The Demise of Cardillo Travel Systems : Bitter Feud Among Rognlien Family Brings Down Business Empire

In October, 1986, a well-known Los Angeles travel agency suddenly closed its doors, and the mystery is only now starting to unravel.

It is a tale of intrigue worthy of “Dallas,” featuring a wealthy entrepreneur, a bitter divorce and a costly feud over a family business empire.

At its center is Arnold Walter Rognlien. Although he is unknown to most Southern Californians, thousands of them bought airline tickets or vacation cruises through his Cardillo Travel Systems, based in Culver City and once among the nation’s largest travel agencies.

A wealthy auto parts salesman who enjoyed travel, Rognlien acquired Cardillo in 1956. As the agency grew, it served as the centerpiece of a mini-conglomerate that included a fast-food restaurant chain, an ice drink confection company and an auto parts distributorship.

Rognlien quietly ruled it all until Cardillo somehow ran out of money. Now, much of his empire is gone or in shambles.

The collapse still amazes those who worked alongside Rognlien for the past two decades. “It was a family company. I never thought it, or the family, would break apart the way it did,” said Larry F. Sternberg, a former executive and one of Rognlien’s closest advisers for nearly 30 years.

At an age when many men work on their golf swing, Rognlien, 75, now works at defending himself. He faces misdemeanor charges for allegedly not paying 27 Cardillo employees during the travel agency’s last months. The Securities and Exchange Commission has filed a civil suit that accuses Rognlien and his wife, Esther I. Lawrence, Cardillo’s ex-president, of falsifying the agency’s books to show a profit. The Rognliens deny any wrongdoing.

What’s more, Cardillo’s bankruptcy trustee, Los Angeles lawyer Richard M. Pachulski, is disputing the shift by Cardillo of its most valuable asset, a $827,436 note, to Rognlien’s private holding company. Rognlien has been ordered by the court to turn over Cardillo’s books to the bankruptcy trustee.

Esther and Walter Rognlien and his son, David Rognlien, didn’t respond to repeated requests for an interview for this story. Walter’s ex-wife Adele and their other son, Bruce W. Rognlien, declined to be interviewed.

Rognlien’s empire began as an auto parts distributorship known as A. Walt Runglin Co., using the phonetic spelling of his name. He opened the business at age 33 with little cash, essentially “out of a suitcase,” he testified in court years later.

He worked hard and loved to entertain his customers. The son of an Iowa preacher, he quoted the Bible during business meetings. More often than not, a business dinner at the family home in the La Canada Flintridge area ended in song, former associates say, with Rognlien leading the chorus in a deep baritone.

Yet the mercurial businessman is said to be as harsh as he is charming; around the company headquarters, his tongue-lashings were legendary. Former employees recall that a small matter, such as a lost memo, could provoke angry outbursts from Rognlien. Often, Rognlien later apologized for losing his temper. William Kaye, a former Cardillo chief financial officer, says Rognlien gave him a $100 bill to celebrate Kaye’s wedding anniversary after one tirade.

“The man was a paradox,” said Richard Churchill, a longtime adviser who was close to the Rognlien family.

1981 a Watershed Year

By 1981, Rognlien’s company had become the largest auto parts distributor in the West, earning a profit of $300,000 that year, according to Sternberg. With such profits, Rognlien financed other ventures. Besides Cardillo, he founded Cozy Nook, a small fast-food chain on the West Coast, and acquired Icee USA, a shaved ice and syrup soft drink company with outlets in K mart and other stores. He managed them all through his private holding company, known as Runglin Co.

Rognlien’s business empire appears to have reached its zenith in 1981--the year Cardillo sold 49.9% of its stock to the public. The Rognlien enterprises posted total sales of $15 million that year, according to Sternberg. And as his businesses grew, so did Rognlien’s wealth. Court documents show that he was worth $8.5 million in 1982 and owned three homes, including an $850,000 penthouse in Santa Monica.

His success wasn’t unblemished, however; during the 1960s, he closed a chain of money-losing shops that installed automobile air conditioners. “He operated somewhat by the seat of his pants,” Sternberg said. “When an idea appealed to him, he just plunged in. He was an entrepreneur in the best sense of the word.”

But there was little doubt about who was boss; his office was decorated with photographs of himself, including one of him with former President Gerald R. Ford. A portrait of Rognlien adorned the lobby at the Anaheim headquarters of Icee USA, which sold the product in the 14 Western states.

Also, there was little doubt about who would someday succeed him. Rognlien’s “lifelong plan and dream” was for his two sons, Bruce, 49, and David, 46, to “take over operation of the entire company,” according to declaration in court by Rognlien’s ex-wife. But that dream melted away in heated feuds between the sons and their father.

Rognlien’s sons joined the family businesses after college graduation; according to court documents, David started as a salesman for the auto parts business in 1969 for $1,100 per month. Eventually, the sons held important jobs. In 1979, Bruce was president of Cardillo and David was president of the auto parts company. Both sons reported to their father, who was chairman and chief executive.

A rift between Bruce Rognlien and his father first surfaced in 1979. According to a court declaration filed by his mother, Bruce felt that his authority was threatened by Esther Lawrence, a 36-year-old vice president at Cardillo who was “involved romantically” with his father, then 66.

Lawrence “used her particular favor with (A. Walter Rognlien) to disagree with certain policy decisions of Bruce Rognlien and go directly to (Rognlien) and persuade him to side with her,” Walter Rognlien’s first wife testified during divorce hearings.

When Bruce asked his father for support, Rognlien told him to “leave the company,” Adele Rognlien testified. After negotiations, father and son struck a deal: Rognlien sold Bruce a controlling interest in several Orange County travel agencies, to be known as Associated Cardillo, and Bruce resigned as president of Cardillo.

Bruce paid $135,300 cash, and his father carried a note for the $541,200 balance. With Bruce gone, Esther Lawrence became president of Cardillo in 1981.

Frequent Disputes

Bruce wasn’t the only executive to quit in a dispute with his father. In mid-1986, Icee President Edward Steele quit, upset over $23,000 in monthly management fees Icee paid to Rognlien’s private holding company, according to knowledgeable sources. In court testimony sometime later, Steele cited Rognlien’s “personality” as his reason for quitting.

Although management fees charged by a parent company are often considered routine, the Rognlien firm’s fees were a sore spot with other executives. In 1985, Ted Salac, a financial vice president at Runglin Co., urged Rognlien to drop the $23,000 monthly management fee charged to loss-plagued Cardillo. He said his advice was ignored.

The management fees also annoyed David Rognlien. According to sworn statement by one of his employees, David complained to her that his father’s holding company had diverted profit from the auto parts business to “other purposes.” He also said $20,000 was taken each month from the auto parts company for a “management shares plan which did not exist.” The documents do not say what that plan was.

In 1981, David asked to buy his father’s auto parts business. According to a sworn statement by David in court documents, Rognlien agreed to the sale on several occasions, but changed his mind each time. David testified that his father told him in February, 1982: “David, if you have any guts, you’ll go out and start your own company.”

The next day David quit his father’s auto parts business, and shortly thereafter 10 of its top salesmen joined him in a new company. The defections halved the auto parts business almost immediately. Within two years, Ronglien’s original auto parts company was losing $1 million a year, according to Sternberg.

Rognlien eventually sued David for raiding his company and stealing clients, but it didn’t lessen the financial blow and likely worsened family relations. “I think David thought he was just asking for his share of the family fortune, but I think Walter saw it as ingratitude--after all, he made David president (of the auto parts business), and was paying him $100,000 a year,” Sternberg said.

A weakened auto parts business hurt the rest of Rognlien’s empire. That business was the most profitable company, the money machine that made the other parts go. When profits turned into losses at the auto parts firm, “Walter had to borrow more heavily from the banks than ever before,” said Sternberg, who was there at the time. Four years later, Rognlien sold the crippled parts business to David to settle the litigation with his son.

The cash crunch at the auto parts company came just as Cardillo’s business soured.

From 1981 to 1984, Cardillo had expanded from 20 to 36 company-owned offices, including one in Washington. In addition, the agency had 35 franchisees, making it the nation’s fourth-largest travel agency, behind American Express, Thomas Cook Agency and Ask Mr. Foster.

Growth had a price. Cardillo lost $965,000 in 1982, despite an increase in sales. After imposing wage cuts and a hiring freeze, the agency recovered in 1983, earning $103,000.

In 1984, profits again took a nose dive. The expansion program cost $600,000 that year, and vacation travel fell--in part because so many Southern Californians stayed home that year to attend the summer Olympics in Los Angeles.

A new contract with the state of California boosted sales but hurt Cardillo’s already fragile cash flow, according to former executives at the agency. The state paid its bills within 60 days, but airlines demanded their payment within 10 days.

As Cardillo’s situation worsened, Rognlien was divorcing his first wife. Rognlien married Esther Lawrence in November, 1982, two months after his divorce was granted.

Even after the divorce but before their property settlement two years later, his ex-wife Adele Rognlien stayed on as vice president in charge of office design at Cardillo, and their bitter personal dispute apparently continued. At one point in 1983, Rognlien closed Adele’s office at Cardillo and sharply reduced her pay. In 1984, he ousted his sons from the holding company board, accusing them of siding with their mother.

Later that year, he and Adele agreed to a property settlement. Rognlien was required to pay his ex-wife $2.6 million over six years and to give her most of their real estate, including the Santa Monica penthouse. Significantly, Rognlien also gave his ex-wife Icee’s Anaheim headquarters building and his interest in the office building that housed Cardillo’s headquarters.

Court documents indicate that Rognlien agreed to the settlement with reluctance. “She was to become my landlord and I her tenant in the various businesses I had built,” he testified during the divorce hearings.

By the end of 1984, Cardillo was losing money and needed cash. The agency sold its 49% stake in Associated Cardillo to Bruce Rognlien for $1.5 million. Bruce paid Cardillo $300,000 cash and signed another note for the balance. The deal finally gave him what he wanted five years earlier: full control of a travel agency. He continues to operate that business, now known as Associated Travel.

The sale helped Cardillo’s balance sheet, but not enough. Although the agency reported a $722,123 gain on the sale, it lost $448,002 for the year, according to its financial statements.

Walter Rognlien and his wife embarked on a complicated series of financial transactions to save Cardillo, according to court documents.

Charges of Insider Trading

By June, 1985, Cardillo was unable to borrow enough under its $1.5-million line of credit at Bank of America to cover expenses, court documents show. The Rognlien holding company, which had its own $1-million credit line at B of A, at one point borrowed money and lent $694,200 to Cardillo.

When it came time to renew the holding company’s credit line in June, 1986, the bank demanded additional collateral from the holding company. So, in an action later challenged in bankruptcy court, Cardillo paid its debt to the holding company by transferring Bruce Rognlien’s final purchase note for Associated Cardillo to the holding company. The holding company then pledged the note as security to B of A.

Bank of America also kept as collateral half of Rognlien’s stock in Icee.

According to the SEC lawsuit filed last summer, Esther and Walter Rognlien allegedly doctored Cardillo’s books to show a profit for the quarter ending June 30, 1985. The SEC claims that the couple falsely booked $203,210 as income when in fact the money was a reimbursement from United Airlines for expenses incurred by Cardillo when it installed United’s Apollo reservation system.

The SEC is also suing Rognlien to recover $237,500 he allegedly received when he sold 100,000 shares of Cardillo stock on April 10, 1986, on the open market. According to the suit, Rognlien had inside information about Cardillo’s deteriorating financial condition when he sold his shares. Court documents filed by Rognlien in Cardillo’s bankruptcy proceedings show that Rognlien lent the proceeds of that stock sale to Cardillo.

Walter and Esther Rognlien have denied the SEC’s charges of wrongdoing. Cardillo’s former chief financial officer, Kaye, also was named in the civil lawsuit; he has since signed a consent decree without admitting or denying the allegations.

As Cardillo’s financial situation worsened, the atmosphere at the travel agency grew chaotic. At one point, American Airlines took away Cardillo’s access to the airline’s computer reservation system, crippling Cardillo’s Sacramento office. Tickets were sent by courier from Culver City to Sacramento until the dispute was resolved.

Costly acquisitions soured. In 1982, Cardillo purchased Johanna Elliot’s Los Angeles travel agency to obtain its lucrative account with the USC School of Business. Within months of the purchase, USC put the account up for bids, and Cardillo lost it.

”. . . She (Lawrence) never consulted me. She was very secretive,” Elliot said.

When Willem Westerhuis joined Cardillo as a vice president in January, 1986, he found $75,000 in unpaid bills submitted by Pacific Southwest Airlines that Cardillo disputed.

“No one dealt with the problem,” Westerhuis said. “The bills just sat in a box.”

Later, Westerhuis received a bigger shock. In June, he submitted a dental claim, only to learn that Cardillo’s medical and dental insurance coverage for employees had lapsed two months earlier for non-payment of premiums. After he complained, Lawrence fired him, Westerhuis alleged in a lawsuit he filed against the the Rognliens. Esther Rognlien has denied Westerhuis’s allegations.

By that time, Lawrence appeared to have few admirers among Cardillo’s executives. Turnover at the agency was high; chief financial officers lasted no more than a year or two.

One vice president said she needlessly told him to “wear a suit and look nice” at meetings with clients, but rarely discussed strategy.

Some executives complained that she ignored their advice. Kaye says that in October, 1985, a group of top Cardillo executives worked over a weekend to come up with a plan to alleviate the agency’s cash flow problems. He said the group recommended that Cardillo close most of its offices and consolidate its operations. The plan would have saved Cardillo $1 million a year, he said.

The following Monday, the executives gave Lawrence their report, but she dismissed it without asking a single question, Kaye said. “She said Walter wouldn’t go for it, and that was it.”

On Aug. 28, 1986, Cardillo’s landlord--an investment group that included Rognlien’s ex-wife--locked the travel agency out of its main office in a dispute over rent.

The lockout threw the agency into deeper confusion. Its 82 offices lost access to Cardillo’s central computer, making it impossible to process bills and track the sale of tickets. Even worse, Bank of America had stopped advancing it funds because the agency couldn’t provide the mandatory accounts receivable report.

“Unless we regain access to our corporate headquarters immediately, we will be out of business,” Lawrence testified in court at the time.

Two days after the lockout, two executives from Cardillo and two from his holding company invited Rognlien to a private meeting at the Holiday Inn in Brentwood. “We told him his wife had to go,” said one participant at the meeting. The executives urged Rognlien to seek bankruptcy protection for Cardillo.

“We thought that if Cardillo could reorganize its finances in bankruptcy, it would survive,” said Kaye, who also attended the meeting.

Shocked by the demand, Rognlien accused the executives of mutiny. “I expected to be fired Monday morning, but nothing came of it,” a participant said.

Negotiations Flounder

A week after the meeting, Cardillo paid the overdue rent and reopened its office. By then, Cardillo’s business had been severely weakened, as nervous customers moved their accounts to its competitors. Cardillo became a takeover candidate.

Ronald Lockhart says his former employer, B. T. Travel Ventures, was especially interested in Cardillo’s large agency network and its back-office computer system.

About six weeks after the rent dispute, Lockhart, then controller of that South Carolina agency, flew into Los Angeles on a weekend to review Cardillo’s operations. Rognlien stubbornly refused to negotiate.

“We talked about acquiring them, but we were millions of dollars apart,” Lockhart said. “Cardillo’s business had eroded too much. Walt Rognlien wanted more than it was worth.” Lockhart returned to South Carolina on Sunday and forgot about Cardillo.

Within weeks, Cardillo was out of business, its authority to issue tickets revoked by the Airline Recording Corp., a clearinghouse for the airlines. The state Labor Department filed charges against Rognlien and Lawrence, alleging that they failed to pay employees in the weeks before the agency closed. The Rognliens are disputing those misdemeanor charges and will be negotiating with Labor Department officials, according to Marc Smith, their Universal City lawyer.

On May 28, 1987, unsecured creditors, including Elliot and Kaye, forced Cardillo into involuntary bankruptcy proceedings. Elliot was never fully paid for the agency she sold to Cardillo, and has a judgment that totals $900,000 against the company. Kaye says he is owed back wages.

Little remains of Rognlien’s empire. Cozy Nook, the fast-food chain, collapsed under a mountain of lawsuits from angry franchisees. When it sought bankruptcy protection last December, it listed no assets and $19.8 million in debts.

Rognlien still owns some overseas Icee operations and Orange Magic, a small company based in Ontario that sells orange-flavored drinks.

But the bankruptcy filings didn’t end the story.

Bank of America threatened last April to sell Rognlien’s half interest in Icee to satisfy the debt owed it by his holding company. The bank planned to sell the stock to a group of Icee executives, including Sternberg, Lawrence C. Maltz and Rodney Sexton.

Rognlien successfully sued to halt that sale and then sold his 41% interest in Icee last May for $3 million to J&J; Snack Foods, a New Jersey company.

Since then, J&J; Snack has claimed that its Icee acquisition has given it some surprises. In several lawsuits filed in Los Angeles, J&J; Snack contends that Rognlien overcharged his former frozen drink company for cars, Icee machines and franchise rights. In one case, J&J; Snack asserts that Rognlien’s holding company sold Icee 81 used soft drink machines for $173,000--about three times what Runglin allegedly paid for them.

In response, Rognlien said in court filings that transactions between Icee and the holding company were fair, and that the stock sale agreement between Rognlien and J&J; Snack prevents J&J; Snack from taking legal action.

Another J&J; Snack lawsuit against Icee’s underwriters in the firm’s 1985 initial public offering alleges that Icee vastly overpaid for rights to do business in Canada and Mexico. Icee paid the holding company $2.2 million for exclusive franchise rights in those countries in 1985, but J&J; Snack says the franchise is worth just $200,000. The underwriters, Sutro & Co. and the Ohio Company, have denied wrongdoing.

“We were surprised to the extent that these (transactions) surfaced,” said Gerald B. Shreiber, J&J;’s president, who is trying to recover some of the $3 million his company paid for Icee. “I hope he (Rognlien) has some money left.”

Runglin Cos A. Walter Runglin Co Cardillo Travel Systems Inc. 50.1% owned Associated Cardillo 49% owned West America Touring Inc. Western Icee Corp. Western Syrup Co. 50% owned Icee Hawaii 40% owned Icee USA Inc. 75% owned Cozy Nook Inc. Runglin Overseas Ltd. Hong Kong Icee Hong Kong Icee Singapore Icee Overseas Runglin Exports Inc. Source: Court filing by A. Walter Rognlien