Grandsons of CKE founder mired in mess
The LaVecke brothers at one time owned 80 Hardee’s, 85 Carl’s Jr., 11 Pizza Patron and 22 KFC restaurants, holdings that are making their way through bankruptcy court.
Last summer, a dozen investor groups filed lawsuits against CKE franchisees Jason and Carl LeVecke, claiming the brothers had defrauded them through a property-flipping scheme. The lawsuits generated media attention because the franchisees are grandsons of Carl Karcher, CKE’s founder and namesake. CKE owns the Hardee’s and Carl’s Jr. brands.
The LeVecke brothers, who live in Arizona, also filed for corporate and personal bankruptcy. Their franchise holdings, consisting of 80 Hardee’s, 85 Carl’s Jr., 11 Pizza Patron and 22 KFC restaurants, were turned over to a bankruptcy trustee for immediate sale.
In a series of telephone interviews, Jason LeVecke blamed CKE and its CEO, Andrew Puzder, for all his and his brother’s woes. Puzder and his legal team claimed the problems lie with the LeVeckes, their aggressive franchise expansion and the financing program they used to build all those stores.
How could this all happen? Finding out required a search through old articles and new court filings, and interviews with franchise experts and attorneys, including the lawyer used by Jason and Carl’s mother when she sued them for fraud herself.
A promising start
In 2001, Jason and Carl LeVecke, two of their sisters and their mother, Margaret Karcher LeVecke, became CKE franchisees when they took over two corporate Carl’s Jr. stores near Phoenix. The family formed MJKL Enterprises in Guadalupe, Arizona, made Jason the director of administration, and began acquiring and opening more units.
By 2003, the family operated 24 Carl’s Jr. restaurants in Arizona, and received the chain’s Founder’s Award. In a recent phone interview, Jason attributed their early success to lessons he’d learned as a kid. “I grew up with the brand,” he said, “and spent a lot of time in the back seat of my grandfather’s car, visiting his restaurants in California.” When reporting on their growth, one journalist asked, “Could a little hamburger be woven into the founding family’s genes?”
In 2008, the family took over 51 corporate Hardee’s and expanded into the Midwest. By 2009, MJKL was operating 134 franchises in seven states, including 59 Carl’s Jr., 60 Hardee’s, 12 Pizza Patrons and three Bill’s Ghosts and Spirits, a convenience store concept. After one of their new Carl’s Jr. restaurants in Arizona broke the chain’s record for opening-day sales, CEO Puzder said in an interview, “I am very proud that the LeVeckes are carrying on the successful legacy of their grandfather.”
But just a couple of years later, the brothers’ success began to change. During the recession, sales dropped in the LeVeckes’ Arizona restaurants, they owed CKE almost $5 million in back royalties and fees, and their mother had filed a lawsuit, claiming she had been cheated out of her share of the profits from their franchise business. CKE terminated their franchise agreements, but Jason and Carl were able to sell a 60 percent interest in their CKE restaurant venture to Eric Lester, whom Jason called “one of our early investors.”
The brothers restructured their multi-unit franchise company, now called Frontier Star, paid their arrears to CKE, paid off old bank debt with a new $30 million loan and continued opening 15 to 20 stores a year, a rate Jason said was faster than any other CKE franchisee. Relations with corporate were cordial and in the summer of 2014, CKE sold them 20 corporate Carl’s Jr. restaurants in Texas and let them take over four more.
By early 2015, the LeVeckes were again in financial trouble and corporate asked them to curtail development and focus on getting current with their royalties and fees. In an email response that CEO Puzder shared with Franchise Times, Jason wrote, “Halting our development is like benching LeBron (James) for being hurt. We are bullish and maybe even aggressive but we are NOT dangerous or deleterious.” He closed by thanking “Andy and Mike’s (CKE President Michael Murphy) leadership of a world class brand we are proud to be part of.”
On July 16, 2015, CKE sent the LeVeckes a demand letter, asking for immediate payment of the $2.9 million they owed in back fees and royalties or they would lose their franchise agreements. In September, the first of the lawsuits alleging land fraud was filed and on September 14, Frontier Star filed for Chapter 11 bankruptcy protection.
ICE comes to visit
In an interview, Jason blamed their financial downfall on “a handful of recent things.” In late 2014, for example, their company was hit with an ICE audit, an inspection by U.S. Immigration and Customs Enforcement agents seeking undocumented immigrant employees.
“We had 4,000 employees and ICE said we had problems with 1,200 of them and had to terminate anyone with fraudulent documents. We told CKE we needed help training their replacements and financial relief because we lost about $10 million in legal fees and lost productivity. CKE said no on all accounts.”
Puzder said CKE did send “some people to help his operators, although a franchisee’s illegal employees are not our responsibility.” In the same LeBron James email, Jason said he and his team had dealt with the audit and the implementation of the Affordable Care Act so well “we made it look too easy.”
Jason also blamed CKE’s business model for failing to generate enough money to keep their stores profitable. “They sold us 20 stores in Texas for $1 and they still are not close to breaking even. The worst business decision I ever made was trusting Andy.”
But mostly, Jason blamed CKE for their development schedule. “They were holding a gun to our heads to develop 20 units a year,” Jason said. “If we failed, we could lose a territory and have to pay penalties. CKE even has the right to take stores back for less than it cost us to build them. Besides, you can’t stop building stores on a dime. An urban store might be in our plans for as long as three years.”
CKE executives say just the opposite. “We did not make them build restaurants. Time and again, I told Jason not to overextend himself. He never asked us to let him modify his development agreements,” Puzder said.
‘All the buyers knew what we were doing’
To meet their development goals, the LeVeckes used a financing method they call construction sale-leasebacks. “We sold real estate to a buyer at above-market rates,” Jason said, “and used the difference to build restaurants on their land. Then we paid them a higher than normal rent for the use of their property.
“Say we owned a piece of property worth $800,000, sold it to them for $1.5 million and used the other $700,000 to put up a Hardee’s or Carl’s Jr. there. Instead of paying rent at a cap rate of 5 percent, we’d pay 7 percent or higher. All the buyers knew what we were doing.”
A lawsuit filed in Illinois on September 16 on behalf of 10 LeVecke landowners claims they had no idea what they were getting into. The complaint, filed by the Chicago law firm Litchfield Cavo, acknowledges that, starting in 2013, the buyers were each offered an “attractive long-term lease” from the LeVeckes, who said they would build a Carl’s Jr. or Hardee’s on property that was then vacant or contained another defunct fast food restaurant. The plaintiffs did not know that once they showed an interest, Jason and Carl would buy the property at a low price, then offer to sell it to them for up to $1 million more, the lawsuit alleges.
“Defendants,” the lawsuit claims, “would provide financial information regarding Frontier Star and its subsidiaries showing it had substantial operating profits and net worth…They did not disclose that Frontier Star was actually in financial difficulty and in default of its obligations to CKE.” Jason and Carl also signed personal guarantees knowing they were worthless under Arizona law unless their wives had signed them too, the lawsuit alleges.
In most cases, the lawsuit claims, Jason and Carl would later “disavow the leases,” saying CKE had not given them commitment agreements for the locations. In others, they continued paying rent until Frontier Star filed for bankruptcy protection. The complaint accuses Jason and Carl of “conspiracy to defraud and racketeering activity” and asks the court to rescind the sales and return their clients’ money. According to court documents, the plaintiffs claim they paid a total of $9.3 million over the actual prices of the properties.
Attorney Milford Dahl Jr. of Rutan & Tucker in Costa Mesa, California, filed a similar lawsuit on February 2, 2016, in that state on behalf of three elderly brothers, the Watanabes, who had invested the proceeds from the sale of their family business with the LeVeckes. This time, Jason and Carl did build a Hardee’s on the Watanabes’ property, in Lemont, Illinois, but closed it after only a few months.
In a phone interview, Dahl claimed he believes the LaVeckes had “defrauded” at least 30 individuals in what he termed “a Ponzi scheme.” Although Ponzi schemes are illegal, Dahl said “typically criminal authorities don’t like to get involved in mostly civil matters.”
CKE Senior Vice President and General Counsel William Werner said, “Sale-leasebacks are common in our industry. But other franchisees aren’t sued for defrauding their landlords. We were concerned about Frontier Star’s high rent obligations, especially for sites we had not approved for restaurants, and repeatedly asked Jason to show us information on them. We were not aware of the volume of sites until the lawsuits were filed.”
Ty Brewster, head of the retail team at commercial real estate firm Keyser in Scottsdale, Arizona, said, “I see 100 transactions a year and I’ve never seen a sale-leaseback arrangement that involved an individual investor and a single franchise unit. Sale-leasebacks are complicated and should only be offered to sophisticated investors. “
In our last interview, Jason said that no matter how their bankruptcy proceedings are settled, “CKE says I can’t be part of the new company. But I can’t separate myself from the brand I love. I want to build restaurants for all those landlords or find ways to improve their sites so they can find other tenants. My grandfather always helped his franchisees in tough times. I can’t believe CKE would throw away a person who built 80 restaurants for them.”
All in the family
According to court documents from 2011, Margaret Jean Karcher LeVecke, daughter of CKE founder Carl Karcher, filed a lawsuit against her sons, Jason and Carl LaVecke, and their law firm, Snell & Wilmer, of Phoenix, claiming they had cheated her out of her majority ownership in their franchise company, MJKL Enterprises.
According to the lawsuit, when Jason and Carl approached their mother in 2000 about becoming CKE franchisees, they had few assets. She liquidated savings and retirement accounts and pledged her home, in Anaheim, California, and commercial property to raise $900,000. She and her sons signed documents stating that she owned 90 percent of MJKL and they each owned 5 percent.
But in 2002, the lawsuit alleges, Jason asked her to sign an operating agreement “immediately” to allow him to run their new franchises. Court documents claim he did not give her time to read the agreement and did not leave behind a copy. Years later, the lawsuit alleges, Margaret learned she had actually signed something that reduced her ownership in MJKL to 40 percent and ceded 30 percent each to Jason and Carl.
Margaret’s attorney, Thomas Vogele of Thomas Vogele & Associates in Costa Mesa, California, said, “Margaret is a very trusting mother who thinks her children are wonderful and she did not read the document closely.”
By the late 2000s, Jason and Carl were diminishing their mother’s ownership even further, the lawsuit alleges, by moving franchises out of MJKL and into other companies, including Frontier Star. When Margaret wanted to prepare her estate plan, Jason recommended she use his attorney, John Vryhof, a partner with Snell & Wilmer in Phoenix.
The suit alleges that Jason and Vryhof talked Margaret into disclaiming her inheritance from her parents’ estate, to avoid “death taxes” and reserve more for her children. Vryhof, the suit claims, also turned down Margaret’s request for a copy of the 2002 operating Agreement.
The lawsuit, in which Margaret asked for over $100 million in damages, was resolved in a confidential settlement in 2013, Vogele said. It dismissed all claims against Vryhof, returned 12 franchises to Margaret and removed her name from all leases arranged by Jason and Carl. “Otherwise, she’d be sued by all those landlords, too,” Vogele said. In a statement David McCann, marketing and communications manager for Snell & Wilmer, said, “All allegations against Snell & Wilmer and Mr. Vryhof were denied—and, specifically, Snell & Wilmer never represented any of Mrs. LeVecke’s children.”
When asked about the settlement, Jason denied doing anything wrong and said, “Partnerships with mothers and other family members can be difficult.”
Frontier Star settles bankruptcy
The Arizona Bankruptcy Court and Gregg Curry, the trustee assigned to the Frontier Star bankruptcy case, sold the 79 Hardee’s and 85 Carl’s Jr. restaurants operated by Jason and Carl LeVecke to their investor, Eric Lester, on March 23. According to a spokesperson for CKE Restaurants, Lester’s was the only bid. His new company, Starcorp, will pay about $40 million for the 164 franchised units, according to court documents.
Lester is Starcorp’s CEO; day-to-day operations will be managed by a team led by Dave Glodowski, of Minnesota, a former Hardee’s franchisee who was also a board member of the Independent Hardee’s Franchisee Association and the Coalition of Franchisee Associations. Lester selected Glodowski from a list of possible candidates suggested by CKE for the position.
Lester has no franchise operating history, the settlement documents said, although he and his family members have been landlords for several of the LeVeckes’ franchises. In an interview, Jason LeVecke said Lester owns manufacturing businesses in Taiwan and resides in Oregon and Nevada. “We have been partners and friends with Eric for 15 years,” Jason said. “I know Eric wants me to be part of the new company.”
But “CKE would not be open to Jason or another immediate LeVecke family member taking control of the company,” the corporate spokesperson said in an email.
Other franchises owned by the LeVecke brothers had been sold earlier this year. Their 11 Pizza Patron units were sold to another franchisee of that system, said CEO and founder Antonio Swad. “Jason and Carl were good franchisees and never had a problem paying their bills,” Swad said. Their 22 KFC units were also sold to other franchisees.
The roster of landlords, however, will not receive any proceeds from the Frontier Star bankruptcy settlement, because their leases were with other companies operated by the LeVeckes, said plaintiff attorney Milford Dahl. “We uncovered nine different entities the LeVeckes used to shift money back and forth, like a shell game,” Dahl said.
Instead, the landlords are among the 251 parties involved in Jason and Carl’s personal bankruptcy cases. Dahl said, “We could spend up to six figures for forensic accountants to go through their finances, but the plaintiffs can’t afford that.”