BANKRUPTCY TALES
Lawyer Has Worked on Key Cases; Success Depends on Who’s Asked
Marc Winthrop sees businesses at their worst.
Sometimes the bankruptcy lawyer is brought in to help revive them. Other times he’s there to do a fire sale. Sometimes he’s there just to turn out the lights.
Winthrop is the founder of Winthrop Couchot Professional Corp. in Newport Beach. The firm has 12 partners and three paralegals.
He’s handled several local bankruptcies including Checkmate Staffing Inc., Global Health Sciences Inc., Strouds Inc., Opal Concepts Inc. and GenSci OrthoBiologics Inc.
Winthrop has an altruistic view of bankruptcy: “In the end, you’re always dealing with people.”
Bankruptcy can help save a company and jobs, he said.
“I’m trying to help them through a difficult time,” Winthrop said.
Winthrop went to law school intending to go into land-use planning. But an uncle put him up to bankruptcy and suggested he join up with Jack Stutman, a Los Angeles bankruptcy attorney.
Winthrop’s reaction: “Are you kidding me? I don’t want to do bankruptcy work.”
He ended up working for Stutman and enjoyed it, Winthrop said. He later moved to OC and took a job with Rutan & Tucker LLP in Costa Mesa. He built a practice there and then started on his own in 1987 with two partners. In 1995, he started his current practice.
As for bankruptcy, “It’s turned out to be stimulating intellectually and rewarding financially,” Winthrop said.
The Business Journal’s Sherri Cruz recently talked with Winthrop about cases he’s worked on and bankruptcy trends.
Is there a bankruptcy cycle?
Definitely. Right now bankruptcy is not as hot as it was a few years ago. Filings are down. But the cycle will change. Sooner or later, it will swing in the other direction. The economy will stay propped up until after the election. Then anything could happen.
Does a bankruptcy ever start out one way and end up another?
All the time. In the Checkmate case, the company tried to restructure. But ultimately the best alternative was to sell to a competitor (Santa Barbara-based Select Personnel Services). Sometimes companies go into Chapter 11 believing that they can turn the business around and they are just too optimistic.
Is it better to sell in or out of bankruptcy?
It depends on the circumstances. If there is a lot of bank or trade debt, then bankruptcy is a better route. For the buyer, a bankruptcy is better because the buyer does not have to deal with any of the liabilities. The buyer gets clean assets through what is known as a sale “free and clear.”
What do you think is the path of Foothill Ranch-based retailer Wet Seal Inc.?
They have hired a financial turnaround firm. They are figuring out what to do. Most people in my field think they are headed for a Chapter 11. The problem is that a lot of things needed to turn a company around are best accomplished in Chapter 11. They should probably close unprofitable stores. The problem you have with closing a store is the lease. Out in the real world, you cannot just walk away from a lease. In a Chapter 11, the debtor can reject leases of unprofitable locations with little consequence.
What happened to Wet Seal?
It is hard to say. From what I read, a lot of what has happened is attributed to the product. The fashion world is fairly fickle. Wet Seal was subject to the whim and whimsy of the teenage girl shopper. Most businesses are subject to some time of fluctuation.
What sorts of things cause a bankruptcy?
Any number of things. The overall economy is an overriding factor. Advances in technology that make a product obsolete is another. Global Health Sciences (a now-defunct Orange-based vitamin supplier to Herbalife International Inc.) was an interesting case. What really damaged that business was the loss of an interpersonal relationship between the founder of Global Health (Richard “Dick” Marconi) and Mark Hughes, founder of Herbalife (who died in 2000). The relationship was very close.
Because of this close relationship, Global Health built its business around supplying to Herbalife. Unfortunately, Hughes met an untimely death and the people who replaced Hughes were not friends of Marconi. All of a sudden, 50% of Global Health’s sales went away.
How did you get that case?
I was referred by general counsel and the investment banker who had been hired to explore alternatives.
How do you generally get hired for a case?
I am often referred by the corporate lawyer for the company or by litigation counsel after adverse judgments. Accountants often are the first to spot problems, and they might recommend consulting with a bankruptcy lawyer. Financial advisers often are brought in before lawyers. They also are a source of referrals. Most companies tend to have bank debt. Bankers get regular snapshots of the company’s financial health. If a borrower defaults, the bank may insist that the company bring in a financial adviser. That is what happened in the Opal Concepts case.
What happened in that case?
I represented the creditors’ committee,a group of the largest creditors appointed by the court to represent the interests of all unsecured creditors. Opal Concepts was the franchiser of Fantastic Sam’s. Opal Concepts was an example of how individual franchises can do well, but the franchise system goes bankrupt. The individual stores were fine. What was in bankruptcy was the franchising system. It has happened any number of times. How well the store (performs) does not necessarily have to do with how well the franchise system does.
Opal Concepts sold regions, then it was up to the regional owner to open the individual stores. Opal Concepts only made money when the store opened and the franchisee paid a fee. The people who were making money were the people who bought the regions. It was not a well-constructed system.
How about the Strouds case?
That actually is kind of a lengthy history. It started with 3D Bed and Bath, a company very similar to Strouds. I was brought in to do an out-of-court workout to avoid a bankruptcy. Unfortunately, the business continued to deteriorate. The bank put pressure on the company. It had to file Chapter 11. After filing, it made an effort to restructure by closing stores and starting Internet marketing. Ultimately, the business was not making it and it had to sell. The best stores were sold to Strouds.
That was, for the time, the end of that. Then a couple of years later, a local investor (Walter Cruttenden) called me to help him buy the assets of Strouds.
The investor thought he could put money into the business and make a go of it. We assisted on the “buy side”,including buying back the stores that were sold (in the 3D bankruptcy). What befell 3D befell Strouds.
Why did Strouds fail?
The now familiar Wal-Mart story. Wal-Mart comes into town and blows everybody away. It is tough to compete with the large national chains. The big boxes like Bed Bath and Beyond have terrific purchasing power.
Why did Strouds file Chapter 11 instead of Chapter 7?
So it could go through an orderly liquidation and maximize value. The purpose was not to find a buyer. It was to run a going-out-of-business sale. In a Chapter 7, the business assets are turned over to a trustee. In a Chapter 11, the business still can operate. If we had filed a Chapter 7, all the employees would be fired. There would be no one to conduct the sales.
What are the chances of a successful Chapter 11?
It is hard to say. I hate to sound like a lawyer, but how do you define success? Is it preserving owners’ equity, paying back creditors? If the company gets sold and jobs are preserved, is that a success? I think so. The employees think so. The creditors might think so. But the owners might not think so.
What have you seen cause companies to fail?
There are an infinite number of reasons. Sometimes it is over-expansion. Sometimes it is competition. Or, in other cases, complacency or failure or refusal to change.
Mismanagement is certainly a top-10 reason. A few years ago, we represented a restaurant chain that grew too big and had an old and tired-looking concept. Unprofitable stores needed to be closed. Sometimes companies stop focusing on the core business.
Sometimes management makes bad business choices, growing just to grow. This could be the topic of an entire course in business school.
If a restaurant or a marketing idea obviously is dated, why doesn’t anyone in the company notice?
If it has been in the family a while, they may not notice. A lot of people go by the adage: If it ain’t broke, don’t fix it. They just don’t realize it’s broken.
What happened in the case of GenSci?
There you had a company that had a terrific product (surgical products for bone repair). Management was good and focused. But they got hit with a catastrophe,a large patent infringement lawsuit. The cost of fighting a lawsuit literally runs in the millions of dollars. That really puts a drain on the cash flow. They have to divert cash away from the business to the legal team. Then they got hit with a large judgment.
Was it a case of a large company trying to put the small competitor out of business?
It would be easy to speculate.
What did you do?
We filed Chapter 11 the day before the court was going to order it to stop making its best-selling product. The filing kept the company alive and enabled it to continue to make its products while pursuing an appeal. Eventually, we settled for a much lower amount and all the creditors are being paid over time.
Would you deem that a success?
Without question. GenSci still is in business and doing better than ever. That was a successful case. They obtained an investment from a European company (IsoTis SA of Switzerland). It now is renamed IsoTis in Lake Forest.
Being intimately involved in a company’s business, do you stop thinking about cases when you go home?
I think about them all the time, but not continually. It gives you a sense of purpose. In the end, you always are dealing with and trying to help real people. If I am representing a Checkmate, for example, Checkmate is not a person. But I am trying to help the people,management, the employees,through a difficult time.
Does it affect your family time?
I do not go home and sit in a dark room, if that is what you mean. It will just pop in my head throughout the day. Actually I think it helps. Because when I am busy helping companies work their way through problems, I have a sense of purpose and I am happy.
(Winthrop has four children. One is an investment banker, one a business litigation lawyer in Century City, one goes to Orange Coast College, and one is a senior at the High School of the Arts in Santa Ana.)
How do you stay balanced?
When it snows, I go snowboarding. I am a runner. I run every day four to five miles,that is my equivalent of meditation. I am too type A to meditate. If I’m going to court that morning, I’ll use my run to conceptualize my argument.
