By Jim Schutze
By Rachel Watts
By Lauren Drewes Daniels
By Anna Merlan
By Lee Escobedo
Scott Melton and his onetime Deep Sushi partners are far from samurai. Melton, now owner of Sushi Nights on Main Street, is a former petroleum-industry consultant. With a couple of exceptions, his ex-partners in Deep Sushi on Elm Street are anesthesiologists. But this odd collection of professionals cum restaurateurs, owners of competing Deep Ellum sushi restaurants located a stone's throw from each other, is locked in a caustic struggle that is leaving nerves as raw as the sashimi each parcels out.
The first salvo came the morning of June 30, 1998. Melton, who was Deep Sushi's managing partner, was on his way to the restaurant when he was met at the door by a few of his partners led by Mark Bailey (Bailey refused to comment for this story) and an off-duty police officer. Melton says Bailey told him he had been voted out as general partner and the locks were being changed. "At 9:30 in the morning they were locking me out of my own property," says Melton, whose name appears on the lease for the Elm Street location.
From there, Melton claims, his former partners embarked on a calculated campaign to destroy him. They pressured him to surrender the lease. "Every check in the world that they didn't understand, they just threw it into a pile and buried under all of these fraud allegations with this mean fucking letter [that] was this beautifully prepared assignment of lease form for me to assign my rights, title, and interest to them," Melton says.
He says his partners also froze him out of the restaurant's accounts then refused to pay alcohol and sales taxes on sales incurred while he was running the restaurant. Melton says they were banking state regulators would come after him for tax payments because his name was not only on the lease, it was on the liquor license as well. Melton was stuck with more than $57,000 in tax liabilities plus another $15,000 in debt from various vendors, seriously hamstringing his efforts to open his Sushi Nights in December 1998. Melton briefly bankrupted Sushi Deep Ellum, the company he formed to operate Deep Sushi, in April 1999 to keep from getting squeezed under the crush of the debt. But he pulled it out of bankruptcy a few months later to fire the next salvo in this sushi skirmish: a lawsuit charging his former partners reneged on his management contract.
Last February, Melton's former partners sued him in turn, alleging that he bilked the Deep Sushi partnership of more than $96,000 by draining the Deep Sushi accounts and stealing restaurant equipment. They also charge he used partnership funds to, among other things, purchase personal and household items, pay housing rent, and pay the phone bills for himself and members of his family.
The root of this bitter battle was planted in 1995, when Melton says he got the idea to open a Deep Ellum sushi restaurant while working with Tetsuji Yamaguchi at Yamaguchi's in Dallas. He eventually linked up with Yamaguchi to spearhead the project: Melton would raise the capital and assemble the venture while Yamaguchi would provide the sushi expertise. By April 1996 Melton had secured his Deep Ellum sushi space in a former gun shop on Elm Street.
Melton's first partner was anesthesiologist Marc Brown, who agreed to purchase a 5 percent stake for $12,500. Between April and July of 1996, Melton secured the commitments of a dozen more partners, most of them doctors. The venture was structured so that his investors would be limited partners and Melton would be the general partner through Sushi Deep Ellum Inc. Brown, according to Melton, was pivotal in ousting him from his Deep Sushi perch.
Persuading his partners to fulfill their financial commitments proved difficult, Melton says. "They weren't even giving me any money to put the thing together. I had to borrow from Peter to pay Paul," he says. "I didn't have enough money to live on." He claims that while trying to build Deep Sushi, he was evicted from his apartment because his cash flow was diverted into the restaurant. He resorted to sleeping amongst Deep Sushi's construction rubble and recounts an instance in which he tripped over a homeless man in the kitchen after work crews punched two holes in the building's exterior.
Melton says the cash pinch grew so acute that he resorted to a series of odd financial practices to get the restaurant open before lease payments strangled him. He borrowed money from his mother in $500 increments. Records show he made several trips to Tom Thumb between late June and September 1996, cashing checks in sums of $100.75, the upper limit the store would let him cash at one time, for total outlays of $3,627. He hired his son and daughter to help with construction and paid their rent and phone bills, among other things, in lieu of wages.
"He spent a bunch of money at Sam's on things that could not have anything to do with the restaurant, like tires for his daughter's car and boxes of cigarettes," Marc Brown says. "We still don't know where it all went. After a while it just got to be a black hole."
Melton doesn't dispute he used partnership funds to pay off some of his kid's living expenses. But he says the funds were legitimate payments for work they did as independent contractors, outlays he reported to the IRS. The limited partners also accuse Melton of using Deep Sushi resources to pay his personal living expenses, including rent and utilities. But Melton defends these actions too, saying that he used partnership funds to pay up to 50 percent of these expenses because he was using his apartment to store Deep Sushi furnishings and equipment for long periods of time.
"Look, I got money from everybody," Melton says. "Are you kidding? Do you think I had time to sit around and do books when I had two months to put a place together? If I'm guilty of anything, I'm guilty of sloppy bookkeeping." Melton adds he wouldn't have had to resort to such odd financial arrangements if his partners would have given him the necessary funds to finish building the $250,000 restaurant.
But Brown says the limited partners held back on fully funding their partnership interest because Melton was unwilling to consent to the partnership agreement they had drafted. "He kind of played games with the whole deal," Brown says. "If he'd been straightforward about signing the document that everyone had agreed to, he would have had the money from the very beginning. What he was trying to do was play both sides against the middle."
The restaurant opened in October 1996 amid this chaos, and a partnership agreement was finally drafted and agreed to in January 1997. As part of that agreement, Melton was granted 50 percent of the profits. He also purchased a 1 percent stake in the limited partnership for $2,500.
Deep Sushi got off to a good start. Tax records show it generated some $905,462 in income over the course of 1997, sloughing off a $51,192 management fee for Melton. Yet the relationship between Brown and Melton coarsened as the business got on firm footing. Melton says Brown engaged in a calculated campaign to undermine him, sowing suspicions among the partners that he was fraudulently bleeding them of their investment. So in early April 1997, Melton offered to buy Brown's $12,500 stake for $18,000. "I recognized that he was the biggest troublemaker in the group, and if he was silent and out of there, there would be less likely to be all this paranoia running rampant," Melton says.
After numerous delays, the purchase of Brown's stake in Deep Sushi was to be consummated on June 30, 1998. Instead, Melton was met in front of the restaurant that morning by an off-duty police officer and Mark Bailey. Bailey succeeded Melton through a company he and another limited partner formed called Edamame Inc.
Why didn't Brown follow through with his commitment to sell Melton his 5 percent stake? "There was a problem in where that money was going to come from to consummate that agreement," says Brown, who suspected Melton may have siphoned partnership funds to close the deal. "Looked to me that he was trying to buy himself some credibility that he didn't have."
Melton says that's preposterous, adding he was prepared to put up $5,000 of his own money and make up the rest with a $13,000 loan he had arranged from his attorney, Bruce Peele. Besides, Melton argues in court documents that the partnership agreement allowed him to use partnership funds to purchase a limited partner's interest on behalf of the partnership. In addition, Melton claims the partnership illegally diluted his 1 percent interest to 0.495 percent, and the vote to oust him was illegitimate, a suggestion that draws scoffs from Brown. "After a while, [Melton] managed to make sure that nobody in the partnership had any confidence in him," he says. "In this case it was 100 percent of the vote from people whose names were not Scott Melton. The fact is, to a man, nobody wanted him anymore."
But Melton charges that the current successor to his management, Edamame Inc., is shafting the limited partners out of profits by diverting excessive management fees to itself. Indeed, Deep Sushi's 1998 tax records show that management fees totaled $460,047 for that year on revenues of some $1.04 million, representing a fee of 44 percent in an industry where management fees average 5 to 8 percent. But Brown counters the fee represents other overhead, such as employee salaries and expenses, and not just money paid for management services.
Complicating Melton's fight with his Deep Sushi rivals are his own mishaps with Sushi Nights. Last October, he bankrupted his company Sushi Nights LLC, the company that owned the restaurant in the wake of scandal involving his equity partner, Jason Kosova of Forex Asset Management. Early last year, the Securities and Exchange Commission snared Kosova in an investment-scam sting, accusing him of bilking some 78 investors of more than $3.9 million. At one point, Sushi Nights was partly held by a court-appointed receiver, and through the financial turmoil, the TABC confirms Melton's liquor license was suspended for failure to pay liquor taxes, though it was later reinstated. Melton says he reorganized the restaurant as Sushi Nights and Grill, with backing from his mother and his son.
Despite all of the turmoil, Melton vows to keep fighting the sushi war he admits he may be losing. "Bottom line is that they have more money than me and they can pile on as much pressure as they want until I throw up my hands and say, 'I can't take it no more,'" he snaps. "Ten doctors who make a half million dollars a year against one poor restaurant guy is insurmountable odds."