Furniture Store Owner Learns Painful Lesson About Lawsuits

Alex Liberman says he filed for bankruptcy in hopes of saving his business--but instead came close to losing it.

“I’m in debt up to my neck. I’ll have to live very long to pay this back,” said Liberman, 49, who owns Leaders Furniture in Van Nuys.

In part, Liberman’s story illustrates how vulnerable small businesses can be to litigation.

His troubles began years ago when he fired one of his workers, a furniture buyer. According to Liberman, the woman accepted a gift of a child car seat from one of his suppliers, who told her to take the item and report it as damaged.

The woman said she was fired because she was pregnant, and a jury sided with her--ordering Liberman and his company to pay $115,000 in compensatory damages.

“The veracity [of the worker’s claim] speaks for itself in that a jury found in our favor,” said Beverly Grant, the woman’s lawyer. “There’s no doubt that it did happen, and that was acknowledged by the jury.”

The jury came back with the compensatory award on a Friday in July 1997, and was scheduled to begin deliberations on punitive damages the following Monday.

Fearing an even bigger damage award, Liberman and his wife, Mirta, put his company into Chapter 7 bankruptcy Monday morning. By doing so, Liberman hoped to avoid paying a huge punitive award that might have put him in debt for years.

When a company declares Chapter 7, a court-appointed trustee liquidates its assets and doles out payments to creditors, effectively shielding the company from future liabilities.

Liberman, however, says filing for bankruptcy ruined his credit rating and put his business in the control of an outsider.

“I think that declaring bankruptcy is only for someone who has no assets or practically no assets, not to mention how your credit standing gets ruined,” said Liberman, speaking in the back office of Leaders, which he managed to reopen by purchasing his former assets at the trustee’s auction.

“If it weren’t for the reputation I have in 30 years of business and my family, there’s no way I could be in business. One attorney summed up bankruptcy as financial suicide. It is a perfect description.”

Gordon Klein, a professor of entrepreneurial studies and small business in the Anderson School of Management at UCLA, believes Liberman might have been better off by threatening to file for bankruptcy when he was first hit with the lawsuit.

Liberman could then have used that threat to leverage the worker into a more favorable settlement, Klein said.

“I see the threat of bankruptcy as a wonderful deterrent to people suing you in the first place,” he said. “It gives a possible business defendant a shield against frivolous lawsuits or even legitimate lawsuits because the company holds over anybody contemplating a lawsuit the power to declare bankruptcy.

“But most of the time, you simply have to remind your opponent that you have the ultimate sword at your disposal called bankruptcy,” Klein said. “Usually, people only get to the point of raising the specter of bankruptcy. Rarely do they actually have to declare it.”

Liberman’s said he only went to court because he was convinced he was right. Klein said that was a mistake.

“A lot of people approach lawsuits as a matter of principle and justice because we were always taught the truth ultimately prevails,” Klein said. “Unfortunately, principle has a price, and a savvy business advisor often knows that their client may be in the right but, as an economic decision, you have to settle.

“Sadly, it’s often the cost-effective thing to do--to admit you’re wrong when actually you believe you’re in the right.”

Eventually, Liberman and the fired employee came to an out-of-court settlement. But that wasn’t the end of his problems.

After the initial bankruptcy filing, the court-appointed trustee came in and immediately started to liquidate the assets of Liberman’s Van Nuys store and another shop he used to run in San Fernando.

The trustee hired Liberman to run the stores during the liquidation, since he already knew the business.

“Our sole interest in this whole thing was to make sure our creditors didn’t get hurt,” Liberman said. “Our whole family is in this business, so we wouldn’t only be hurting our relationships with creditors but theirs as well.”

But Liberman’s involvement didn’t end there, as he made another misstep that ended up costing him dearly. In an effort to salvage his business, Liberman bid on his own assets in the trustee’s sale, using another company’s name.

Using money he said he borrowed from his mother, Liberman managed to buy back some of his former equipment, including a computer system, some trucks and inventory, with plans to use them to reopen his Van Nuys store.

But then the bankruptcy trustee found out and sued him for fraud, claiming that Liberman misrepresented himself by bidding through a front company.

“The bankruptcy trustee sued me and pretty much my whole family--claimed the company I used to purchase the assets was a front, that he was not aware of it, and that the purchase of some of the assets was fraudulent,” Liberman said.

Liberman said he did not think he was doing anything wrong because he was using money borrowed from his mother, not corporate assets. He settled that suit two months ago for $200,000, he said.

In addition, Liberman said he ran up $200,000 in attorney fees for the employee lawsuit and the bankruptcy litigation, plus the amount he paid in the out-of-court settlement with the fired employee.

Asked if he would go the bankruptcy route again, Liberman responded with one word: “Never.”