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Suit alleges bungled running of restaurants

A founding partner in the Lexington restaurant franchise company, Thomas & King, alleges that another founding partner, Mike Scanlon, has mismanaged the corporation and wants a judge to step in and appoint new leadership.

Documents filed in Fayette Circuit Court on Feb. 5 accuse Scanlon of using corporate money for his personal gain: to buy airplanes, a bus and cars for his extensive car collection. It also alleges that Scanlon placed a full-time mechanic for the car collection on the Thomas & King payroll, and that he did the same for his personal housekeeper so the person could obtain health insurance benefits.

The filing by Ronald T. Reynolds, who helped found Thomas & King in 1988 with one Applebee's franchise, marks the latest salvo in a legal battle among Reynolds, Scanlon and Douglas Wilson. The three men own more than 90 percent of the shares in Thomas & King, the eighth-largest U.S. restaurant franchise company, according to its Web site. It operates 90 Applebee's and seven Carino's Italian Grill restaurants in five states.

In court documents, Reynolds alleges that Scanlon, the president and chief executive, and Wilson, senior executive vice president of development, were overpaid. In 2005 and 2006, Scanlon was paid more than $750,000. Wilson has drawn a salary of more than $300,000 annually while performing "very few day-to-day services for the company," the documents say.

"Scanlon has dominated the management of T&K. Under his control, he has mismanaged the business in ways that are both reckless and in bad faith," the complaint states.

Reynolds seeks to have the court place Thomas & King in receivership, appointing an independent third party to preserve its assets, and to require Scanlon and Wilson to repay the company for corporate money used for personal gain.

Attorney Scott White, representing Reynolds, said his client wants a jury trial "to decide that Thomas & King has been the object of mismanagement and corporate waste and to recover for the corporation wasted funds."

According to the court filing, Thomas & King began 2007 with $12 million in cash and cash equivalents. By June 2008, Scanlon and the board of directors sought loans from Reynolds and other founders for working capital because cash reserves had virtually evaporated.

During the same period, revenues and sales plummeted, the company sustained significant losses, and it is in default with its major lenders, Reynolds alleges.

Attorney Tim Cone, representing Thomas & King, said Tuesday that the company was "current in absolutely every payment and there is no default in the payment of any money to the lenders."

Cone said the casual-dining restaurant business has been hit hard by the economy.

In 2008, Thomas & King was forced to lay off employees at its Lexington headquarters.

Court documents also show that Scanlon and Wilson each lent Thomas & King $1 million in 2008 as working capital. Reynolds, who retired 10 years ago, declined to do that.

Earlier this year, Thomas & King had planned to raise capital by issuing 3 million shares of non-voting stock for $1 a share.

In a letter dated Jan. 12, Reynolds' attorney, Marshall Dosker, said that if Scanlon insisted on proceeding with the sale, Reynolds would have no choice but to initiate action to take control of the company.

The planned sale was canceled, and Thomas & King went to court to ask the judge to allow the company to raise money by selling shares despite the objections of one of its founding partners.

In a separate action also filed Thursday on that case, Reynolds asked the judge to block the stock sale.

Although some of Reynolds' allegations are new, Cone said Reynolds has complained in the past about the car collection, the bus and the airplane. "We don't think those constitute actionable claims of mismanagement. We are going to defend those very vigorously," Cone said.

In Thursday's filing, Reynolds said that despite the "adverse financial condition of T&K, it still possesses valuable franchise rights and properties which have significant value." By the end of June 2010, the company expects to have a value in excess of $61 million.

Scanlon is a former vice mayor of Lexington.

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