Wednesday, October 22, 2008

Big-time Waffle House guy in trouble

Local entrepreneur James L. Shaub II's job running SouthEast Waffles, a 113-restaurant Waffle House franchise based in Nashville, remains under the scrutiny of creditors amid whispers of missing millions and the shadow of a pending Chapter 11 bankruptcy hearing.

Next week, Shaub could lose his job at what is now the second-largest franchise under the umbrella of Norcross, Ga.-based Waffle House, which granted SouthEast Waffles its franchise here.

Executives with the Waffle House parent company want a bankruptcy judge to oust Shaub from the franchise he bought nearly a decade ago and stop his $20,000-a-month executive salary.

The Georgia-based chain isn't in bankruptcy itself — only Shaub's franchise is mired in the court proceedings. A court-approved turnaround specialist has been appointed to help run the franchise with Shaub serving as his adviser.

Shaub, known for his work at several community nonprofits, including holding a seat on the board of Cheekwood Botanical Garden and Museum of Art, says he was unaware of an alleged check-kiting scheme that creditors say operated through his franchised restaurants.

"I invested 15 years of my life in this company," said Shaub, a Vanderbilt University economics major and an ex-banker. "This has been devastating to me and my family. I would not have done anything to harm any work that I've done."

SouthEast Waffles reported sales of $67 million for the fiscal year that ended in May. But officials at SunTrust Bank said in early August that they discovered "a massive check-kiting scheme perpetrated over several months," according to court documents. Check-kiting refers to a customer's passing worthless checks between banks.

SunTrust officials say the bank lost about $3.7 million, according to court documents. FirstBank of Lexington, Tenn., which had a loan agreement with SouthEast Waffles, says in a court filing that it's owed $12 million.

IRS says it's owed $2.8 million

SouthEast Waffles filed for Chapter 11 bankruptcy protection in August, with $50 million in debts and $10 million in assets, court records show. Among other debts, the company owes nearly $2.8 million in federal employment taxes to the IRS, according to a claim filed in court.

Since September, Internal Revenue Service officers have copied files on the company's computer server that contained financial information, and the FBI has interviewed some employees, said Gary Murphey, the chief restructuring officer. The IRS and FBI declined to comment.

Shaub, 51, acknowledges that he was ultimately responsible as the franchise's chief executive, but said he delegated responsibility for company finances to Chief Financial Officer Becky Sullivan, who left the company earlier this summer as allegations of missing funds first surfaced.

Shaub said most of his time was spent out of the main office, surveying far-flung operations and even cooking alongside employees. "The financial side was ultimately my responsibility, too, but I felt I had delegated that over," he said.

That argument "doesn't make any sense," said Jon Waller, general counsel for Waffle House Inc., the Georgia-based parent. "While we encourage and ask our principal operators to work in the restaurants … we also expect (them) to manage the business prudently."

Sullivan, the deposed chief financial officer, declined to comment. Her attorney, Peter Strianse said: "Whatever she did in her employment at SouthEast Waffles was done at the direction of Mr. Shaub."

Last month, the court approved Murphey, 46, to oversee operations and figure out SouthEast Waffles' finances. "All I can tell you is the books and records are a mess," Murphey told The Tennessean. Murphey's stay can be extended if all parties involved in the case agree to it.

Fate to be argued in court

Shaub gets his $20,000 monthly salary, plus health-care benefits, until December, according to court documents. Shaub's fate — basically whether he will be allowed to stay at the company — will be argued next Tuesday in court.

For now, Murphey has Shaub auditing store managers' weekly reports, overseeing maintenance and making sure managers' specials are consistent across all the restaurants. He has even worked shifts that include busing tables, cooking food and serving customers, Murphey said.

The court-approved turnaround expert said he trusts Shaub and has "no problem with Jim performing the duties that I've assigned to him."

Murphey said the franchise remains profitable, and each store averages $10,900 in weekly sales.

Waller, the Waffle House parent company's attorney, said it's too soon to discuss the future structure of SouthEast Waffles, but added "we do expect that Waffle House as a brand will remain a strong brand in those markets."

Meanwhile, Shaub resigned last month as chairman of the board of trust at Cheekwood, where he oversaw a $6 million annual budget and met face-to-face with donors. However, he remains a member of Cheekwood's board.

Other Cheekwood board members said they stand by Shaub.

"Many of us were taken off guard. Certainly I was," said Dr. Paul Sternberg, the board's new chairman. He said Shaub "has been very committed and has really done an excellent job and has shown integrity in everything he has done."

Shaub said he remains hopeful that SouthEast Waffles can get back on its corporate feet.

"The people that know me know my character. They know I wouldn't be involved in anything like that," Shaub said.

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