SBA Cancels Honor After Businessman’s Bankruptcy Filing

The Small Business Administration’s annual awards celebration is usually a red-letter day for the agency, which gets to shower plucky entrepreneurs with accolades for a job well done.

But the only thing red on Monday were the faces of the SBA’s Los Angeles district office officials, who withdrew the honors of one local firm less than three weeks before the June 5 awards luncheon after the winning company filed for Chapter 11 bankruptcy protection.

Michael Hernandez, the 26-year-old president and chief executive of Santa Fe Springs-based American Headwear Inc., has been stripped of the Young Entrepreneur of the Year award less than a month after it was bestowed upon him. He was to be one of several entrepreneurs and small-business advocates feted at the high-profile banquet next month at the Hotel Inter-Continental in Los Angeles.

The about-face underscores the fragile nature of many fast-growing small companies, whose fortunes can rise and fall in a single business cycle. It also highlights the weaknesses in the SBA’s selection process, which relies heavily on the recommendations of bankers and others hoping to bask in the sunny publicity that accompanies an SBA award.

“For the most part, sponsors of these awards programs are legitimately trying to celebrate the entrepreneurial spirit and recognize excellence,” said Debra Esparza, director of USC’s Business Expansion Network. “But there is also a marketing element involved. Nominators get the benefit of association with the winners.”

Court records reveal that American Headwear filed for bankruptcy protection on March 13, about two weeks before the local SBA announced its 1998 award winners.

The company, which makes custom sports caps, listed assets of $996,000 and liabilities of $763,000 in its filing. According to court records, the company sought bankruptcy protection to stave off Internal Revenue Service liens resulting from unpaid payroll taxes. Those IRS claims amount to $242,000 in back payroll taxes, penalties and interest, according to Hernandez’s attorney Andrew A. Goodman.

Goodman says American Headwear was unable to work out a repayment schedule with the IRS, which was prepared to seize the company’s bank accounts and equipment to secure payment of its claims.

“It would have meant the end of the business,” Goodman said, explaining the company’s decision to seek Chapter 11 protection.

SBA officials say bankruptcy is not a disqualifying factor. They said they were aware of Hernandez’s Chapter 11 filing and were fully prepared to go ahead and crown him with Young Entrepreneur honors based on the strength of his letters of recommendation--until a reporter began asking questions about the selection criteria late last week. The Times is a sponsor of the awards luncheon.

Dorothy A. Overal, deputy district director of the Los Angeles SBA, announced the agency’s change of heart in a statement issued Monday.

Hernandez could not be reached for comment Monday. But he said in an interview Friday that he had never actively sought the SBA award. Rather, Wilshire State Bank, where he applied for a $500,000 SBA-backed loan last year, nominated him for the honor.

That nomination letter describes Hernandez as a courageous young man who left a promising career in the armed forces to run the family business when his father was diagnosed with a terminal illness. It details an ambitious expansion that led to triple-digit revenue, profit and employment growth.

What it fails to mention is that the very bank that hailed his business acumen to the SBA later declined to make him a loan because American Headwear “wasn’t completely acceptable by our credit standards,” according to J. Han Park, senior vice president of Wilshire State Bank.

Park admits he was “a little bit premature” in the nominating process, having known Hernandez only a couple of months. He said he continued to plug the young man for the award even after the loan refusal and Chapter 11 filing “because I had faith in his ability to turn things around.”

John Rooney, president of the Valley Economic Development Center and a veteran watcher of area business awards, said the SBA’s process is more thorough than most. But he said ultimately the agency must trust its nominators, who clearly jumped the gun in this case.

“Wilshire State Bank should have nominated someone they know,” Rooney said.

Hernandez’s attorney said the SBA has deprived the young entrepreneur of deserved recognition. Michael is “doing a hell of a job.”