Bankruptcy Figures Weave Web Costly to County : Litigation: The owner of Tallmantz Aviation Inc. paid himself a high salary while using bankruptcy to fend off creditors; he also hired high-priced lobbyist Frank G. Michelena.

Frank G. Michelena is the guy you go to see when you want something from Orange County government. So it’s no surprise Charles C. Seven retained Michelena, a high-powered lobbyist, because Seven indeed wanted something from the county: to keep his business afloat.

Therein lies a tale that’s spread over U.S. Bankruptcy Court files, county records and lawyers’ offices all over Orange County.

It’s a tale in which Seven says he paid himself generous management fees while his company--Tallmantz Aviation Inc.--was in bankruptcy, losing thousands of dollars and missing loan and rent payments; in which a federal judge said Michelena, Seven and others allegedly misused the federal bankruptcy laws to keep Seven in charge of the company and his creditors at bay, and in which Seven’s legal maneuverings cost the county more than $100,000, much of which it may never recover.

“Even your own statements,” Bankruptcy Court Judge James N. Barr said as he chastised Michelena’s lawyer in a hearing earlier this year, “and the proof that’s put together here” show the lobbyist filed a bankruptcy petition involving Tallmantz “solely for the purpose of delay . . . .”

And the story isn’t over. Several hundred creditors may never get back the nearly $8 million Tallmantz owes them, according to bankruptcy court records. And Barr is now considering whether to impose $160,000 or so in penalties on Seven, Michelena, their lawyers and others for their actions.

Michelena, 60, of Costa Mesa declined comment. Seven, 46, couldn’t be contacted despite repeated attempts to reach him through his lawyers.

For such a complicated tale, this one began rather simply in 1985 at John Wayne Airport when Seven bought Tallmantz Aviation. The company is a fixed-base operator: It maintains corporate aircraft, sells aviation fuel and rents space for parking private planes.

Tallmantz had a colorful history even before Seven bought it. The company was founded in the early 1960s by two movie stunt pilots, Paul Mantz and Frank Tallman. Mantz died in a plane crash in 1965 while filming “The Flight of the Phoenix.” Tallman died in 1978 when he crashed into the Santa Ana Mountains.

Tallmantz’s livelihood has always depended on leasing land at the airport, which is owned by the county. So Seven saw a need to protect his interest and soon after buying the company he hired his old friend Michelena, who had been a county official in the early 1960s but was now a powerful lobbyist.

Michelena rarely talks to the press about his clients, particularly controversial ones like former client W. Patrick Moriarty, the Anaheim fireworks magnate who went to jail in 1986 for bribing public officials.

Michelena, in fact, has been questioned by law enforcement officials in several political corruption cases. He has never been charged with a crime. Michelena made news recently when a commission overseeing plans for a high-speed train between Anaheim and Las Vegas said it would award him a $5,000-a-month, no-bid consulting contract.

His deposition in the Tallmantz bankruptcy case, however, provides a glimpse of how he works.

Frank Michelena Associates got a $2,000-a-month retainer from Tallmantz, according to the deposition. In return, Michelena said, he “worked with them in dealing with the governmental agencies, the County of Orange.” That included helping to renegotiate Tallmantz’s lease with the county, he said.

John Wayne Airport had been a sleepy little suburban airfield when Tallmantz was founded. But in the past 20 years Orange County grew into a vast metropolitan area and the airport was swamped with more passengers than it could cram into its little terminal. In terms of general aviation--privately owned aircraft that are the customers Tallmantz services--Orange County had become one of the busiest airports in the nation.

Yet Tallmantz and other airport businesses were still operating on long-term leases signed in the 1960s, with rents the county was now saying were ridiculously low. Tallmantz, for instance, was paying $2,300 a month rent. Tallmantz’s lease didn’t expire until 1993, but by the late 1980s Seven asked the county to extend it so he could plan for the future.

The county agreed in October, 1988, to write a longer lease if Seven would build new hangars and offices on the property over the next five years. The county also demanded a big rent increase, to $17,100 a month. And the county wanted its share of the equity in the buildings already on the property. Those buildings were to revert to county ownership when the old lease expired in 1993. Because the lease would now be extended, the county wanted its share of the buildings now.

A month or so later, in December, 1988, the county was threatening to evict Tallmantz for missing rent payments and the payment on the buildings. The bill came to $347,000.

About the same time, according to court papers, Tallmantz fell behind on payments to some of its biggest creditors.

One of them was Guardian Savings & Loan Assn., a Huntington Beach thrift that had been looking for new places to loan money after the deregulation of the thrift industry in the early 1980s.

Seven tapped Guardian for $3 million in 1985 to buy Tallmantz and construct more buildings. The thrift lent Tallmantz another $775,000 in 1987. As collateral on his loans, Seven pledged among other assets the most valuable thing Tallmantz owned: its lease with the county.

But Tallmantz, Seven would later testify in a deposition, was even then an ailing company. In 1986, Seven said under oath, the company lost about $200,000; as much as $500,000 the next year and as much as $900,000 in 1988.

When Tallmantz stopped paying the loan, Guardian asked the courts to foreclose, let it sell the lease to another fixed-base operator and keep the proceeds as payment. The county was still threatening to evict and had added yet another complaint: Tallmantz, the county said, had polluted its property by spilling aviation fuel, a toxic substance.

Guardian even began making some of Tallmantz’s rent payments so the lease wouldn’t be lost to another fixed-base operator.

Then in February, 1989, Seven filed the first of several bankruptcy petitions involving Tallmantz. The Chapter 11 petition meant that the county couldn’t legally evict him, Guardian couldn’t foreclose on its loans and Seven remained in control.

He later said under oath that he paid himself about $15,000 each month the company was in bankruptcy. Guardian was outraged.

“It was simply incredible to the thrift that Seven would pay himself as if he had a successful business after he had run it into the ground,” said Ronald Rus, a lawyer for Guardian at the law firm of Alvarado, Rus & McLellan in Orange. “He was paying himself with the bank’s money.”

Chapter 11 bankruptcy is supposed to allow troubled companies to operate while devising a plan to reorganize and pay their debts. The idea is to help a business survive while satisfying creditors’ demands.

But the law can be abused. In such cases, the financially strapped company continues to lose money or, in the worst cases, assets are deliberately stripped away.

That’s what Guardian alleged Seven was doing. During the Tallmantz bankruptcy hearing, Guardian stood up and told the judge the company was still losing money even though it was skipping loan and rent payments. In fact, Guardian said, Tallmantz seemed to be losing money even faster based on its monthly financial statements.

What’s more, there weren’t enough assets and money left in the company to repay both Guardian and its 200 or so other creditors. Because Guardian was a secured creditor--it had the lease as collateral--it stood first in line to be paid and there wouldn’t be anything left for the other, unsecured creditors.

So there was no reason to keep either the company or the bankruptcy going, Guardian told the judge. The thrift asked him to throw the bankruptcy petition out so Guardian could foreclose and collect what it was owed. The judge complied in September and dismissed the Chapter 11 proceeding.

But Seven wasn’t through yet. What happened next is what got Michelena, Seven and the others into trouble with the bankruptcy court.

Before Guardian could get through the legal process of foreclosure or the county could finish eviction proceedings, Michelena and two other business associates of Seven’s put Tallmantz back into the bankruptcy courts the next month. The three, who said Seven owed them money, asked the court to put Tallmantz into a Chapter 7 involuntary bankruptcy. Chapter 7 allows for liquidation of a company--the sale of all its assets to pay off its debts.

The two others seeking the Chapter 7 filing were Newport Beach accountant Paul Motenko of Motenko, Bachtelle & Co., who did accounting for Tallmantz and for Seven personally, and Russell Frederick Padia of T.R.P. Development, who consulted for Seven on environmental matters. (Padia’s qualifications as an environmental expert were questioned in court and he was dismissed from testifying as an expert.)

Once Tallmantz was back in bankruptcy court, Seven filed yet another petition two weeks later converting the petition to Chapter 11, again forestalling liquidation of the company.

This bankruptcy didn’t even last as long as the first one. There was something fishy about the new one too, Guardian’s lawyers told the judge. Seven, they said, had put Michelena up to filing the involuntary bankruptcy as a way to get Tallmantz back into bankruptcy through the back door for the sole purpose of stalling. Michelena and Seven then recruited Motenko and Padia as camouflage, the thrift charged.

In January, Barr ruled that Michelena, Motenko, Padia and their lawyer, Steven M. Fischman, and Seven and his lawyer, Max C. Garrick Jr., had had the bankruptcy petitions filed in “bad faith.”

“The evidence,” the judge told Michelena’s lawyer during the hearing, “proves the (involuntary bankruptcy) petition was filed at the request of Seven and Michelena despite Seven’s and Michelena’s denials of that.”

The judge said he would punish the group. He is still considering how to do that, including a request by Guardian and the county that the men pay $162,000 in costs from the case.

Michelena, Motenko, Padia and Fischman’s firm, Teague & Brannan, all offered to settle with the county for what some lawyers in the case consider the modest sum of $1,000 apiece. The county counsel recommended taking it, and county supervisors voted to accept the settlements in March.

“It was a judgment call,” said Robert L. Austin, deputy county counsel, explaining why the county didn’t try to get from the four men a bigger chunk of the $107,000 the case cost the public.

“It was sort of an unusual situation, and the bankruptcy judge has a lot of discretion. We felt they probably wouldn’t be penalized a large amount,” Austin said.

That still leaves Seven and his lawyer, Garrick, for the county to collect from. And Guardian says it’s going after all six men for its share of the costs, or $55,000.

Motenko, who says he’s still owed more than $10,000, insists he was only trying to collect money he believes he’ll never see.

“They shouldn’t punish you for using legal means to try and collect what you’re owed,” he said.

Padia could not be reached despite repeated attempts to contact him. Garrick could not be reached despite repeated phone calls to his office.

Don H. Teague, a partner in Fischman’s firm, says the judge’s decision was unfair and that his firm was merely meeting the wishes of its clients.

What’s more, says Teague, he has a charge of his own: Guardian, he says, will reap “a huge windfall” when it sells Tallmantz’s lease.

Guardian denies it.

“Guardian will probably get significantly less than what it’s owed from the sale of the leases,” said Rus, Guardian’s lawyer. “Mr. Seven has already sucked off most of the collateral.”

Guardian is negotiating with several buyers for Tallmantz’s lease. The thrift has been besieged with offers, says Guardian’s counsel Sunil A. Brahmbhatt. A deal should be struck in the next three months.

Meanwhile, Seven was in bankruptcy court again, this time for a personal bankruptcy filed Feb. 14. Tallmantz is being run by a court-appointed receiver who is keeping the operation going until it can be sold.

In an odd postscript, Seven sued Orange County under a federal statute usually used by prosecutors against gangsters. In the suit filed under the Racketeer Influenced and Corrupt Organizations statute, he alleged the county had formed a “criminal conspiracy” to take his leases away.

The suit was dismissed recently, but not before it cost the county still more thousands of dollars in public funds for legal fees defending itself.