Andy Wiederhorn will remain CEO of the bankrupt restaurant chain operator Fat Brands, at least for a few weeks.
But questions remain about his activities at the helm of the Beverly Hills, California-based company, as do concerns about what he may do while the company navigates the Chapter 11 debt protection filing.
“We remain concerned something might happen again,” said Jason Zakia, an attorney with White & Case representing a group of lenders, said at a court hearing on Tuesday. The group had asked the bankruptcy court to suspend Wiederhorn over an unauthorized stock sale after the bankruptcy filing.
“We have very little confidence in this management team’s way of governing these debtors.”
Attorneys for the lenders, the company and vendors agreed to a series of governance changes designed to keep management in check during the process. A select committee will exert more control over the bankruptcy process while both the chief restructuring officer (CRO) and his deputy must sign off on all disbursements.
The court also tabled a hearing on the motion to suspend Wiederhorn as CEO until early March.
At issue is a stock sale in late January. Fat Brands filed for bankruptcy on Jan. 26, citing $1.5 billion in debt, a poor structure of a series of securitized financing measures and a difficult operating environment.
Just before the filing, Fat Brands agreed to sell 9 million shares of Twin Peaks operator Twin Hospitality Group to White Lion Capital for $3.1 million.
Brands went ahead with the sale on Jan. 30, four days after the bankruptcy was filed and two days after the first hearing in the case. It did so without seeking court approval, a violation of court rules that require companies to get a sign-off on any transaction that goes beyond the “ordinary course” of business, like buying food or paying workers.
The stock sale prompted a group of the company’s bondholders to ask the court to suspend Wiederhorn, an extraordinary move that is rare in bankruptcy cases.
“The problem is … you get court approval before you do that non-ordinary course thing, not after,” Zakia said. He noted that Fat Brands’ attorneys, the chief restructuring officer or a committee of the company’s unsecured creditors did not know that the transaction took place until after it was completed.
“The debtor’s CEO and chairman just did this on his own, without telling anybody,” Zakia said. “That’s a big deal. This is not making a mountain out of a molehill.”
The bankruptcy of Fat Brands is complex, with several dozen corporate entities, including five that hold the bulk of the company’s debt, and two that are publicly traded. Wiederhorn is the fast-food chain operator’s chairman, CEO and majority owner. Family members dominate the company’s board and its executive team, including his four sons.
The hearing, and the debate about the proposed suspension, highlight some of the major questions about Wiederhorn and his continued control of the company. Lenders almost immediately questioned his shortly after the bankruptcy was filed—saying in one filing that he treated the company “as his personal piggy bank.”
Wiederhorn founded Fat Brands around the burger franchise Fatburger and the steak concept Ponderosa and Bonanza. The company amassed some $900 million worth of chains in 2020 and 2021, including Fazoli’s, Twin Peaks, Johnny Rockets and Round Table Pizza. Yet that left the company with a steep amount of debt.
Along the way, the company has faced lawsuits from shareholders, franchisees, vendors and lenders about a host of activity. Attorneys questioned some of those actions in the hearing on Tuesday.
In particular, Kris Hansen, an attorney with the law firm Paul Hastings who represents a committee of Fat Brands’ unsecured creditors, questioned retention bonuses and raises given to top executives early last month before the bankruptcy was filed. Two of those three executives are sons of Wiederhorn.
“We have a pretty serious concern” about the compensation, Hansen said. “That’s just troubling from an insider perspective.”
Ray Schrock, an attorney with Fat Brands with the firm Latham & Watkins, told the court that governance changes were made almost immediately once the stock sale was discovered. He also said that the brands and their management team are sound. And he assured that any potential conflicts involving Wiederhorn will be addressed.
“They have significant EBITDA,” Schrock said of the brands, referring to earnings before interest, taxes, depreciation and amortization. “There’s good businesses that are here. We think there’s a very sound management team. There’s going to be a process of some sort. Will it be a reorg process? Will it be a sale process? Who will be involved in that process? We’re certainly very experienced. If there are conflicts to manage, we’ll manage them.”
Alfredo Perez, the bankruptcy court judge hearing the case, told Schrock that the stock sale “was concerning.”
“This does violate the rule of no surprises,” Perez said. “And that’s concerning.”
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