Karcher Pulls Star-Crossed Finances Back From Brink

When Carl N. Karcher risked the family’s Plymouth sedan as collateral for a $311 loan to buy a secondhand hot dog cart in 1941, the fledgling businessman’s wife worried that it was dangerous to owe anyone that much money.

Margaret Karcher’s initial fears proved to be unfounded. The hot dog stand at the corner of Florence and Central avenues in Los Angeles prospered. And, during the subsequent post-World War II boom, Karcher made a fortune by correctly forecasting Southern California’s burgeoning hunger for hamburgers.

But five decades later, Margaret Karcher’s worst fears were realized when the couple was pushed to the brink of personal bankruptcy by a staggering debt load and a string of soured investments.

During the past three years, the founder of the 665-unit Carl’s Jr. burger chain has had to restructure nearly $70 million in troubled loans.

On April 18, the 79-year-old businessman reached a hard-fought agreement with the last of 27 major creditors, including more than a dozen that had the power to push the couple into bankruptcy.

In the process, Karcher also concluded a string of bitter court battles that pitted him against longtime friends and business associates, a handful of banks and the federal government.

Karcher, who’s written a book about his life and is working with a Hollywood insider on a proposed movie script, isn’t comfortable discussing the latest chapter in his personal finances.

“If Carl wanted to disclose all of his finances, we’d go out and rent a billboard,” said Andrew F. Puzder, an attorney who’s spent more than five years helping Karcher to recover from ill-fated business investments.

But, according to terms of the settlements, if Southern California’s real estate market continues to rebound and shares of his company stock stays near its historic high of $19.88 creditors will, on average, receive about 50 cents on the dollar.

The businessman is adamant that the settlements are more favorable than any that would have been negotiated in Bankruptcy Court.

“People would have gotten nothing if I’d filed for bankruptcy,” he said.

But that still doesn’t make the lifelong Republican, who counts President Reagan as a friend, comfortable with his business dealings outside of the restaurant industry where he made his fortune.

“It’s embarrassing,” Karcher said quietly during an interview in a corner office at the Carl’s Jr. headquarters building in Anaheim that’s crammed with a lifetime of photographs and mementos. “It’s not something to be proud of.”

Karcher is a self-made man who possesses a lightning-fast mind, an ability to remember arcane dates and a down-home sense of humor honed during a boyhood on the family farm in rural Ohio. He’s fiercely loyal to his friends and family and is a ceaseless competitor in the restaurant industry.

Karcher typically rises early each morning to scour the newspapers before heading off to Mass at St. Boniface Catholic Church near his family’s beautifully maintained home in Anaheim. At an age when most executives are content to reminisce, Karcher’s social life would wear out many younger people.

When he visits Carl’s Jr. restaurants, he picks up litter in the parking lot and will catch a restaurant manager’s attention by running his finger through the dust on a canopy above the salad bar.

Karcher can be blunt. His religious beliefs have put him at odds with some gay rights activists, and his political views can make a liberal’s blood boil. And, like many successful businessmen, observers say, Karcher has an unlimited belief in his own abilities.

Karcher had his share of blunders in the restaurant industry--including the hasty retreat after an ill-timed expansion into Texas during one of that state’s severe economic downturns.

Also during the 1980s, he agreed to pay a $664,000 fine, but admitted no guilt, to settle Securities and Exchange Commission charges of insider trading.

But, for the most part, the Karchers enjoyed the good life during the go-go 1980s.

The family mainly lived in Anaheim, had its pick of second homes in Palm Desert, San Clemente and Cabo San Lucas. During his world travels, Karcher had audiences with presidents and the pope. He also was quick to pull out his checkbook and dash off donations to favorite charities.

Not content to sit on his increasingly valuable stock in the Carl’s Jr. chain, Karcher confidently leveraged his holdings--nearly half of the restaurant chain’s 18 million shares--in much the same way he used the 1941 sedan that’s now garaged at the company headquarters.

“Carl, like many entrepreneurs, thought that he had the Golden Touch,” Puzder said.

Karcher, who acted as his own investment advisor during the 1980s, spun a tangled web of deals with longtime friends and business associates that took several months for Puzder and accountant Ed Pasquale to decipher. One night, Puzder recalled, “I asked Ed if things were as bad as I thought they were. And Ed told me ‘No, they’re worse.’ ”

Karcher’s most obvious route out of debt--selling stock in CKE Restaurants Inc., the Anaheim-based parent company of the Carl’s Jr. chain--was complicated by the fact that shares were mired at about $6. Most of his shares were being used as collateral and he also faced a hefty state and federal tax burden, so proceeds from a stock sale would have been minimal.

At the same time, Karcher’s investments--from real estate development companies to a medical products company--were hemorrhaging red ink. Some projects, like a building products company, never turned a profit. Others, including a home-building company founded by longtime family friend Maurice Monnig, were hammered by a severe real estate downturn.

Karcher’s financial footing was so unsettled during the early 1990s that, during one negotiating session with a creditor, Puzder used an ice cube in a nearby glass to underscore the need for a quick resolution.

“You see that ice cube?” Puzder asked the creditor. “We need to take action before it melts. That’s how bad it is.”

In rapid succession during 1993, Karcher successfully restructured a $25-million personal loan from Union Bank and a $5.3-million personal loan from Commercial Center Bank in Anaheim. He also restructured a $25-million loan for a troubled urban renewal project near the Carl’s Jr. headquarters building in Anaheim.

The cost of those settlements was high.

Karcher was forced to turn over about 5 million shares of CKE stock. Karcher, who held about half of the chain’s shares in the early 1980, now has less than 9%.

The April 18 settlement, which ended a bitter court contest with a Fullerton dermatologist over a failed $3.8-million real estate deal, eased the immediate threat of bankruptcy. But long term, the possibility still looms.

“The settlements we’ve accomplished are largely Band-Aids,” Puzder said. “The immediate threat of bankruptcy is gone. What Carl needs now is for the real estate market to rebound and his stock to remain on the upswing.”

Based upon CKE Restaurants’ stock performance in the past year--it has soared to $19.88 from a low of $6--Karcher and his creditors have reason to be happy.

But the businessman also is haunted by the fact that had he been able to keep his 50% stake in CKE Restaurants, rather than using the stock to restructure debt, his shares would now be approaching $100 million in value.

The public didn’t learn of Karcher’s personal financial woes until late in 1992, shortly after Karcher’s handpicked board of directors at CKE Restaurants rejected a deal that would have let Karcher sell stock to a Los Angeles investment firm, generating $43 million in cash.

Karcher still grows somber when recalling the Dec. 22, 1992, board vote: “It put me in a casket,” Karcher said. “I couldn’t live anymore.”

The board vote also led to a rough-and-tumble fight for control of the Carl’s Jr. chain that, ultimately, resulted in Karcher being unceremoniously dumped in October 1993 as chairman of the company he founded in 1941. He has since returned to the Carl’s Jr. chain as chairman emeritus.

Ajudge who presided over one of the trials that Karcher’s financial problems generated once wrote in a decision that “Carl Karcher is not the first litigant who signed a contract without reading it and ended up in a lawsuit.”

That same judge also wrote that some of the language in a contract that Karcher signed was “about as unambiguous as a drawing by the illusionist M.C. Escher . . . [it paints] a picture that makes no sense to the eye.”

Those who know Karcher say that he--and probably his business partners--were ill-served by his willingness to conduct business with a simple handshake.

Karcher now acknowledges that he failed to do his homework: “When you have collateral available, people find out and they come to you with proposals. The lesson I’ve learned is that you’ve got to learn who to trust.”

Karcher shoulders the blame for making bad business and investment judgments. But he also maintains that, on some occasions, he was ill-served by associates.

Failed business deals prompted Karcher to part ways during the early 1990s with Daniel Holden, a family friend who’d also served as Karcher’s personal attorney for decades.

Karcher alleged in court proceedings that Holden often failed to protect his interests while helping to negotiate business deals. Holden has declined to comment on his relationship with Karcher.

Karcher also ended up in a court battle with Maurice Monnig, another longtime Karcher friend who owned a real estate development company. Monnig, who went to grade school with Karcher’s children, was general manager of a home-building business funded in large part by Karcher during the 1980s.

Monnig subsequently alleged that Karcher had failed to meet his financial obligations. But in recent months, he has opted to forget about the past.

“Let’s just say it was a very, very difficult time to be in the residential retail development business,” said Monnig, who declined to discuss terms of a settlement agreement with Karcher. “The complications of our disagreement only made it harder. I’m just glad it’s behind us.”

Karcher said he also was occasionally targeted by shady dealers who “used my name to the hilt. . . . One guy asked me for a loan and gave me six references. I called each of them and they said, ‘Sure, he’s a good guy.’ So I did business with him. The guy turned around and used my loan to pay back $250,000 that he owed to those same people.”

Said Karcher: “I like to trust people, to believe that they’re telling me the truth. But after something like this happens, you start to lose faith in people.”

The now-concluded string of settlements won’t leave Karcher a pauper.

He still has the Anaheim home, just up Harbor Boulevard from the corporate headquarters building that sits on land once owned by Margaret’s father.

The vacation home in Cabo San Lucas--with the restaurant chain’s Happy Star logo painted on the bottom of the swimming pool--is in the process of being sold. But the Karchers will keep second homes in San Clemente and Palm Desert.

Karcher also draws a $400,000 annual salary as chairman emeritus, according to Securities and Exchange filings, and is guaranteed a $200,000 annual salary in retirement. And he still holds the nearly 9% stake in Carl’s Jr. and hopes of repurchasing additional shares.

Attorneys for some of Karcher’s creditors grumble that the businessman will have a comfortable retirement. But Karcher dismisses talk that he’s feathered his own nest at the expense of creditors: “I’ve played it fair and aboveboard. What I’ve done doesn’t bother my conscience.”

But there are signs that the near brush with financial failure has darkened normally lighthearted occasions, like the spring afternoon in 1995 when Karcher spun tales about his long career for a group of schoolgirls.

Mixed in with the humor and lighthearted stories was the decidedly sober advice that the youngsters take a careful look at future business partners.

“I didn’t do that,” Karcher said. “And now I’m almost broke.

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Carl Karcher’s Financial Dilemma

A series of troubled investments made during the 1980s and early 1990s pushed the hamburger magnate deep into debt. Key events:

Borrows $37 million to purchase Versailles Apartments, a 364-unit development in Costa Mesa that subsequently caused heavy losses.

Purchases an interest in Computerized Medical Systems PLC, a British firm from which he will never profit.

Teams with friend and developer Terrance Barry to refurbish Park Vista apartments, a 392-unit complex near Karcher Enterprises headquarters in Anaheim. Karcher subsequently forced to restructure a $26-million bond.

Karcher pays $664,000 fine to the Securities and Exchange Commission to settle claims of insider trading.

Invests $2 million for a 30% stake in Monnig Development, a San Bernardino home-building firm operated by Maurice J. Monnig, a long-time friend. Company goes bankrupt, sparking a court battle between Monnig and Karcher.

CKE Restaurants board rejects Karcher’s proposal to sell huge stake in CKE stock to a Los Angeles-based based investment company for $43 million. Rejection leaves Karcher with no choice but to restructure nearly $70 million in troubled loans.

* Karcher declines offer from CKE board to ease his financial woes by purchasing $10 million of his stock.

September: Threatens a proxy battle to regain control of CKE.

Oct. 1: CKE directors oust Karcher as chairman.

Oct. 13: Investor group led by William P. Foley II arranges to assume $30 million of Karcher’s personal debt in exchange for about 30% of CKE Restaurants’ outstanding shares.

December: Karcher rejoins firm as chairman emeritus.

Karcher begins court battles with multiple creditors in San Bernardino, Orange and Los Angeles counties.

Karcher reaches last of 27 major settlements, avoiding personal bankruptcy.

Source: Times reports

Researched by JANICE L. JONES / Los Angeles Times