Millions missing, CEO under scrutiny at bankrupt restaurant firm

Creditors say 'gross mismanagement' and 'extravagant payments' preceded collapse of SouthEast Waffles, countering chief exec's claim that check-kiting by CFO is to blame

Email | Print By E. Thomas Wood

Jim Shaub

Jim Shaub lives a world away from the fry-cooks, servers and others among the 2,100 hourly employees of Nashville-based SouthEast Waffles LLC.

He has a house on Belle Meade Boulevard, a board seat at Pinnacle Financial Partners, and enough spare change to make (along with his wife) nearly $30,000 in donations to Republican electoral candidates and committees in the past four years.

But Jim Shaub now has something in common with employees at SouthEast Waffles, where he has served as chairman and chief executive officer since 2000: In the wake of recent revelations in Bankruptcy Court, their futures are uncertain.

In court filings, creditors of SouthEast Waffles have made a number of assertions that appear to lay blame for the Waffle House franchisee's financial woes at the feet of Shaub, who is said to have taken more than $1 million a year out of the company even as it failed to pay withholding taxes for part of 2006 and all of 2007.

Some creditors want Shaub removed from the company's operations. One stated today that "there is considerable reason to doubt" that SouthEast Waffles, with its 113 shops in four states, "will prove to be administratively solvent" once the bankruptcy process runs its course.

Revelations and indignation

When the company filed for reorganization under Chapter 11 of federal bankruptcy law in late August, Shaub attributed its difficulties to "accounting irregularities" discovered shortly after the abrupt resignation of a key accounting employee. Creditors' filings, however, lay out a more complicated sequence of events:

August 13 — Shaub told Byron Kurtgis, a SunTrust banker, that he had learned of a large-scale check-kiting scheme carried out by SouthEast Waffles Chief Financial Officer Becky Sullivan. Checks had been made out to the company itself, on accounts at SunTrust and FirstBank, and presented to the banks in order to cover other checks. Kurtgis said SunTrust had lost $3.7 million from the scheme.

Shaub agreed to meet with Kurtgis the next day.

"He called me the following day, advised me that he had retained counsel, and that he would not be able to meet with me," Kurtgis told the court.

An attorney involved with the case told NashvillePost.com that the Nashville law firm of Crocker and Niarhos is representing Shaub personally. Efforts to reach that firm's principals, as well as Shaub himself, have been unsuccessful in recent days. Attorneys from Harwell Howard Hyne Gabbert & Manner, representing SouthEast Waffles, have also been unavailable.

August 25 — SouthEast Waffles filed for Chapter 11 protection.

August 29 — SunTrust filed a motion seeking the appointment of a special examiner in the bankruptcy case. The company's initial filing, the bank said, "does not even point to the tip of the iceberg that makes up the 'accounting irregularities' plaguing this Debtor." SunTrust claimed that Waffle House Inc., which has SouthEast Waffles as one of its largest franchisees, had looked into the company's finances and "issued a franchise termination letter on the alleged basis of insolvency." According to the filing, the franchisor's personnel found that expenses at SouthEast Waffles "have been and continue to be grossly excessive in relation to industry standards, due in part to extravagant payments to Debtor’s principals," including Shaub.

The examiner would investigate and "determine actual claims against the company and actual claims by the company against insiders and affiliates," SunTrust said.

August 31 — SouthEast Waffles filed a response, blasting "inaccurate and inflammatory statements" by SunTrust. It said the bank had left out "various critical facts" in a "disingenuous attempt to create a false impression" that it was not "taking appropriate action to identify and quantify the accounting irregularities created by its former bookkeeper."

The response pointed out one claim in SunTrust's filing, involving a supposed ownership transfer of Shaub's house, that was entirely inaccurate; SunTrust promptly amended its filing to drop that claim.

SouthEast Waffles asserted that it had been "acting responsibly since the departure of its chief accounting employee" and that there was no need for the emergency appointment of an examiner. "The Debtor is working diligently with the assistance of outside professionals to thoroughly investigate the circumstances of the accounting irregularities and minimize any potential impact on operations," the company said.

September 5 — The Internal Revenue Service filed a document showing SouthEast Waffles with past-due employment taxes, interest and penalties of some $2.8 million.

September 8 — FirstBank asked the court to take away the permission it had granted for SouthEast Waffles to keep using its existing cash for day-to-day operations.

The company should not be allowed to touch that money, the bank said, until an outside manager was put in charge of it. FirstBank asked that Waffle House Inc. be appointed the manager.

"FirstBank requests that the Court condition any further use of cash collateral on a prohibition of any further payments to James Shaub, the principal of the Debtor," the FirstBank motion continued. "Mr. Shaub has withdrawn over $1 million in each of the last two fiscal years, while at the same time the Debtor was not paying its withholding taxes and was engaged in a massive check-kiting scheme."

September 9 — At a hearing, creditors' attorneys cross-examined Shaub about the company's financial state. When asked about audited financials from the 2006 and 2007 fiscal years, Shaub was unable to refute the claim that expenses and other current liabilities were under-reported by $1 million because the unpaid taxes were not reflected.

September 15 — The United States Trustee's office for Middle Tennessee asked the court not to allow SouthEast Waffles to retain the accounting firm Lattimore Black Morgan & Cain as a financial advisor during bankruptcy, because LBMC may not have a “disinterested” position in the case.

"Given Mr. Shaub’s testimony" about the financials produced by LBMC, the trustee stated, the company's bankruptcy estate "may have a cause of action against LBMC."

September 16 — SunTrust echoed the trustee's call for LBMC not to be hired as the company's advisor.

"The Debtor’s failure to pay said taxes is apparently a chronic problem, and the Debtor’s principal testified on September 9, 2008, before this Court that he did not learn of the Debtor’s failure to pay withholding taxes, dating back to 2006, until August 11, 2008," the bank said.

"Additionally, the Debtor’s principal has apparently compensated himself on a somewhat random basis based on his personal cash needs in disregard of the cash needs of the Debtor."

The fact that there was "gross mismanagement" at SouthEast Waffles "while Lattimore was retained by the Debtor to provide professional tax, audit, and accounting services, indicates that Lattimore has not been successful historically in any attempts to 'assist the Debtor with operational, strategic, or financial issues,'" SunTrust asserted. The bank repeated the trustee's warning that LBMC might be subject to liability in connection with the case.

September 18 — Landlords of three Waffle House properties asked the court to compel rent payments now rather than later, arguing that it is unclear the bankruptcy estate will end up being "administratively solvent."

NashvillePost.com asked officials at LBMC for comment on the claims made about its work with SouthEast Waffles, but it became clear that the accounting firm was restricted from stating its side of the story. Leisa Gill, director of marketing at LBMC, noted that not all facts are yet known in the case. "We are limited by our code of ethics on what we can say regarding client financials," Gill said.

Attorney Peter Strianse of Tune, Entrekin & White is representing former CFO Becky Sullivan. "At this early stage in the proceedings, she is not in a position to comment," he said. "As her lawyer, I have read some of the things that Mr. Shaub has said, and frankly, the version he is spinning reads like a love-letter to himself."

Other counsel on the case: Glenn Rose, Barbara Holmes, David Cañas and Tracy Lujan of Harwell Howard Hyne Gabbert & Manner, for SouthEast Waffles; Bob Goodrich and Madison Martin of Stites & Harbison, for SunTrust; Jim Kelley of Neal & Harwell, for FirstBank; Caroline Krivacka of the U.S. Attorney's office for the IRS; Teresa Azan for the Trustee's office; and Rhea Bucy of Gullett, Sanford, Robinson & Martin, for the landlords.