The Waiting Game : O.C. Woes Push Some Vendors to the Edge

When she’s not being chief financial officer of a big grading contractor here, 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 county vendors, have been waiting more than six months for word on when they might be repaid.

And 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. As much as that hurts, says Schulte--appointed by the court to represent the vendors--there are many suppliers with far fewer dollars at stake but in greater pain.

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. The man, a Latino immigrant, had built up a company that provided work for 15 to 20 people. But when the county, his biggest customer, stopped paying its bills Dec. 6, his world began caving in.

Orange County owes him less than $10,000--peanuts compared to many of the bondholders with whom the county is now negotiating repayment terms. But he has had to lay off 12 of his employees and, according to Schulte, is several months behind on his office lease and is delinquent on his quarterly payroll taxes. The small businessman has used up his savings and has borrowed everything he can from friends and family.

“It’s a nightmare, and it’s 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 other unsecured creditors “until sometime next year.

“There is growing concern,” Schulte said, “that by then there won’t be any money left for us.”

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

All 12 went through a highly confidential process to get emergency payments 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 Daniel J. Bussel, a UCLA professor who specializes in bankruptcy law. “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, say Schulte and others on the official subcommittee of vendors in the case, are interim payments such as those granted under the emergency claims.

She estimates that at least 2,000 businesses are owed for goods and services they supplied to the county before it filed for bankruptcy protection in the wake of an investment loss of nearly $1.7 billion.

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 unpaid bills can spell doom.

Many of the vendors subsist now on borrowed money. They say 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. Then they waited again while a payment plan was being negotiated with Wall Street investors who hold $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 highway construction contractor owed $550,000 for paving work at John Wayne Airport.

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“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.”

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 date set for the county to come up with one.

Bruce Bennett, the county’s bankruptcy attorney, said he expects to start work on a repayment plan later this year. But if county voters do not approve the Measure R half-cent sales tax increase Tuesday, he said, “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 vendor complaints about unequal treatment, experts say. Bankruptcy law “lets the debtor spend its money as it sees fit” until a plan is filed, Santa Ana bankruptcy attorney Steven K. Linkon said.

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.”

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Part of the reason vendors are still waiting may be that county officials don’t have a clear idea of 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.”

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.

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

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

The debt has cost most of the employees their raises for 1995 and has heaped on extra work as they scramble to find new clients to replace the business they used to get from the county. The bankruptcy also means sharply reduced contributions to their retirement, benefit and stock purchase plans this year. And if the firm is not repaid in full, the value of their shares in the company will fall.

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

Albert Hernandez could not borrow. To cover the $5,500 hole he was left in by the bankruptcy, the Fullerton general contractor laid off two of his 10 workers--family men who are still collecting unemployment because jobs in the recession-ravaged building industry are hard to come by.

For small contractors such as Hernandez and big ones such as Sukut Construction and Griffith Co., public works contracts from county government have been among the few steady sources of work in recent years.

But with the county cutting down on its contracting work in the wake of its financial debacle, Hernandez says he has to travel a lot farther now to find jobs. He winces as he recalls several times during the winter when he asked some 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 can put a big dent 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,” he said. “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 has had to postpone re-roofing his 73-year-old house in Santa Ana. ‘ Sandy Schroeder and partner Doug Eldridge are out $4,013.10--enough to force 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 would 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 cannot make a partial recovery by claiming a credit against their income taxes.

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.”