Applebee’s, which is owned by Dine Brands, operates over 1,600 locations in the Ubnited States and other countries.
The attorney for the Applebee’s franchisee who filed for Chapter 11 bankruptcy protection in Southern Florida District Court this month is wondering why it even got to this point after “a viable” option to transfer ownership of the troubled restaurants was rejected by the casual dining franchisor.
“I honestly don’t know why we ended up where we are today,” said Douglas Draper, whose law firm Heller, Draper & Horn represents Louisiana Apple owner Seenu Kasturi, who operated 14 Applebee’s in Kentucky, Oklahoma, Indiana and Arkansas.
“Yes, we owned money, but we had a viable buyer lined up, which would’ve meant everyone would get paid and everything would roll forward,” Draper said. “But for some reason that no one has been able to explain, Applebee’s ultimately torched that buyer and then engineered the transaction whereby these cases would be turned over to an entity for basically no money.”
City National Bank of Florida, which in September sued Louisiana Apple, alleged the parent company of Mountain Apple, Kentucky Apple and Oklahoma Apple, owed $8.3 million for a loan tied to the Federal Reserve’s Main Street Lending Program. The debt dates back to September 2020 when an initial loan was made for $7.1 million.
The bank claimed Louisiana Apple “failed to make payments due since on or about July 28, 2023,” and entered into a forbearance and loan modification agreement in February of this year. That agreement expired in May, and CNB alleged the franchisee has since failed “and refused” to make any payments.
Applebee’s sued the franchisee and terminated some of its franchise agreements in July after the franchisee failed to pay royalties and other fees. The lawsuit, which was initially filed in a Kansas court, noted the franchisee were also in breach by closing certain locations without permission.
Applebee’s and the law firm representing the company in the bankruptcy case did not immediately respond to a request for comment.
Shortly thereafter, court documents show that Applebee’s and its operator settled out of court, at which time Applebee’s assigned the franchisee’s leases to another operator, SBG Apple Central, which is owned by Andrew Levy.
Levy is the CEO of the Starboard Group, a major Wendy’s franchisee with leases for 72 restaurants in Florida, Alabama, Illinois, Missouri and Wisconsin. Starboard filed for Chapter 11 bankruptcy protection last year, citing the stress of its Main Street loan as a reason for the company’s financial problems. At the time of its bankruptcy filing, Levy’s company was the 32nd largest franchisee in the U.S., operating more than 185 Wendy’s locations.
Reassigning the leases amounted to “the transfer of full control over the assets of (Louisiana Apple) to the SBG Entities as well as full control over the operation of the restaurants to the SBG entities,” according to case documents. In the complaint, which resulted in the appointment of the receiver, CNB claimed those actions violated the loan agreements.
Draper said Louisiana Apple seeks to preserve the assets of its preference claim through bankruptcy court.
Louisiana Apple’s bankruptcy filing is the latest action in an ongoing legal battle with Applebee’s involving unpaid loans, alleged breaches of franchise agreements and efforts by a creditor and the franchisor to reclaim control of the restaurants.
Making the case even more complex is that court documents offer little insight into what pushed Louisiana Apple to default on its debts. Draper said Kasturi acquired “troubled existing Applebee’s restaurants” and was unable to turn them around. He declined to elaborate further.
Kasturi is also the CEO of ARC Group, the owner of Dick’s Wings, Tilted Kilt, Fat Patty’s and Winghouse. ARC obtained a $4.4 million Main Street loan for Fat Patty’s and a $3.2 million loan for Winghouse in 2020, also funded by City National of Florida.
“Look, how many restaurants have been through this? When you go back to COVID, and you go back to where things were then for restaurants and even now, you understand how tough of a business this is for them, even when things are going well,” Draper said.
Applebee’s is not the only casual restaurant chain that has faced enormous financial challenges this year. Rising food and labor costs, higher interest rates on debt and consumers being more selective about discretionary spending continues to cut into restaurant profits.
As a result of those pressures, several well-known brands have closed underperforming locations and some filed bankruptcy to reorganize their businesses. Companies that have filed for bankruptcy this year include Red Lobster, BurgerFi and Tijuana Flats, along with a number of franchisees in the Pizza Hut, Arby’s and Dickey’s Barbecue Pit systems.
Applebee’s, owned by Dine Brands, comes in at No. 23 on the Franchise Times Top 400 list, which ranks the largest franchise systems based in the United States. Applebee’s finished 2023 with an estimated $4.6 billion in global sales from 1,642 units. Dine Brands also owns IHOP and Fuzzy’s Taco Shop.
Dine Brands’ latest financial report shows Applebee’s same-store year-over-year sales have decreased every quarter since Q2 2023 and its unit count is also slipping. It ended the second quarter of 2024 with 1,627 global locations, 1,520 of those in the U.S. The company is scheduled to report third quarter results on November 6.