Submarina says full steam ahead, but founder’s son points out iceberg
Illustration by Jonathan Hankin
Later this month, CEO Bruce Rosenthal believes Houston-based Submarina’s three-year ordeal in bankruptcy court will at last come to an end. He expects to receive a judgment to collect at least $1.7 million from a group of franchisees in California who stopped paying royalties in 2012. Rosenthal plans to use that recouped money to repay creditors and exit Chapter 11.
And then what? “We grow!” he said in an interview. “Once this is resolved, we will be solely focused on growing our company,” which is down to 31 units.
Rosenthal is an investment banker who made a bridge loan of $200,000 to Submarina’s founders, the Warfield family, back in 2009. He soon had to pour in more money, for $3 million total, and ended up buying the chain and taking over as CEO in 2010.
He is willing to work out payment plans with the franchisees who stopped paying, but only if they are “in absolute and complete” compliance going forward, said Rosenthal, who likes to spin a metaphor or two.
“In a sense they’ve created their own Titanic and the music’s been playing and the music has now stopped. They now are in a situation where I’m happy to offer them all lifeboats but they all have to get in.”
But the leader of those non-paying franchisees is none other than Jeff Warfield, the son of Submarina’s founder and current franchisee. He throws very cold water on Rosenthal’s expectations of a resolution just around the bend. “I spent 40 years building this thing, and I own three stores. Believe me this fight is not over,” declared Warfield, whose group includes seven franchisees who own 13 stores in California.
“These aren’t multi-store owners. These aren’t millionaires,” Warfield said about the franchisees. “If this gets pushed out” through more litigation, “most of them are going to file bankruptcy.” Bankrupt franchisees, of course, cannot pay restitution, on which Rosenthal’s reorganization plan depends.
Submarina started in 1976 as a California-centric sandwich chain, but the roots of its problems date to 2006. That’s when then-CEO Warfield and his management team decided to embark on a nationwide expansion that ran straight into the financial collapse of 2008.
Desperate to survive, the founding family turned to Rosenthal for that bridge loan, and by June of 2010 Warfield was out as CEO and had become an area developer for Submarina.
By 2012, the accounts of the two men begin to diverge widely. “When I acquired the company, it was in truth in liquidation mode but it didn’t know it,” Rosenthal said. “The management was hiding from the franchisees that it was insolvent.”
Rosenthal said it was a “mistake” to give Warfield total control as an area developer, especially when he sent Warfield “100 percent of the M&P,” the marketing and promotion fund, “to spend as he wishes.” When Rosenthal ended the practice, “he staged a revolt,” Rosenthal said.
Warfield paints a radically different picture. “We managed the whole thing top to bottom including the accounting side of it. It was very successful,” Warfield said. Then corporate stopped transferring M&P funds, Warfield said, yet Warfield already had signed contracts for advertising. Rosenthal called a meeting of franchisees and said Warfield had been misusing the funds, Warfield said. “At that point we lost total trust, for obvious reasons.”
A breakdown in trust
Warfield also brings up Victoria Wofford, Rosenthal’s wife, and her criminal conviction in 2010, as a reason for the breakdown in trust. Wofford owned Tri-Pen Management, a travel management company. In 2011 she was sentenced to two to six years in prison after she pleaded guilty to grand larceny. She would book phony trips, charge them to dormant client accounts, and then pocket the money when American Express paid, prosecutors said. She was ordered to pay back $25 million, according to news accounts.
Court documents showed she used most of the stolen funds to support a separate software company that she was also trying to get off the ground, according to Business Travel News. But she also “provided her husband with $2.4 million to invest” in Submarina, the article said. Warfield maintains Wofford’s actions scared potential investors away and damaged Submarina finances.
Rosenthal was indignant when asked about Wofford. “That’s relevant how?” he said. He said forensic accountants determined the actual amount she gave Rosenthal was closer to $600,000 and at any rate he had many other sources of funds. Moreover, the bankruptcy case is about Submarina alone as a separate business entity. “I’ll take the businesses that she created from scratch,” he said about his wife, “versus Jeff working in a sandwich shop and a business he drove into the ground.”
Her prison sentence now served, Wofford works at Submarina but Rosenthal did not specify her title. “Her position is she advises and assists me,” in technology implementation and customer service. “She has nothing to do with finances and nothing to do with banking, has no ability to sign a check. So that’s as big a red herring as you can get.”
What the judge said
As for the rest of War-field’s claims, Rosenthal points to the 54-page decision and the $329,000 judgment against the franchisees made by U.S. Bankruptcy Judge Mike Nakagawa on April 15, 2016. The judgment was for money owed up to the date of trial, which was in January 2014. Rosenthal has asked the court to increase that to $1.7 million, or the amount owed up to the present, plus more amounts from other franchisees who withheld royalties and M&P funds.
“The judge heard from Jeff Warfield, the judge heard from franchisees, and the judge concluded that what they were saying was without merit, foundation or evidence, and he said as much,” Rosenthal said.
Warfield vowed to keep fighting and said he feels responsible for the franchisees. “It’s a mess. My heart goes out to these people. I’m not going to bail on them, man.”
Beth Ewen is editor-in-chief of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to firstname.lastname@example.org.