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DENVER – Although Quiznos CEO Stuart Mathis assured concerned franchisees less than a month ago that the company didn’t expect any problems with its Chapter 11 bankruptcy, there is now a disturbing glitch in their plan.
Former owner/CEO Richard ‘Rick’ Schaden and his management team filed their objection in bankruptcy court, stating that Avenue Capital Group and Fortress Investments, first-lien lenders that took over the troubled chain in January 2012, had no right to sue their group on claims of fraud and breach of fiduciary duty. While the hedge fund companies allege the former Quiznos executives had deceptively lured investors during that first restructuring, the former executives claim Avenue and Fortress had cleared them of any future liability as part of the deal.
In a Delaware U.S. Bankruptcy Court filing on April 29, Schaden and his management team stated that this latest information must be made clear to unsecured creditors because they are being asked to choose between two forms of recovery under Quiznos’ reorganization plan: One, either a piece of potential proceeds from the lawsuit the hedge fund groups are planning to file or two, a share of 300,000 common interests in the restructured company.
Dow Jones Bankruptcy & Debt reported last week that once the administrative expenses related to the lawsuit are paid, 25% of the first $16 million in awards would go to unsecured creditors that opted to sue. The remaining 75% would be kept by Avenue Capital and Fortress, who are set to see their equity stakes erased when Quiznos emerges from bankruptcy. Avenue Capital has a 73% ownership in the company, and Fortress has a 16% ownership.
The article further states that the executives are asking the bankruptcy judge to reject the Chapter 11 bankruptcy plan, which swaps $444 million in senior debt for $200 million in new debt and a majority stake in the restructured Quiznos. The Schaden team argued that it was absurd that each of these former managers, as well as every other officer, director, agent and employee who worked for Quiznos before January 2012, conspired against these “two enormous hedge funds who hold themselves out as extremely sophisticated investors,” and that Avenue and Fortress relied solely on these "faulty projections" rather than the advice of their lawyers and financial advisors.
Dow Jones said the most significant point that the executives said was left out of Quiznos’ disclosures to creditors was that they were leased of all claims resulting from any omissions during the 2012 restructuring. The parties also agreed not to sue each other. And, in the event the executives were sued, Quiznos would have to defend them.
Another report on Law360, Los Angeles, told that the executives’ objection to the planned lawsuits states, “The debtors seek approval of their disclosure statement and to cram down on former manager creditors a Chapter 11 plan that violates important statutory mandates.” The Chapter 11 plan hopes to slash its more than $600 million in debt by two-thirds with an option for second-lien and unsecured creditors to get either equity in the sandwich chain or a portion of proceeds from the lawsuit planned against the former brass.
Quiznos current CEO Stuart K. Mathis filed a declaration on March 14, the day of the bankruptcy filing, stating that an investigation into the 2012 restructuring deal revealed an “apparent effort by former Quiznos executives to deceive others in the company and its leaders about the likely success of the reorganization that slashed the company’s debt by $300 million.” That plan proposed a special litigation agreement between Quiznos and lenders Avenue Capital and Fortress, to jointly pursue fraud and other allegations and split the proceeds, court documents state.
The objection to the bankruptcy plan was on behalf of former manager creditors: Greg MacDonald, Dennis Smythe, Richard ‘Rick’ Schaden, his father Richard F Schaden, Frederick H. Schaden, Andrew R. Lee, Patrick E. Meyers, John M. Moore, Thomas M. Ryan and Cervantes Master LLC.
A hearing on the plan is scheduled for May 12 before Judge Peter Walsh in Wilmington, Delaware bankruptcy court.
What will this latest filing mean to franchisees?
When CEO Mathis announced in his system-wide conference call April 10, he reassured franchisees the reorganization plan would move forward, despite the hearing date being rescheduled from April 25 to May 12. He told store owners that Quiznos approved the change to provide more time for their unsecured creditors to thoroughly review the strategy. Mathis said the extension was common in a restructure process.
“We met with this committee for the first time earlier this week. Based on our conversations with them we do not anticipate any major issues will arise and will significantly deter or prolong our court supervised process,” he said. He added, “We still expect to execute our plan successfully and emerge from this court supervised process on an accelerated basis. I know you are all anxious to hear more details of this plan, and I hope to share this information as soon as it is approved.”
John Gordon, restaurant analyst who is a close Quiznos observer, noted the Quiznos U.S. Chapter 11 will now be extended and will delay Quiznos actions to help franchisees via lower fees and purchasing rebates as Mathis had indicated. Gordon added, "The bankruptcy court has already scheduled Quiznos hearings for May, June and July, 2014 and the hoped May 12th Chapter 11 exit date doesn't seem likely. The judge will have to consider both the unsecured creditors and the Schaden group objections and how to maximize value for the bankruptcy estate. Part of the plan was to distribute future potential lawsuit winnings to the creditors. That will now be contested. This will take time. Quiznos cannot act until the judge approves the plan. So, more uncertainty exists going forward."
· Quiznos settles dispute with defunct franchisees (Denver Post)