Many Firms Don’t Survive Filings for Bankruptcy : Commerce: The process in the Southland is the most expensive and least successful in the nation.

Vince Punaro took a major gamble in 1988 when he put his small Los Angeles trucking company into Chapter 11 bankruptcy in hopes of straightening out its tangled business affairs.

Now, deep in debt, he is trying to start a new career at age 62. A&B; Transportation Services, his old firm, is out of business; its trucks have been sold at auction. Instead of helping, the bankruptcy filing hurt business and hastened his company’s demise, Punaro said.

“The decision to file,� said the blunt-spoken Punaro, “was a bad one.�

Such is the treacherous world of corporate bankruptcy in Southern California, where satisfaction is largely reserved for the lawyers, accountants and business advisers whose highest hourly fees exceed $400.

With the region’s recession persisting, the bankruptcy courts are getting unaccustomed attention. Scarcely a month passes without another major Southern California company seeking protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code. Among those firms that filed Chapter 11s in 1991 were Broadway department store parent Carter Hawley Hale, RB Furniture, Barker Bros., TV-movie maker Fries Entertainment and Pioneer Chicken.

Yet business bankruptcies in Southern California today are among the most expensive and least successful in the nation. The process itself is bankrupt, some critics suggest, because so few companies emerge alive.

A common scenario is the one exemplified by Punaro’s firm: Companies file for Chapter 11, hoping to get back on track, but eventually close down without reorganizing, leaving a trustee to divvy up the carcass through a liquidation sale.

“The system is working very, very, very poorly,� said Aaron Phelps, a retired bankruptcy court judge in Orange County.

Only large companies have a good chance of surviving bankruptcy because only they have the financial resources to afford it, most experts said.

“The small- and medium-sized firms don’t have a chance,� Punaro said. “They go in, and they don’t come out.�

The corporate bankruptcy courts are rough-and-tumble places where bruising disputes, often narrow in scope but intense in nature, are played out. Questionable characters abound; reports of intimidation and threats of violence are not uncommon.

Law enforcement officials in Los Angeles say that crime in the bankruptcy courts is fast-growing and pervasive.

As many as 100 cases--corporate as well as personal--are under investigation, said Maureen A. Tighe, the assistant U.S. attorney who prosecutes bankruptcy fraud in the Central District of California, which covers most of the Southland, except San Diego and Imperial counties.

“The problem,� Tighe said, “is huge--overwhelming.�

The poor performance of bankruptcy courts across the country is getting increased political attention. A bill introduced in the U.S. Senate in November by Sen. Howell T. Heflin (D-Ala.), former chief justice of the Alabama Supreme Court, calls for a nine-member commission to study the code.

The nation’s bankruptcy laws have been getting progressively more forgiving for nearly 200 years. Once a nation that jailed its debtors, the United States today is one of the most tolerant in the world.

The bankruptcy laws underwent a major overhaul in 1978, when Congress passed the most comprehensive reform in 80 years. The changes took the lid off attorney fees and ensured that owners normally would remain in control of their businesses during reorganization.

Supporters say the system is working well enough, given that it is overworked and underfunded. “It is functioning amazingly well,� said Robert Ordin, a former bankruptcy judge in Los Angeles.

But many others--particularly creditors and debtors--feel that major reforms are needed for the courts to operate more cheaply and efficiently. Proposed changes include fee caps for professionals to cut costs and tough deadlines to prevent Chapter 11s from lingering in the courts for years, as they often do.

“There is no (financial) incentive to get the job done,� said Jeffrey Chanin, an investment banker in Los Angeles who specializes in bankruptcy cases.

No one knows the precise percentage of companies that survive Chapter 11; such statistics are not kept. But the success rate is believed to be lower in the Southland than nationally. Two reasons are the higher costs and the region’s real estate-linked economy.

According to a 1989 estimate by the Administrative Office of the U.S. Courts, 10% to 12% of Chapter 11 cases “result in a successful reorganization.� But in the Central District, 5% or less successfully reorganize, according to the Office of the U.S. Trustee.

The poor success rate of Chapter 11s does not lie solely with the system. Bankruptcy experts say that many businesses never emerge from Chapter 11 because they are poorly run, short of capital and generally beyond salvation by the time the petition is filed.

A&B; Transportation was a troubled company that only got sicker in Chapter 11. Hurt by labor problems and rising insurance costs, it lost major contracts after its reorganization petition was filed, Punaro said.

Also, the legal bills--more than $100,000--were too much for a firm whose annual revenues were less than $6 million, Punaro said. They “were greater than the profits we were making,� the owner added.

Not surprisingly, many bankruptcy attorneys view the world differently. They say that they often face long delays in getting their fees--even major losses if their clients are broke.

Punaro’s tale of woe brought a sharp retort from his own bankruptcy attorney, Alan G. Tippie. “That case was not expensive for him at all,� Tippie said. “He never paid. I’m sitting on a (big) loss on this case.�

A&B; Transportation paid $25,000 in pre-filing fees, both men agree. Another $70,000 in bills from Tippie’s law firm have yet to be paid, Tippie said.

Fees in Chapter 11 cases are approved by the court and supposedly reviewed by the Office of the U.S. Trustee, an arm of the Justice Department that administers the cases.

In reality, it is difficult for judges to evaluate whether the fees are deserved. And the U.S. Trustee’s Office in Los Angeles has done little to monitor the bills, which are rarely organized in a coherent way.

“To think that this office is doing a good job monitoring attorneys’ fees is a joke,� said one official in the U.S. Trustee’s Office who asked not to be named.

When the fees are closely scrutinized, though, the results can be illuminating. Take the current reorganization of retailer Carter Hawley Hale, one of the largest Chapter 11 cases ever filed in the Central District.

Concerned about its mounting legal and accounting bills, the company hired its own computer specialist to analyze the costs, said Marcy Tiffany, head of the local U.S. Trustee’s Office.

It turned out that a paralegal for the law firm of Skadden, Arps, Slate, Meagher & Flom billed Carter Hawley Hale for 27 hours of work in one day. Skadden attorneys acknowledged that the billing was a mistake.

The computer records also showed that the accounting firm of Coopers & Lybrand repeatedly sent five people to attend meetings of Carter Hawley’s creditors.

“At some point you have to say, how can you justify sending five partners to every creditors meeting,� Tiffany said.

Stanley E. Speer, a partner in Coopers & Lybrand’s Los Angeles office, said the attendance was justified. “There is no one person who could have addressed all the questions,� he said.

Though corporate bankruptcies at even the best-known companies are now commonplace, what happens behind the scenes--after the petitions are filed--usually gets only scant attention.

The experience is often painful.

“Bankruptcy is a dreadful experience,� said Severyn Ashkenazy, who owns several Westside hotels that have sought Chapter 11 protection in recent years. “It’s demeaning and filled with shame.�

Ashkenazy said that the lingering recession and travel cancellations caused by last year’s Persian Gulf War have been devastating for his businesses. “Most of the time you don’t have money enough for everything,� he said. “You just keep juggling and wait for better times.�

At their most dramatic, the bankruptcy courts are a stage where power and control are bitterly contested against a backdrop of anger, hard feelings and charges of incompetence or wrongdoing.

Consider Leisure Technology, a real estate development firm in Los Angeles that filed for Chapter 11 in April.

Angry creditors have charged in bankruptcy court that chief executive Michael Tenzer drove the firm into the ground and misled the public about its financial condition. Others named in the suit are retired Gen. Alexander M. Haig, a former director, and housing economist Michael Sumichrast, a board member.

Meanwhile, expenses for lawyers and accountants have surpassed $2 million--and may force a liquidation. “We’re already very close to that point,� said Theodore B. Stolman, one of the firm’s bankruptcy attorneys.

And the fight has just begun. “Mike Tenzer is not the kind of guy to back off,� said Marshall Grossman, another of Tenzer’s attorneys. “He hasn’t done anything wrong.�

Leisure Technology is one of many companies in Southern California whose fortunes have plunged with the declining real estate market.

An estimated 40% of the business bankruptcy reorganizations in the Central District are real estate-related, according to the U.S. Trustee’s Office. Many are partnerships that own a single piece of property and file a Chapter 11 to fend off foreclosure.

Critics say these Chapter 11s are a misuse of the courts because they are not usually a means for business reorganization. Though the Chapter 11 petition automatically halts a pending foreclosure, lenders typically seek to have the stay lifted.

The process is often contentious--and drawn out. In one recent case, the main lender on an office building in Malibu repossessed the property only after it went through five receiverships and two Chapter 11s.

And then there is B.K. (Dave) Madan, a real estate investor from Long Beach who has a string of commercial properties in the Los Angeles area that are worth several million dollars.

Facing major debts, Madan placed his troubled properties into separate partnerships, which then were placed into Chapter 11, court records show. The partnerships were ordered liquidated, but Madan has fought the move with a passion ferocious even for bankruptcy.

“I hope GOD gives you Cancer in all your body and in your loved ones bodies and to all those who conspired with you guys to steal from our hard-earned funds,� Madan wrote to Arnold Kupetz, a well-established bankruptcy lawyer who is supervising the liquidation as trustee.

Madan sent copies of the letter to two bankruptcy judges whom he labeled “co-conspirators.� One rent collector alleged that Madan threatened him, saying: “If you don’t get off my property, I’m going to kill you,� court papers show.

In a phone interview, Madan denied that he has threatened anyone and said his words only reflected his extreme frustration with the bankruptcy process. “I see in front of my eyes all my hard work being snatched away,� Madan said. “I just expressed in words what was in my heart.�

Another embattled figure in bankruptcy court is real estate investor Sherman Mazur, who was indicted in December as part of a federal investigation that lasted at least three years.

Mazur was charged with 45 counts of bankruptcy fraud--the largest indictment of its kind ever handed down in the Central District--and he is expected to be charged with tax law violations, prosecutor Tighe stated in court.

Known for his stylish dress, Mazur appeared at his bond hearing attired in prison-issue blue sweats and red sandals with no socks. He was being held at the Metropolitan Detention Center in downtown Los Angeles, but was freed on $400,000 bond.

Mazur was unceremoniously arrested at his Century City office by FBI and IRS agents instead of being asked to surrender voluntarily. Some saw the tactic as a deliberate attempt to humiliate a cocky figure accustomed to fine cars, expensive jewelry and beautiful homes.

“I think the government really wants to make an example of him,� said William G. Wilson, Mazur’s attorney in civil matters.

The government portrays Mazur as an unscrupulous figure who cheated his colleagues and lied to federal authorities, court records and testimony show. He was known to pull a pistol out of his desk during heated arguments with employees, prosecutor Tighe said during Mazur’s bail hearing.

Mazur was charged in connection with his management of more than 200 limited partnerships across the nation. Though he was touted as a real estate turnaround specialist, his business associates accused him of looting the assets while putting the partnerships into bankruptcy, court documents show.

Mazur has listed his net worth at more than $15 million, most of which is believed to be tied up in his luxury homes in West Los Angeles and south Orange County. A detective agency hired by the trustee supervising the liquidation of Mazur’s company, American Resource Corp., spent $50,000 searching for hidden assets but came up empty.

Another familiar figure in Southern California’s bankruptcy courts is Craig E. Caldwell, whose career in the last 20 years has been one of great promise mixed with repeated run-ins with the law.

Caldwell, who declined to be interviewed, is a 1972 graduate of USC, where he was president of the student Senate and head varsity yell leader. Today, he is a convicted felon.

Caldwell pleaded guilty in 1989 to three felony counts of fraud stemming from the 1982 collapse of Santa Ana-based Western National Bank. In his early 30s at the time, Caldwell was the bank’s chairman and major stockholder. He received three years of probation and a $15,000 fine.

Shortly after the guilty plea, Caldwell was fined $261,000 by David N. Naugle, a bankruptcy judge in San Bernardino. The fine, which is under appeal, resulted from Caldwell’s operation of a company called Rainbow Magazine.

Caldwell used the company to gain control of a Palm Desert apartment building and then placed the operation in Chapter 11 after paying himself more than $157,000, court records show. In his decision, Naugle called the case an “embarrassment to the bankruptcy court.�

Caldwell, he said, was a bankruptcy expert with “a fire-sale mind-set and penchant for cutting ethical corners.� The judge stated that Caldwell had lied under oath on at least four occasions and, despite his intelligence, “has a terrible memory for any embarrassing details.�

“The only two witnesses I have observed in over 13 years on the bench with worse memories,� the judge said, “were self-acknowledged as brain-damaged--one from alcohol abuse.�

Business Bankruptcies 1. Businesses typically file for bankruptcy under Chapter 11 of the Bankruptcy Code. These petitions are designed to provide troubled companies time to reorganize under court protection. The filing cost is $600. (Liquidations occur under Chapter 7, although companies rarely make their initial filing in that form.) 2. A listing of the company’s assets and liabilities must be filed within 15 days of the initial filing. 3. For 120 days after the initial filing, debtors have the exclusive right to file a bankruptcy reorganization plan with the court. After that, creditors may file their own reorganization plans. 4. There are no other deadlines. Chapter 11s usually drag on several years, during which the debtor company’s attempts to reorganize often fail. In those cases, the petition is converted into a Chapter 7 bankruptcy for liquidation by a court-appointed trustee. In Southern California, companies in Chapter 11 succeed in reorganizing in less than 5% of cases.