Brother, Can You Spare 30 Cents on the Dollar?

When a business fails, is the owner ethically accountable to make good on all debts? Or are bankruptcy laws, which absolve a business owner from paying back the full amount, punishment enough?

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When your company goes broke, should you have to pay people back?

"Why should a man who has all the money he did be able to walk away from a million-dollar debt?" asks Daniel J. Driscoll. "They should make it illegal. If you have the funds to pay your debt, then you shouldn't be able to walk away."

Driscoll, who owns a $4-million general-contracting company, is referring to money he lost back in 1995, when he did some framing work for Coffee by George, a start-up of drive-through coffee kiosks based in Boston. The short-lived venture was founded by George Naddaff, best known as the entrepreneur who discovered Boston Chicken, the restaurant chain that in 1993 became one of the hottest public offerings ever.

"When he realized that his concept wasn't going to be the next Boston Chicken," says Driscoll, "he pulled the plug on it and fucked everybody."

After having invested about $5 million in the Coffee by George concept, Naddaff and his partners at Olde World Bakeries Corp., the corporation that owned the business, realized it wasn't going to work and decided to liquidate it. They ended up with an agreement to pay creditors roughly 30¢ on every dollar owed. Driscoll agreed to the payout.

But he wasn't pleased. What's Driscoll's beef? Well, in a nutshell, he believes that although what Naddaff did was perfectly legal, he shouldn't have gotten off so easily. Given that he had the means to do so--personally or through his other ventures--Naddaff should have been responsible for making his creditors whole.

Indeed, while the extent to which the owner's personal assets are protected when a company goes bust varies from state to state, some business owners have taken the stance that making good on what you owe means going beyond what the law requires.

When Hawkeye Pipe Services Inc. went under, in 1985, Bill Bartmann, who founded the manufacturer of pipes for oil rigs, was left owing creditors more than $1 million. Rather than reaching a liquidation agreement with creditors or filing for bankruptcy protection, Bartmann decided to pay back his debts regardless of how long it would take.

"I was born and raised in Iowa, and back in the Calvinistic Puritan Protestant work ethic kind of environment, you were supposed to pay your bills," says Bartmann, now president of Commercial Financial Services Inc. (CFS), a roughly $1-billion debt-collection company based in Tulsa. "It just seemed inherently wrong to try to escape by using a law--granted, it was a valid law, and I am a lawyer--as an escape hatch or excuse. It just didn't seem the proper thing to do."

It took him two and a half years from the time he shut down Hawkeye, but Bartmann paid everyone back in full.

"You know the American capitalistic system is the neatest on the globe," says Bartmann. "It's a wonderful environment to allow people to go out and assume the risks and rewards of life. Now, people understand the reward side very easily. I don't think they understand the reciprocal side is that they should be obligated to pay the piper if indeed there are any assets with which to do that.

"The question," says Bartmann, "is do they have a responsibility beyond the legal requirements?"

Chris Graff thinks they do. Graff, president of Marque Inc., a fast-growing ambulance manufacturer based in Goshen, Ind., wasn't so successful with a previous venture. In 1989 Geste Corp., a furniture-making business he'd founded, went belly-up. "After the auction I didn't have everybody paid off. I was about 10 grand short," he says. "So I went to work and paid it back out of my income." As Graff recalls, it took him about four months. "I guess it's just a moral or ethical issue for me," he says. "When we make a decision to do something, we should be able to explain that decision in the same way to anybody who asks, be it our spouse, our business partner, an employee, a creditor, or a customer. I have to sleep at night."

For folks like Bartmann and Graff, the decision to pay back creditors in full also has a distinctly pragmatic side to it. "I understand how people view bankruptcy," says Bartmann. "I guess I rationalized it pretty quickly that although I was eligible to take the easy cure, to do so would forever taint me with that stigma." Because Bartmann took the harder route, when he was seeking working capital for CFS, he was able to point to the fact that he'd paid people back as evidence that "lending me money now again is the safest risk you're ever going to take."

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