Ewwww: Franchisees blame Taco Bell E.coli, rats for shortfall

Lender sues local fast-food operator for violating loan covenants; borrower says taint of disease and pestilence caused sales to drop

Email | Print By E. Thomas Wood

Making a run for the Bubonic border: A scene from local news footage of rats overrunning a Greenwich Village Taco Bell in 2007

Lenders have lost their appetite for extending credit to a major Taco Bell franchisee based in Brentwood. And fair warning: After you read this story, you may lose your appetite, too.

Bank of New York, as servicer of a group of loans totaling $14.4 million, has sued American Hospitality Corp. and affiliated entities, claiming they have defaulted on the loans. The legal action seeks to place the companies in receivership and names their top officers — Nashville entrepreneurs Farzin Ferdowsi, Homayoun Aminmadani and Michael Shahsavari — as co-defendants.

At issue is the franchisees' compliance with the terms of a debt restructuring agreement reached back in 2001. The lawsuit claims that the companies were then facing bankruptcy and that the lenders agreed to new terms that included "strict reporting, budgeting, and expenditure restrictions" on the borrowers.

The bank asserts that the companies "impermissibly transferred approximately $3.8 million to insiders" in 2006 and 2007, "in direct violation" of the 2001 workout agreement. It also accuses the companies of failing to meet other financial requirements. The complaint is available at this link.

For their parts, company representatives point out that they are current on payments. And in a June 2008 letter appended as an exhibit to the lawsuit (available at this link), Senior Vice President and Chief Financial Officer Shahsavari said the companies wanted to pay back the disputed inter-company transfers last year. He blames their failure to do so, essentially, on the gross-out factor.

"The severe decline in revenues of our Taco Bell business due to the nationwide negative publicity related to the E.coli event and the photographed rats event made it very difficult for the owners to personally raise funds," the CFO wrote.

The "E.coli event" was a 2006 outbreak of intestinal disease in New York and New Jersey traced to bacterial contamination of lettuce consumed at Taco Bells. As for the rats, well, watch for yourself if your stomach is strong enough. In February 2007, television news crews filmed a Manhattan Taco Bell being overrun by the creatures.

The American Hospitality companies owned none of the Taco Bell units involved, but in their 2007 financial statement (also filed as an exhibit, available at this link) auditors stated: "The negative publicity related to these two incidents resulted in a 1.79 percent decline in 2007 sales as compared to 2006, approximately $797,000. This decline in sales was the main cause leading to the technical default with financial covenants relating to restructured debt."

Attorney Jim Kelley of Neal & Harwell is representing the defendants. "American Hospitality is a highly regarded company that since 1987 has successfully operated family restaurants throughout the Southeast," he said in a statement released over the weekend. While disputing Bank of New York's allegations about breaches of the loan agreement, Kelley said, the companies "in good faith had agreed to arbitration in order to resolve the issues.

"It is therefore perplexing and disturbing that, during these tough economic times, Bank of New York has sued a borrower that is current on its loan payments and committed to working through the disputes," Kelley said.

Bob Mendes of MGLaw in Nashville filed the complaint in U.S. District Court on behalf of the lenders.

The financial statements show that American Hospitality and its affiliates posted a loss of $1.1 million in calendar year 2007 on sales of $45.5 million. The companies, which operate more than 80 Taco Bells, are part of Management Resources Co., a larger group of enterprises operated by Ferdowsi, Aminmadani and Shahsavari. The parent company also owns the Off The Grill fast-food concept and facilities services company Group Xcel.

Ferdowsi is also chairman of Reliant Bank, based in Brentwood. Aminmadani is on Reliant's board. Both men immigrated to the U.S. from Iran in the 1960s. Earlier this year, Swiss diplomats (on behalf of the U.S. government) served the Iranian government with a lawsuit that Ferdowsi filed against it for the abduction, torture and murder of his father, a leader of Tehran's Bahai faith community, by the Islamic revolutionary authorities in the early 1980s.

The London-educated Shahsavari serves as chairman of the board at Dallas-based XFormity Technologies Inc., which provides analytical technologies for fast-food operators. He, Ferdowsi and Aminmadani each own large stakes in the company.