Supermacs owner considers purchase as part of compromise for $21m the Irish-themed chain owes him, writes Sean O'Driscollin New York
Supermacs owner Pat McDonagh is considering the purchase of bankrupt Irish-themed Claddagh restaurant chain, following a bitter legal dispute with its former chief executive.
McDonagh's Cincinnati-based attorney, Tim Hurley, said McDonagh was in "constant contact" with Claddagh's creditors and court-appointed trustee in an effort to keep the chain running.
The Claddagh trustee, attorney Rick Nelson, removed chief executive Kevin Blair earlier this year after a Cincinnati civil court forced Blair to pay $2 million (€1.47 million) damages to McDonagh following a fierce courtroom battle. The court also ordered Claddagh to repay $21 million it owned to McDonagh.
Hurley said that McDonagh might purchase the chain after a possible compromise on the $21 million the company owes him.
He said McDonagh was involved in several conference calls and "many, many" e-mails to decide Claddagh's future, along with other creditors and the court-appointed trustee. The chain has unsecured debts of over $33 million and may be sold off by the end of the summer, Nelson confirmed yesterday.
Nelson said the individual units of the chain are financially viable and that the chain was now well run. Both he and Hurley said they were still grappling with Claddagh's figures and trying to find its true net worth.
Claddagh, which has 17 units and close to 1,000 US employees, went into bankruptcy protection last year after a dispute between McDonagh and Blair, a former operations manager at Supermac's Galway headquarters.
The two men had hoped to bring the Irish-themed restaurant and bar chain to cities across the US after opening the first Claddagh restaurant in 2001. The chain expanded rapidly, using capital borrowed from US banks and the $21 million given by McDonagh.
However, McDonagh and Blair fell out in 2004 when McDonagh claimed that the $21 million he had given the company was a loan, while Blair claimed it was an investment. In increasingly hostile e-mails shown in court, Blair accused McDonagh of underfunding the company and warned that he would not let his reputation be ruined.
By December 2004, Blair was begging his former boss for more cash to keep creditors at bay.
"I am in desperate need of this money as I communicated to you last week," he said in one e-mail shown in court.
By February 2005, Blair was openly hostile. "I have been forced to continue operations and expansion without any funding other than cashflow, which you know is impossible," he wrote, warning that "the US papers are quick to pick up lawsuits by angry creditors, and it is no secret why I cannot obtain necessary financing".
Blair's lawyers showed the court folders of newspaper clippings in which McDonagh discussed his interest in Claddagh. They wanted to show that McDonagh was an active founder and investor in the company and not just a passive lender.
However, on his side, McDonagh brought forward independent auditors who claimed that that they were blocked from seeing Claddagh's true accounts.
One claimed that he was kept waiting more than an hour in Claddagh's lobby before he was given ledgers accounts that had serious omissions.
McDonagh's side also complained about Blair allegedly spending Claddagh's money, including $100,000 on an athletics scholarship at Blair's former university and luxury SUVs for Blair and his wife.
If Claddagh's woes weren't bad enough, three creditors went to court to have it placed in involuntary bankruptcy. The creditors also showed a report from a CBS news affiliate in Cleveland which alleged state and federal tax authorities had raided Claddagh.
In that legal battle, Blair's lawyers alleged the creditors were working for McDonagh and relying on his legal experts as part of a campaign by McDonagh to drive Blair out of the company.
The creditors won the case, Claddagh was placed in bankruptcy and Nelson was appointed trustee earlier this year. Blair suffered a second blow when a jury sided with McDonagh in the ownership dispute and forced Blair to pay over $2 million to McDonagh in damages. It also ruled that the $21 million McDonagh gave Claddagh was indeed a loan and should be repaid.
Blair is now appealing the ruling, but a decision is not expected for another year. In the meantime, McDonagh and other members of the Claddagh creditors' committee are meeting Nelson to decide the future of the company, and how best to pay off debts, including taxes.
Nelson said that tax officials were "extremely unhappy" with the company's finances before it went into bankruptcy, but said that Creative Hospitality, a Chicago-based consulting company, was now managing the company and working closely with tax officials and creditors. He added that he had visited 14 of the 17 restaurants and was satisfied that they were operating well.
Nelson also said its debt burden would grow if he ordered a refund to Claddagh on what are termed "eve of bankruptcy" payments. These are payments made to creditors just before a company declares bankruptcy.
However, Nelson said that he did not believe Blair had deliberately favoured certain creditors by making payments to them before the company went into involuntary bankruptcy.
There is also another issue for Nelson - possible overstatement of claims by some of the creditors. "You get that kind from time to time. Let's just say I'm going to be keeping a close eye on the figures," he said.
