By Mary Ellen Podmolik, Sandra M. Jones, Ameet Sachdev and Michael Oneal The Chicago Tribune June 7, 2009
Mandy Dalton is a professional clown. She likes to make kids laugh.
"We're kind of the blue-collar workers of the entertainment industry. We get paid contractually," she said. "We're the ones that have to show up with a big smile on our face and make sure everyone is having a good time."
But she doesn't have any smiles left for General Growth Properties Inc.
On March 18, Dalton juggled, danced and made goofy faces for children gathered at Owings Mills Mall, just outside of Baltimore. On April 16, Chicago-based General Growth, the mall's owner, filed for Chapter 11 bankruptcy protection from creditors.
As a result, Dalton still is trying to collect her $200 fee. When a company files bankruptcy, if it is big enough and well-known enough, it makes the headlines. If it has viable business prospects, it is given time to work through its debt and emerge from bankruptcy in a pared-down and presumably more financially sound state.
But the same can't always be said of all the smaller concerns left in the wake of larger bankruptcies.
As the pace of corporate bankruptcies quickens, an untold number of companies, many relatively unknown, find themselves caught up in the spillover effect, and their own fortunes are affected.
Typically, vendors that supply companies with goods and services are unsecured creditors, meaning they are at the end of the line seeking repayment when a company goes bust. Many of them go empty-handed. Some go bust themselves.
For the first five months of the year, 709 commercial bankruptcies were filed in U.S. Bankruptcy Court for the Northern District of Illinois. That compares with 1,140 for all of last year, 749 in 2007 and 589 in 2006, according to data from Aacer, a bankruptcy data and management company. Those numbers don't include the large companies that often file for bankruptcy in Delaware.
The fallout from corporate bankruptcies goes beyond the potential loss of a storied name like GM or a longtime brand like Hartmarx, said Robert Lawless, a University of Illinois law professor.
The paper trail that accumulates in a corporate bankruptcy can fill a banker's box or a filing cabinet, but it invariably includes the names of businesses big and small that are owed money. The process of sorting it all out can take months or years. As a result, the outcome of the process is critical not just to the filing company's stakeholders and employees but also to any company that had a relationship with the venture.
"Who cares about the name on the door?" Lawless said. "What we really want to make sure is the assets and the jobs that a company like Hartmarx represents continue to be productive jobs and assets for the economy. And just because it's not the company you work for, that doesn't mean it doesn't affect you."
General Growth, which declined to comment, is a case in point. It is one of the nation's largest shopping mall operators and ranks as one of the biggest real estate bankruptcies in U.S. history. It owes big banks and bondholders billions of dollars. Dalton knows she has a lot of folks in front of her trying to collect their money.
So Dalton, who said she can't afford a lawyer, would consider joining a "convenience class" if General Growth were to establish one. That means her claim could be settled with other relatively smaller creditors in one swoop. But there's no guarantee she'll get paid all she is owed.
"I might make pennies on the dollars," she said.
And from now on she is asking for payment upfront.
Good lien, bad timing In a better economy, Bestler Corp., a family-owned plumbing contractor in Hampshire, Ill., wouldn't sweat the loss of client Neumann Homes Inc., which sought bankruptcy protection in November 2007 and is being dismantled. That's because mechanic's liens are considered secured claims in a home builder's bankruptcy, meaning Bestler's approximate $80,000 in liens are near the front of the line for repayment
But the assets that Neumann has to liquidate are unfinished residential subdivisions, and there aren't any takers in the current market for its properties or anyone else's. Neumann declined to comment.
As a result, Bestler is in limbo. It hopes to negotiate a partial payment on some of the claims and must decide whether to undertake the expense of additional legal action to fight for others. The company finds itself in similar situations with some of its other home-builder clients that have gone bankrupt too. In a few cases, it has bartered with builders, taking small pieces of land in exchange for withdrawing the liens.Meanwhile, Bestler's typical crew of 60 to 80 plumbers during the building season has shrunk to eight part-timers.
"Our legal costs were zero for the 10 years prior," said partner Mike Bestler. "Now we have legal fees we never thought we'd have. We're looking to get any work we can."
Stiffed by suitmakerAfter getting burned once, Bruce Schedler, vice president of the Chicago Collective, is not counting on one of his biggest exhibitors to attend the menswear trade show in August at the Merchandise Mart.
That's because Hartmarx Corp., the Chicago-based suitmaker known for its Hart Schaffner & Marx and Hickey Freeman lines, was a no-show at the February event. So was the $15,000 exhibit fee, which typically is paid at the time of contract but wasn't in Hartmarx's case.
A few days before seeking bankruptcy protection in January, Hartmarx told Schedler that it would not participate in the February show, despite signing a contract to take prime exhibit space at the entrance to the hall. The cancellation was a blow to the show's image and left Schedler scrambling to rearrange the exhibit space.
"People come expecting to see them," said Schedler, who spent nine years at Hartmarx. "I filled the space but not the bank account."
A potential sale of the company is winding its way through bankruptcy court, but Schedler isn't banking on Hartmarx's return. He already has found other tailored-clothing manufacturers to fill the void left by Hartmarx.
"Hartmarx hasn't committed," he said. "It's like throwing a party, and your guest of honor is not there."
Really deferred payPhilip Franzese understands that it's a long shot that he will recover any of his $218,750.25 from the Tribune Co. Chapter 11 bankruptcy case.
But at 69, he has made it his obsession to fight for every penny, which is why he never refers to his claim without saying "and 25 cents."
He has hounded the U.S. bankruptcy judge and trustee in Delaware. He has written and called every public official he can think of.
"I'm a madman, I'll admit it," Franzese said. "They're dealing with the wrong guy."
Franzese's claim couldn't seem more disconnected from Tribune Co.'s problems. It stems from a deferred-compensation plan given to him and three co-workers in 1987 to persuade them to stay at a small, family-owned publisher of advertising circulars on Long Island, N.Y.
John Sutter, the company's former owner, said he "funded the plans religiously" for a decade so each of the employees eventually would have a 10-year retirement payout of $35,000 a year.
Then in 1996, he sold the company to a California outfit named Newport Media, which consolidated it with other shoppers before selling them to Newsday on Long Island. A year later, Tribune Co., which publishes the Chicago Tribune, bought Newsday's parent, Times Mirror Co., making Sutter's shoppers part of a media conglomerate.
Franzese's deferred-compensation plan drifted from owner to owner as an increasingly insignificant liability. And when Franzese turned 65 in 2005, Newsday started sending him checks for about $3,000 a month.
"I waited 22 years for that money," he said.
In 2007, however, Chicago real estate magnate Sam Zell took over Tribune Co. in a deal that saddled the company with $13 billion in debt just as the economy and the newspaper business began to collapse. Zell unloaded Newsday to raise $650 million to pay down debt. But he kept a small ownership stake and some liabilities, including Franzese's deferred-compensation plan.
When Tribune filed Chapter 11 in December, Franzese's checks stopped abruptly, leaving him unable to pay many of his bills, he said. That was especially troublesome because the money had helped him start up a small ad agency on Long Island. He recently filed a letter with the bankruptcy court stating that JPMorgan Chase has foreclosed on his home, and creditors have begun to seek judgments against him.
Adding insult to injury, he said, Tribune Co. has insisted that his claim is worth $176,017.37, not the $218,750.25 his contract says the plan owes him. That's because the company values this and all other deferred-compensation claims at "net present value."
"They're not only saying they won't pay me, they're saying they won't pay me a reduced claim," Franzese said.
In a statement, Tribune Co. acknowledged Franzese's claim but said it "will be processed in accordance with the plan of reorganization that will be approved by the bankruptcy court."
Given that the $8.6 billion owed senior lenders likely will overwhelm other claims, Franzese's chances are grim.
Sutter, who set up the plans, is appalled.
"You spend your whole working life in America, and then you're cut out," he said. "This is how little people get crushed in these cases. It's a bitter pill."
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