Business and Personal Filings Have Doubled Since 1980

Orange County boasts one of the most vigorous small business climates in the nation, but it also is one of the most volatile, with thousands of companies closing their doors each year.

Many die quiet deaths, but a growing number are using the liberalized federal bankruptcy laws to either liquidate their assets or gain protection from creditors while they try to reorganize their finances and remain viable businesses.

Since 1980, the number of bankruptcy actions filed in Orange County each year has more than doubled from 3,776 to 7,784 last year. Most of those were Chapter 7 liquidations, according to Michael Rotberg, newly appointed director of research and development for the U.S. Bankruptcy Court’s Central District, which covers Los Angeles, Orange, Riverside, San Bernardino and Ventura counties.

And the number of Chapter 11 business reorganizations, the most complex and costly type of bankruptcy action, more than quadrupled from 90 in 1980 to 384 last year.

For the entire Central District, said Rotberg, there were 50,533 bankruptcy actions filed in 1988, including 39,665 Chapter 7 liquidations, 1,358 Chapter 11 business reorganizations and 9,510 Chapter 13 personal reorganizations.

Bernadine Gordon, division manager for the Central District branch in Santa Ana, said the caseload has increased so much in the past few years that a third bankruptcy judge was named for Orange County in December.

One consequence of the growth in bankruptcy filings is that an increasingly large number of Southland firms are finding themselves in the unaccustomed position of being a creditor to a bankrupt business.

The most striking case involved the Chapter 11 filing last month of American Continental Corp., owner of Lincoln Savings & Loan Assn. in Irvine.

Although American Continental is headquartered in Phoenix and filed its bankruptcy petition there, it had aggressively marketed its corporate IOUs--called subordinated debentures--to customers of the S&L.;

When the bankruptcy papers were filed, it was revealed that about 22,000 individuals--most of them from Southern California and many of them elderly people who had invested their retirement funds--had become creditors in the bankruptcy action. They are owed an estimated $200 million.

But there are lots of other individuals and companies in Orange County that are being caught in the unfamiliar web of bankruptcy proceedings as their customers go under and they are forced to queue up in the creditors’ line.

In part, bankruptcy filings are increasing because going broke has evolved from a mark of failure to a sign of aggressiveness and entrepreneurial zeal, and no longer is something to be ashamed of, said David Krajanowski, a partner in the regional accounting firm of Singer, Lewak, Greenbaum & Goldstein. The Santa Ana-based CPA firm does a lot of work with faltering businesses.

“The number of bankruptcies has just absolutely, greatly increased over the past 5 years,” Krajanowski said.

One of the big problems nationally “is that we have a lot of dreadfully managed companies,” said said John C. Boland, publisher of Bankruptcy Values, a Baltimore-based newsletter that tracks the investment value of public companies that are in bankruptcy.

But the biggest cause of the surge in bankruptcy activities was the 1978 overhaul of the federal bankruptcy laws.

The changes transformed the much-amended federal Bankruptcy Act of 1898 into a modernized, streamlined U.S. Bankruptcy Code that took effect in October, 1979.

“The code folded all the various procedures for reorganization into Chapter 11, for example. It streamlined and modernized everything,” said Marc J. Winthrop, a bankruptcy attorney in Irvine.

To most laymen, a business bankruptcy means liquidation--shutting the doors for good. That is what happens in most cases, especially with smaller businesses that really have no other options than closing down. Of the 7,784 bankruptcies filed in Orange County last year, 6,138 were Chapter 7 actions.

But bigger businesses, those with lots of assets or a solid customer base, tend to look to the bankruptcy courts to help protect and shepherd them through a rebuilding or reorganization in the Chapter 11 process.

A Chapter 7 action, according to Winthrop, is no longer useful to most larger businesses because the Bankruptcy Code does not allow a corporation or partnership to obtain forgiveness of all debt through a liquidation, although an individual or a sole proprietor can.

A third common type of bankruptcy action, the Chapter 13, is the consumer’s version of the Chapter 11--a debt reorganization for wage earners whose unsecured debts do not exceed $100,000 and whose secured debts do not exceed $350,000.

In all cases, the filing of a bankruptcy petition stops litigation and foreclosure actions and any other efforts by creditors to obtain money or property from the debtor.

In a Chapter 11, filing the petition enables the debtor to continue operating the business while putting together a plan for financial rehabilitation and reorganization.

A Chapter 11 action also allows the business to shed poor or unprofitable contracts and leases while assuming profitable contracts and favorable leases, even if they had defaulted on them before filing the petition, Winthrop said.

And finally, filing a Chapter 11 gives a company the ability to raise money from unusual sources. A business in Chapter 11 can borrow money secured by a new first lien on property that already has a first lien on it.