Steak 'N Shake in fast food fight avoids bankruptcy, but fries Fortress

Steak 'n Shake Inc. sued lender Fortress Investment Group LLC after the burger chain paid off debt coming due to avoid bankruptcy, accusing Fortress of misusing confidential information to mount a takeover bid.

The Indiana-based milkshake-and-burger chain, backed by entrepreneur Sardar Biglari, said that Fortress obtained sensitive information through negotiations for a potential real estate deal with Steak 'n Shake, then used that knowledge to build an $89 million position in the company's loans.

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After acquiring the loans, Fortress made clear it "would not accept a negotiated repayment" and said it "would either force the company to repay the loans in full or file for bankruptcy," according to the complaint.

Steak 'n Shake paid off the loans in full on Friday, spending nearly $103 million to retire the debts and avoid a bankruptcy filing, the company said.

Steak 'n Shake's lawsuit, filed Friday in Marion County Superior Court in Indiana, seeks to recoup alleged losses from Fortress's actions.

Fortress didn't immediately respond to a request for comment.

Steak 'n Shake had been struggling with the impact of the COVID-19 pandemic on the restaurant business, transitioning from a table-service model to self-service. To fund the transition and weather the pandemic, the company last year explored selling a portfolio of 15 real estate properties.

Fortress expressed interest in buying the properties and entered into a confidentiality agreement to get information about them. But the investment firm didn't do a real estate deal and began buying up portions of Steak 'n Shake's loan from other investors, ending up with more than 50% of the balance, according to the complaint.

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Steak 'n Shake said management "thought they were providing this information to a potential counterparty to a real estate transaction, not to a vulture investor" seeking to potentially seize control by forcing the company into bankruptcy.

The company for months has been buying up portions of the loan on the open market at a discount from other investors. But with the loan maturity approaching in March, Fortress said it wouldn't accept less than full value, the lawsuit said. Lenders aren't generally required to accept anything less than full repayment.

Steak 'n Shake said the information provided to Fortress about the 15 properties made it possible for the investment firm to extrapolate the total value of the company's real estate and other details concerning Steak 'n Shake's value, which was useful to anyone aiming to buy the company.

The company had been preparing for a possible restructuring and hired legal and financial advisers for a possible out-of-court restructuring or bankruptcy filing.

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Steak 'n Shake traces its roots to a hamburger stand founded in 1934. It passed through a series of owners before Mr. Biglari took control in 2008 and invested heavily in expanding the business throughout the U.S. and abroad.