Hard Times Mean More Companies Winding Up in Bankruptcy Court : Nagging Recession Continues to Take a Heavy Toll With Bankruptcy Filings Up 17% From a Year Earlier

As the recession drags on, local businesses keep going out of business at an alarming rate.

At least 260 businesses in the San Fernando and Antelope valleys and Ventura County have been forced into bankruptcy court in the last six months alone. That figure is up 17% from a year ago, according to Bankruptcy Bulletin Weekly Inc., a Nacogdoches, Tex., company that tracks bankruptcy filings for The Times.

Throughout the city of Los Angeles, if failures continue at their current pace, close to 2,000 businesses will disappear by the end of this year, a 150% increase over 1991, predicts Jack Kyser, chief economist of the Los Angeles County Economic Development Corp.

The outlook for next year is just as grim. New hardships in the wake of the recent fires from Calabasas to Malibu are likely to compound the region’s already poor economic prospects. Many retailers “are just hanging on by their fingertips now,” Kyser said. “This Christmas will probably be the moment of truth.

“Retailers and restaurants are the kinds of businesses that were able to live off the fat of the land while jobs were good and people had money rolling in,” Kyser said. Now we have “started seeing a wringing out of all the me-too establishments, especially the ones in marginal locations.”

In a Chapter 11 bankruptcy, a struggling company keeps operating but is shielded from creditors while devising a plan in court to pay off its debt. Those businesses that figure that they have no chance of recovering liquidate under Chapter 7 of federal bankruptcy laws.

Bankruptcy experts say that because a reorganization is often very expensive, most troubled small businesses that attempt to reorganize end up failing anyway. Even a relatively uncomplicated case can cost tens of thousands of dollars.

Ninety percent of the businesses “that go into Chapter 11 never get out,” said Thomsen Young, a Century City bankruptcy attorney. The odds of surviving the ordeal, which can last for years when creditors are uncooperative or other problems crop up, are even worse in a deteriorating economic environment, he said.

But many owners of mom-and-pop businesses in particular are reluctant to give up. Often it is a matter of personal pride as much as money.

Here are three local businesses that are trying to climb out of bankruptcy:

Simi Valley residents Drew and Kerry Lobenstein, both teachers in their mid-40s, are longtime animal lovers. In 1986, the couple dipped into their savings and took out a home-equity loan to buy what they thought was the perfect small side business: a Simi Valley store called Pet Experience. They paid the owners, who were retiring, about $200,000 for fixtures and inventory.

“We made money the very first year” on about $450,000 in sales, said Drew Lobenstein. Their success prompted them to borrow $50,000 against their home in 1989 to rent and remodel space in a Moorpark shopping mall where they opened their second Pet Experience store.

In 1990, the Lobensteins took out another home-equity loan and borrowed $70,000 from a friend to triple the size of their Simi Valley store. The expansion, just as the economy was starting to weaken, proved disastrous.

To keep going, they dipped into retirement savings and maxed out their credit cards--but it wasn’t enough. Last summer, the couple had to close their original store. Now, they are desperately trying to save the Moorpark store, which has been operating in Chapter 11 bankruptcy since August.

The small shop, not far from the Simi Valley Freeway, specializes in parrots and other exotic birds, reptiles and fish. The store’s bankruptcy filing lists debts of about $150,000 and assets of about $21,000.

Drew Lobenstein has had to take a full-time job teaching social studies at Moorpark High School, in addition to teaching speech classes at night at Moorpark College. In between, he puts in 25 to 30 hours a week helping five part-time employees mind the pet store. To earn more money, Kerry has started doing marriage and family counseling in addition to her full-time job teaching English at Simi Valley’s Royal High School.

“It’s really tough. We’ve lived with this thing every minute for 2 1/2 years,” said Drew. “The hardest part has been the strain on our kids,” an 11-year-old daughter and 8-year-old twins. “We’ve had to cut back in almost every area of our lives. We have no social life--we’re too busy doing all of our jobs.”

The Lobensteins considered liquidating their business. “But we have a lot of ourselves invested in this,” Drew said. “We wanted to try and make it work.”

Competition did in their Simi Valley store as much as the economic downturn. Shortly after they leased larger quarters in 1990, a big chain-store rival, Pet Co., opened across the street.

Unable to match their rival’s prices, the Lobensteins’ sales plunged as the economy worsened. Within six months they were in the hole, losing $1,000 to $3,000 a month. The Small Business Administration would not give them a loan because of the debt on their house. Eighteen banks, finance companies and mortgage firms also turned them down.

Then their credit cards were canceled “even though we were making our payments,” Drew Lobenstein said. “The banks said our debt-to-income ratio was too high. It killed us. After that, all our suppliers” demanded cash on delivery. When their Simi Valley landlord threatened to sue them last summer because they were 30 days behind on the store rent, the Lobensteins had no choice but to close it. At that point, they filed Chapter 11.

“At least it got the wolves off our neck,” said Drew Lobenstein. “But you have these incredible feelings of failure. All along, my wife and I kept saying to each other that we’re both intelligent, hard-working. Why can’t we make a go of this?”

The cost of filing Chapter 11 has been stiff: $10,000 so far, including legal advice and court fees. The initial paperwork required by the bankruptcy court has been equally heavy, running to more than 150 pages of financial statements, tax returns and other records. They still must come up with a reorganization plan that they hope their creditors will approve.

(If a company’s creditors cannot agree on a debt-payment schedule, the bankruptcy judge can force them to go along with a “cram-down” plan, said Young, the Century City lawyer. Such a plan typically promises a company’s creditors at least as much as they would get if the business were liquidated.)

“That’s what makes Chapter 11 so expensive,” Young said. Whereas a liquidation can be over with in a few months, “a reorganization can drag on and on.”

The final straw may be when a major creditor becomes impatient. That’s what happened to Vivaldi, a small Italian restaurant with a bar and about a dozen tables in Van Nuys. It has been operating in Chapter 11 since September.

Located on busy Van Nuys Boulevard, Vivaldi is the latest of several restaurants that have occupied the site over the last 20 years, some of them quite successful. But despite Vivaldi’s homemade cannoli and other desserts and a number of devoted regulars, the recession has put a damper on business. In the last two years, several neighborhood restaurants have closed.

Mario Grassano, a 51-year-old Glendale accountant, bought Vivaldi in 1989 with a partner, whom Grassano’s brother-in-law, Gus Pelaez, 50, later bought out. Pelaez, a jovial, outgoing man, became primarily responsible for running Vivaldi when he took early retirement from a management job at Weber Aircraft in 1991.

The restaurant had been doing OK for its size and was making a profit on about $60,000 in monthly sales, Pelaez said. But in the last two years, as the local economy has struggled, Vivaldi’s business has fallen by 50%.

Pelaez said Vivaldi managed to keep going in part by not paying some of its taxes. By the time it filed Chapter 11, the restaurant owed $24,000 in California sales taxes and $18,000 in federal corporate income taxes plus interest, Pelaez said.

The IRS was willing to work out a reasonable payment plan, he said. “But the state wouldn’t give us more than 120 days. It didn’t make sense. They didn’t care if we paid our rent, our employees. They just wanted their money.”

When the State Board of Equalization began formal collection activities--levying Vivaldi’s checking account, for example--the restaurant fled into bankruptcy.

“The reason most business owners go into Chapter 11 is precisely because they are cash poor,” said Richard Garber, a Van Nuys bankruptcy attorney representing Vivaldi.

Pelaez has hired an experienced, professional restaurant manager. The hired hand added some lighter dishes to the menu, lowered prices 10%, updated the eatery’s old red-and-black decor in softer peach tones and added white tablecloths. The renamed Vivaldi Cucina is now a handsome, informal cafe, where a smiling Pelaez greets customers at the door.

Vivaldi is limping along on sales of as little as $24,000 some months, but Pelaez is optimistic. Garber hopes that its creditors will approve a reorganization plan by the end of next March and enable the restaurant to survive and pay off its debts within five years.

The future of Hola!, an Encino restaurant and nightclub in Chapter 11, is also uncertain. The club, located on the bottom floor of a Ventura Boulevard high-rise office building, had been a restaurant run by the Hamburger Hamlet chain for a time in the late 1980s. Since 1989, it has been owned by an Orange County lawyer, said Hola! general manager George Maklouf.

When Hola! filed bankruptcy in June, it listed nearly $1 million of both assets and liabilities. Maklouf said the club’s largest creditor is Sherman Oaks-based Hamburger Hamlet Restaurants Inc., which is still owed $500,000 for furniture and equipment that it sold Hola! four years ago.

Hamburger Hamlet forced Hola! into bankruptcy when the company declined to change terms of the $500,000 note to help the nightclub get through the recession, Maklouf said. A Hamburger Hamlet spokesman declined comment on the bankruptcy case.

When Maklouf took over running the club this fall, it had a Spanish theme. Business had become so slow that it was only open on Friday and Saturday nights, he said. “We had to find something new, so we’ve been trying a lot of different things.”

Now, the club’s live entertainment goes beyond salsa bands to include Mediterranean, French, Spanish and Italian music some nights. Such special events are drawing good crowds most nights, Maklouf said. The club’s Spanish restaurant also has a new, expanded menu, while the bar offers free hors d’oeuvres.

Maklouf says Hola! hopes to hang on until times get better, partly by charging $4.25 for a martini “that costs $7 anyplace in Beverly Hills.”

“All of our food and drinks are at 1989 prices,” he declared. “We plan to get through these problems. It’s not impossible.”

Bankrupt Businesses

As the Southland economy has struggled in recent year, the number of companies filing for bankruptcy protection has increased. About 260 businesses in the San Fernando and Antelope Valleys and Ventura County, entered bankruptcy court proceedings between April and October of this year, up 17% from the same period a year ago.

In all of Los Angles, 777 businesses entered bankruptcy or went out of business altogether, through June of this year, an increase of 11% from the first half of 1992. This group includes businesses that closed their doors after settling with creditors, or quit leaving unpaid debts.

Sources: Bankruptcy Bulletin Weekly, Inc., Nacogdoches, Texas; Dun & Bradstreet; Los Angeles County Economic Development Corp.