Advertisement

LAST IN LINE : O.C.’s Vendors Are Awaiting Word on When They’ll Be Paid. Some Fear Bankruptcies of Their Own

Share via
TIMES STAFF WRITER

When she’s not being chief financial officer of a large Santa Ana grading contractor, Mary Ann Schulte spends most of her time listening to horror stories from business owners owed an estimated $200 million by bankrupt Orange County.

The companies, all vendors to the county, have been waiting more than six months for word on when they might be repaid. It is likely they will have to wait another six months--or more--before they see any cash.

Schulte’s own company, Sukut Construction Inc., is the largest creditor among the vendors, with a $4.8-million claim against the county in federal bankruptcy court here. But as much as that hurts, says Schulte, who was appointed by the court to represent the vendors, there are many with far fewer dollars at stake who are in greater pain.

Advertisement

Take the janitor, for instance.

He won’t let his name be used because he’s afraid that his creditors will pull the plug if they find out how close to collapse his business really is.

He’s a Latino immigrant who has built a janitorial business that for several years had provided work for 15 to 20 people. When his biggest customer, the county, stopped paying its bills Dec. 6, his world began caving in.

Orange County owes him less than $10,000--peanuts compared with most of the bond investors with whom the county is now negotiating repayment terms.

Advertisement

But he has had to lay off 12 of his employees so far as he struggles to stay alive, Schulte said. He is several months behind on his office lease payments, and is delinquent as well on his quarterly payroll taxes. He has used up his savings and has borrowed everything he can from friends and family.

If he’s lucky, he’ll be able to persuade the county to make an emergency payment soon of up to half of what he’s owed, but he doubts that it will be enough, Schulte said.

“It’s a nightmare, and its not the only one out there,” she said. “What I hear, over and over, are pleas for help from a county that isn’t even proposing to have a repayment plan [for vendors and all other unsecured creditors] until sometime next year,” she said. “There is growing concern that by then there won’t be any money left for us.”

Advertisement

*

Although no companies are reported to have filed for bankruptcy because of the county’s financial dilemma, a dozen vendors so far have sought emergency claims, stating that they were on the verge of collapse.

All 12 went through a highly confidential process to get emergency payment of up to half of what they were owed, Schulte said. Three more, including the janitorial service owner, “are on the verge of bankruptcy now,” she said, “and as this goes on there are going to be a lot more.”

The time frame for repayment isn’t unusual for a large bankruptcy--and this is the biggest municipal bankruptcy in history.

“If this were a corporate Chapter 11, getting repaid in a year to 18 months would be really fast,” said UCLA bankruptcy law professor Daniel J. Bussel. “Debts usually aren’t taken care of until confirmation of the [repayment] plan, and that can take two to three years in a complicated case.”

What Orange County’s vendors want while they wait, Schulte and others on the vendor subcommittee say, is an interim payment of part of what they are owed.

She estimates that there are at least 2,000 businesses that are owed for goods and services they supplied to the county before it went into bankruptcy court after racking up an investment loss of nearly $1.7 billion.

Advertisement

Although about 80% of the vendors are from Orange County, economists say the county’s debt to them isn’t big enough to do serious damage to the local economy. But individually, the debts can spell doom.

Many of the vendors exist now on borrowed money, and some reportedly are delaying state and federal tax payments in order to meet their payrolls or buy the raw materials they need to stay in business.

They say that they waited patiently while the county and its bankruptcy attorneys negotiated a 77% payoff to government agencies that had pumped more than $4 billion into the county treasurer’s ill-fated investment pool and waited patiently again while a payment plan was being negotiated with Wall Street investment firms that have bought $1.1 billion in county bonds.

“We are at the bottom of the chain, and we want some equity now,” said Tom Foss, Orange County district manager for Griffith Co., a Santa Fe Springs-based highway construction contractor owed $550,000 for paving work at John Wayne Airport.

“We are vendors who are businesses in Orange County, and we have been ignored so far in this whole episode,” Foss said. “The county has paid attention to the problems of the pool investors and the bondholders, but I look at them and see that the money they had with the county was, for the most part, voluntary investment money. My money, and the money of most of the vendors, was working capital. We are suffering more than the investors.”

Without repayment, Schulte said, “these businesses can’t grow, they can’t function competitively and some of them can’t survive much longer. We have stood by and supported the county as it took care of the other unsecured creditors, but now it is our turn.”

Advertisement

*

The vendors, most of them small, private companies in Orange County--many run by women and minorities--are especially concerned that no formal repayment plan has been prepared and that there is no set date for the county to come up with one.

Bruce Bennett, the county’s bankruptcy attorney, said that he expects to start work on a plan later this year but maintains that if voters don’t approve the special Measure R half-cent sales tax increase on June 27 “it could be well into 1997” before the bankruptcy is resolved and creditors are paid.

Until a formal repayment plan is filed with the court, there are no legal grounds for complaining about unequal treatment. Bankruptcy law “lets the debtor spend its money as it sees fit” until a plan is filed, said Santa Ana bankruptcy attorney Steven K. Linkon.

The vendors have been made to wait while county officials focus on other creditors because “in this case there is tremendous political pressure that doesn’t exist in a corporate bankruptcy,” said vendors’ attorney Richard A. Marshack. “The state is concerned that if the county doesn’t repay its bondholders, it will cripple the ability of every school district, water agency and municipality in the state to sell bonds,” he said. “So the bondholders have been put on top.”

*

Part of the reason vendors still are waiting may be that county officials don’t have a clear idea about how much is at stake.

The data on actual debts exists, but it remains scattered among a dozen or more county agencies that do their own contracting. “Nobody has bothered to pull it all together yet,” Schulte said. “We’re not that important.”

Advertisement

But don’t tell that to Jessica Johnson.

For the 20-year-old office assistant, as for thousands of other workers at the businesses that are owed money, Orange County’s bankruptcy is an ever-present specter affecting daily life.

“This hits us in the face every day at work,” said Johnson, who works at LSA Associates Inc., an environmental planning firm in Irvine. “I’m always worried now about my job and about the future of the company.”

LSA is a company owned by its employees, so the $400,000 that the county hasn’t paid it since the Dec. 6 bankruptcy is more than just the boss’s problem.

Put simply, each of LSA’s 80 employee-owners is out an average of $5,000 unless the county pays up.

The debt has cost most LSA employees their raises for 1995 and has heaped more work on them as they scramble to find new clients to replace the business they used to get from the county. It also will sharply reduce contributions to their retirement, benefit and stock purchase plans this year and, if not repaid in full, will cut the value of their shares in the company.

Les Card, LSA’s president, said that one immediate impact when the bankruptcy cut off payments from the county “was that we had to borrow money immediately to meet our payroll.” LSA since has repaid that loan, Card said, “but we still are missing $400,000 from our operating budget.”

Advertisement

Albert Hernandez couldn’t borrow, so to cover the $5,500 cash shortage the county’s bankruptcy left him with, the Fullerton general contractor laid off two of his 10 workers--family men who still are collecting unemployment because jobs are hard to come by in the recession-ravaged building industry.

For little contractors like Hernandez and big ones like Sukut and Griffith Co., public works contracts from county government have been one of the few steady sources of work in recent years.

But with the county cutting down on its contracting work in the wake of its bankruptcy, Hernandez says he has to travel a lot farther now to find jobs. He winces as he recalls that several times during the winter he had to ask for a couple of employees to volunteer to wait a week or two for their paychecks so he could afford to buy supplies needed to complete a job.

*

Santa Ana decal maker Patrick Cory Sr. went through a similar rough patch. He is owed only about $4,500, but for a small business that puts a big hole in the bank account.

Cory says he still wakes up in a cold sweat some nights, recalling how he had to empty his personal savings account to meet his payroll on three occasions. “The county check was due just before payday, and until the bankruptcy the county paid like clockwork. When the money didn’t arrive, I had to take it out of savings and then I had to ask my employees not to cash their paychecks for two or three days until my check cleared.”

To replace the money in his savings account, Cory said he’s had to postpone re-roofing his 73-year-old house in Santa Ana. During the heavy rains this winter “I just put out a bunch of buckets and listened to the water drip down,” he said.

Advertisement

Sandy Schroeder and partner Doug Eldridge are out only $4,013.10, but that has forced the partners to forgo paychecks in order to buy the components that they wholesale through their Fountain Valley computer hardware business. The county’s debt to Datron Peripherals has taken enough out of the small business’s bank account to hamper its growth.

Schroeder said she and Eldridge have had to pass on several prospective contracts because “the money’s not there.” If it were, they’d have used it to buy inventory to have on hand when an opportunity pops up, Schroeder said.

“In this recession, even the large corporations are paying vendors in 45 to 60 days instead of 30, and that makes cash flow all that much more difficult to manage,” she said. “And the effect on us of the Orange County bankruptcy compounds everything.”

Adding insult to injury, she said, is the fact that the debt cannot yet be classified as a loss for tax purposes, so Datron Peripherals and the other vendors can’t make a partial recovery by claiming a credit against their income tax bills.

That’s what Schulte calls “one of the million legal issues we’ve all been focusing on. Now,” she said, “it’s time to focus on the human issues.”

Advertisement