O.C. Bankruptcy Filings Soar as Recession Lingers
Bankruptcy lawyers William M. Burd and Richard A. Marshack used to start their workday at 9 a.m.
But that has changed in the past few months. Their caseloads have doubled; now they’re up at dawn and don’t get home until late in the evening.
Like a bad cold that won’t go away, the lingering recession continues to weaken Orange County’s economy. Companies and individuals who had hoped for a quick recovery have given up hope, and bankruptcy lawyers are much in demand.
In the first half of this year, 7,117 bankruptcy filings were recorded in Orange County, up 15% from the same period last year. The records show that 84% of those filings--5,984 individual and corporate petitions--were for liquidation under Chapter 7 of the U.S. Bankruptcy Code.
“The economy stinks,” said Marshack, who with Burd is a partner in the Santa Ana law firm of Burd & Marshack. “A majority of our clients are first-time filers. Many of them are people who have been in business for 20 years.”
From upscale restaurants and real estate firms to high-tech manufacturers and retailers, they are trooping to the bankruptcy court in Santa Ana. Factors contributing to their financial problems include poor sales, mismanagement and heavy debt loads.
Even the funeral business, once considered immune to economic distress, has been affected. Among companies seeking to reorganize under Chapter 11 of the Bankruptcy Code is Abbey Funeral Center Inc., formerly known as Melrose Abbey Mortuary. In its court filing, the company listed its $5-million, 19-acre cemetery among its assets. Liabilities, however, totaled $2.4 million. Since seeking court shelter, the company has new management and is looking for investors. It has been renamed Angel’s Lawn Cemetery Funeral Home.
Not surprisingly, businesses that depend on the real estate industry--furniture manufacturers and carpet makers, for example--have been hurt badly this year as residential and commercial construction has slowed to a crawl.
With thousands of people losing their jobs and thousands more nervously hoping to avoid the same fate, consumers have cut back on spending. And that scrimping is beginning to hurt retailers in the Southland.
“Clothing retailers are starting to be hit because of the cash liquidity problem . . . lack of financing and consumer confidence in the economy,” said Robert E. Opera, senior partner at the Irvine law firm of Lobel, Winthrop & Broker. “This explains the lack of expenditures on clothing and other retail goods.”
Several upscale restaurants either closed or filed for reorganization under Chapter 11 this year. The ritzy Rex restaurant in Newport Beach closed in January, and Italianate Zeppa in Fashion Island shut down last month. In April, the Villa Nova restaurant, which has fed the well-heeled in Orange County for 25 years, filed for reorganization.
Observers say the slow economy, however, is not entirely to blame. Many financial crises might have been avoided, they say.
For example, some companies that loaded up on debt or made poor investments in the mid-1980s are now haunted by their earlier decisions. Ocean Pacific Sunwear Ltd. in Tustin, whose OP line is one of the nation’s biggest names in surf wear, filed for Chapter 11 protection after it had trouble repaying $11 million in debt, which it blamed largely on a failed manufacturing venture. It has also said that the bankruptcy filing will forestall the costs arising from its defense of a lawsuit by its largest shareholder.
Filing for reorganization gives OP a breather and allows its management to pay attention to running the business, said Michael G. Balmages, the company’s general counsel and senior vice president.
“If we had to do it over again, we’d do it earlier,” Balmages said of the bankruptcy court filing. He predicted Monday that the company will emerge from court protection by year’s end.
Other companies hit early by the recession never quite managed to get back on their feet. EECO Inc., a Santa Ana computer products company, filed for reorganization under Chapter 11 in May, 1990, and soon emerged from bankruptcy protection. Two years later, it again sought court protection, filing for reorganization in April.
Even the matchmaking business is cooling off. The Right One, a dating service in Newport Beach, went out of business last month, court records show. Its client list was merged with that of Connections Inc., a dating company in Orange.
In recent years, as a bankruptcy filing has become less a mark of disgrace than it once was, individuals are also turning to the courts in increasing numbers, lawyer Burd said.
“The stigma attached to filing bankruptcy has been gradually reduced in the last decade,” he said. “But it is still, in my opinion, an extremely traumatic experience for the vast majority of individuals who file for Chapter 7,” under which a company or individual’s assets are sold and the proceeds used to pay creditors.
“Many people who consult with us initially want to file a Chapter 11 reorganization or a Chapter 13, which is a form of debt adjustment for individuals,” Burd said. “But after examination of their financial condition, there’s usually no viable option but to file for Chapter 7.”
Lawyers say one reason for Chapter 7’s increasing use is that it allows a company or individual to start anew. More important, filing for bankruptcy under Chapter 7 costs from $500 to $5,000, compared to a minimum of $15,000 for a Chapter 11 reorganization. Lawyers’ fees soar during a Chapter 11 case because of the time required by attorneys to draw up financial packages acceptable to both debtor and creditors.
A serious drawback for an individual who seeks Chapter 7 liquidation is that he or she will have difficulty obtaining credit in the future. But even that prejudice is slowly eroding, some lawyers say, noting that some companies are relaxing their restrictions on past Chapter 7 filers.
“Starting in the beginning of 1990 with the recession, many people either lost their jobs or saw their incomes substantially decrease. That has made bankruptcy a very viable option for many individuals and small-business owners,” said Bruce D. White, a partner at Kent & White, a Garden Grove law firm specializing in bankruptcy cases.
“Taking that into consideration, the stigma of filing any kind of bankruptcy--be it personal or corporate--is already starting to dissipate,” he said.
Because of that and the lingering economic malaise, bankruptcy lawyers say they expect business to remain brisk in the months ahead.
Bankruptcy filings in Orange County set a record last year: 12,368. And lawyers are predicting that 1992’s filings, which through June were 58% of last year’s pace, will easily exceed 1991’s total.
Demand is such that Burd & Marshack, because of a heavy caseload, are now turning away some potential clients. “For every five requests we get for our services, we refer four to other attorneys,” Burd said.
Grim Chapter in Bankruptcy
The number of bankruptcies continued to soar in Orange County in the first half of this year. A majority, 84%, were under Chapter 7 of the U.S. Bankruptcy Code. Bankruptcy lawyers say most of those filing are by individuals who overspent during the 1980s.
Defining the Chapters
* Chapter 7: Personal or business debts are so far in excess of assets that the petitioner seeks liquidation.
* Chapter 11: Petitions are generally used by businesses seeking protection from creditors while they reorganize their finances.
* Chapter 13: Personal financial reorganization under which consumers repay creditors under supervision of a court-appointed trustee.
Seeking Shelter in Orange County
During the first six months of 1992, 7,117 individuals or businesses filed for bankruptcy reorganization or liquidation in Orange County.
Month Chapter 7 Chapter 11 Chapter 13 Total January 937 33 164 1,134 February 850 43 122 1,015 March 1,156 34 159 1,349 April 988 35 146 1,169 May 995 35 163 1,193 June 1,058 35 164 1,257 Total 5,984 215 918 7,117
One-Year Change
The number of bankruptcy cases increased about 15% in the first six months of this year from the same period in 1991. Despite the bleak picture, there is a positive side: Bankruptcy filings had increased nearly 40% in 1991 from 1990.
1991-92 Month 1991 1992 % Change January 940 1,134 +20.6 February 972 1,015 +4.4 March 1,078 1,349 +25.1 April 1,024 1,169 +14.2 May 1,195 1,193 -0.2 June 976 1,257 +28.8 Total 6,185 7,117 +15.1%
County Comparison
For the first half of the year, Orange County had fewer bankruptcies than other regions of Southern California:
Los Angeles*: 29,608
San Bernardino-Riverside: 9,398
Orange: 7,117
* Includes Los Angeles, Santa Barbara, San Luis Obispo and Ventura counties
Source: U.S. Bankruptcy Court
