands for not handing over stock in Twin Peaks as collateral for the defaulted loans.
The company and its bondholders are also at odds over the status of Wiederhorn. A group of lenders earlier pushed to have a trustee appointed to oversee the company and later asked that Wiederhorn be suspended, citing an unauthorized stock sale.
Attorneys for Fat Brands instead agreed to a series of steps designed to assuage lenders’ concerns over what Wiederhorn may do with the company during the bankruptcy process.
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