From the Puget Sound Business Journal: by Jeanne Lang Jones, Staff Writer
December 16, 2011,
http://www.bizjournals.com/seattle/print-edition/2011/12/16/sale-likely-for-skyway-luggage-as.html
Prominent Seattle businessman Henry “Skip” Kotkins Jr. is embroiled in a multimillion-dollar legal battle with the receiver he selected to sell his family’s struggling Skyway Luggage Co. and its assets to satisfy creditors.
The legal dispute arose out of a financial crisis that has hobbled the 101-year-old Seattle company credited with popularizing the wheeled suitcase.
The receiver, Revitalization Partners LLC, in early November filed a lawsuit in King County Superior Court accusing Skyway Luggage CEO Kotkins and other company executives of “excessive wages” and “failures … to exercise any management or control,” among other things, according to the complaint. The lawsuit also accused Kotkins of “unjustly enriching” himself with $14.9 million in personal loans.
Kotkins denied the allegations, arguing that the company was dragged down by market conditions, a dramatic industry consolidation, and that the temporary loans he received were common practice for a family owned business. Both sides agree that the company’s financial condition deteriorated and it needs to be sold.
Seattle-based Revitalization Partners, acting on behalf of Skyway Luggage’s creditors, is seeking at least $39.9 million from Kotkins, as well as at least $6 million each from two other company executives, according to the lawsuit. Kotkins, who chairs the Seattle Metropolitan Chamber of Commerce and is a director for the Seattle Branch of the Federal Reserve Bank of San Francisco, told the Puget Sound Business Journal he has done nothing wrong.
“I know what I did and why I did it, and I did not do anything wrong or illegal,” he said. “If I had, I wouldn’t have chosen to go into receivership. Why expose myself to any public document scrutiny if I had done anything wrong? “I have lived my whole life as an upstanding, contributing part of the community. Everyone knows me and my reputation is strong.” Kotkins’ attorney, John Rizzardi of Seattle law firm Cairncross & Hempelmann PS, said his client denies the allegations.
The receiver’s attorney, Michael Nesteroff, of Seattle law firm Lane Powell PC, declined to comment on the case. Whatever the outcome, the dispute is probably the beginning of the end of the Kotkins family’s ownership of Skyway Luggage, which was founded by Kotkins’ grandfather in 1910 and survived the Great Depression. Three generations of the Kotkins family have managed the company, which is now owned by Skip Kotkins and a family trust.
In recent years, the company made luggage under its own brand and under a manufacturing licensing agreement for retailer Eddie Bauer, among others.
The lawsuit and related documents, along with several interviews with Kotkins and other parties to the dispute, paint the picture of a third-generation owner who put his struggling company into receivership, only to have the receiver sue him and other executives for damages.
Kotkins said he put his own company into receivership in June, after Skyway Luggage foundered under the onslaught of a “perfect storm” of business reversals. The recession battered the company’s sales, one of its largest customers couldn’t pay its bills, and the company struggled with its main Chinese manufacturer over quality issues, he said. The recession has claimed a number of other wholesale luggage makers that have either closed or been sold to competitors as the industry consolidates.
The receiver, Revitalization Partners, specializes in business turnarounds, receiverships and bankruptcy and crisis support. Similar to a bankruptcy filing, receiverships in Washington state put litigation and collection proceedings on hold, but the procedure does not follow the same strict timelines as bankruptcy, allowing the receiver greater flexibility in selling assets.
Kotkins said he concluded that Skyway Luggage was worth more as a going concern, and should be sold as an intact business.
“Skyway going it alone as an independent company did not make sense,” Kotkins said. “It needed to be part of a larger operation. And, at my age and stage in life, it made sense to be a seller.”
But the lawsuit filed by the receiver painted a different picture of what was behind the company’s financial struggles. Revitalization Partners alleged in its lawsuit that it “was appointed due to Skyway’s mounting financial difficulties arising from the diversion of its working capital to fund excessive wages to Kotkins” and two other executives, William H. Wilhoit, the chief operating officer and president; and Jennifer Carmichael, the executive vice president and secretary.
Carmichael is Wilhoit’s daughter. Wilhoit, who joined the company in 1990, was appointed president in 2003. According to Kotkins, Wilhoit oversaw much of the company’s day-to-day management. Skyway Luggage’s performance was also compromised, the lawsuit alleged, by “personal loans” to Kotkins, as well as by “the failures of Kotkins, Wilhoit and Carmichael each to exercise any management or control over the corporation’s business.”
“The company now faces potential liquidation because of its lack of working capital and inability to access credit,” the lawsuit said. The attorney for Wilhoit and Carmichael, Chris Nicoll, of Nicoll, Black & Feig PLLC in Seattle, said, “Bill and Jennifer are capable and competent executives. They sought out and relied upon the advice of professionals and we will be providing our defense in due course.” Kotkins said of the allegations: “Anybody can say anything they want in a complaint, and they usually do.”
Revitalization Partners is asking for a judgment of at least $25 million against Kotkins and $6 million each against Wilhoit and Carmichael, alleging breaches of fiduciary duty, waste of assets and unjust enrichment. The receiver is also seeking a judgment of $14.9 million for amounts owed on a series of loans Kotkins obtained from the company between 2006 and 2010.
In detailing its claims against Kotkins, Wilhoit and Carmichael, the receiver put forth its scenario of the company’s decline.
Between 2006 and 2010, the company’s gross sales plunged 69 percent — from $46.6 million to $14.6 million — and the company became insolvent, the receiver contends in its lawsuit.
In his answer to the complaint, Kotkins denies the company was insolvent in 2007, claiming it had a net worth of close to $20 million at that time. He admitted that Skyway Luggage’s financial condition deteriorated between 2007 and 2010, but denied that the decline was the result of his taking loans from the company.
Instead, he said “the greatest cause of Skyway’s deteriorating financial condition … was the drop in value of Skyway’s marketable securities portfolio,” which was “the primary contributor to Skyway’s inability to pay its vendors.”
The securities portfolio was later surrendered to the company’s bank. Kotkins also “denies that he failed to exercise appropriate supervision and control over Skyway’s officers and employees,” his answer to the complaint said. Meanwhile, the receiver claimed the company paid $5.3 million in dividends to Kotkins that was used to pay off unspecified prior loans, according to the lawsuit.
Kotkins’ lawyer, Rizzardi, points out that for Subchapter S corporations, such as Skyway Luggage, shareholders are responsible for paying the company’s taxes and that distributions are commonly made for that purpose. In October, Revitalization Partners told the court it had a plan for selling Skyway Luggage and its assets, and had received an offer on one of the company’s properties.
Revitalization Partners’ Al Davis said he believes the Skyway Luggage brand name will survive. “Our objective always is to maximize the value of the assets, and Skyway is an iconic brand,” he said. “I believe we will be successful in having it survive.”
In mid-November, with the holiday shopping season nearing, the court authorized the receiver to sell certain Skyway inventory for approximately $1.3 million.
Kotkins and his company face other challenges. In July, Kotkins and his wife, Jacqueline, gave Columbia State Bank their home in Seattle’s Magnolia neighborhood with a deed in lieu of foreclosure. Kotkins said the couple, as empty nesters, had wanted to downsize to a smaller residence. They had been trying to sell their home for 16 months and had dropped the price by 40 percent when they contacted the bank about taking the deed, he said.
“We initiated that idea and they agreed,” said Kotkins. “We are very pleased that this allowed us to move to a smaller residence, as so many couples do at our stage in life.” The house is currently listed for sale for $4.9 million, according to the online listing service Zillow.com.
In November, Wells Fargo Bank sued Kotkins personally for $9.5 million in King County Superior Court, claiming he unconditionally guaranteed a series of loan agreements between Skyway Luggage and Wells Fargo that were not repaid.
Wells Fargo’s attorneys did not return calls for comment on that case. Rizzardi said it was “unfortunate” that Wells Fargo took legal action rather than being willing to wait for the assets to be sold.
Skyway Luggage’s main manufacturer and largest unsecured creditor, Suzhou Harmony Travelware Co. Ltd. in China, claims it is owed about $6 million, said Harmony’s attorney, Dean Messmer of Seattle law firm Lasher Holzapfel Sperry & Ebberson PLLC. According to a declaration that’s part of the court file in the receiver’s lawsuit, Skyway Luggage made its last payment to Harmony in May, when the Chinese manufacturer stopped shipments. At the time, Harmony claimed it was owed about $4.4 million for shipped orders.
“We are waiting to see the results of the receiver’s liquidation of assets and the receiver’s lawsuits against Mr. Kotkins and the other officers of the company,” said Harmony’s attorney Messmer. “If he is successful, my client will be repaid in full.”
Rizzardi said Harmony’s claims are in dispute.
“Our understanding is the receiver wants to complete the receivership as quickly as possible,” Rizzardi said. “It will sell the assets, possibly resolve the lawsuit in mediation and obtain a decision on the disputed Harmony claim in coming months.”
Meanwhile, Kotkins is working on selling his family’s company with Davis, the receiver, who is simultaneously suing him in King County Superior Court.
Davis said: “This is a business problem. It is not a personal problem.” “It is a strange situation,” Kotkins said. “I’ve got someone who is suing me and I’m working closely with them every day.”
A Three-Generation Endeavor
The legal battle between Henry “Skip” Kotkins Jr. and the court-appointed receiver for his business, Skyway Luggage Co., is the greatest challenge yet for a family that has weathered crises through three generations.
The Seattle-based company was founded in 1910 by Kotkins’ grandfather, Abe Kotkins, a Lithuanian immigrant, as Seattle Suitcase, Trunk and Bag Manufacturing Co., according to a history on the Skyway Luggage website. Abe Kotkins built the business for a quarter century, then struggled to keep it afloat during the Great Depression. He died of a heart attack at the age of 49, reportedly having worked himself to death.
His son, Henry Louis Kotkins, was a year out of law school when he stepped in to save the family business in 1936. He was an innovator, renaming the company Skyway Luggage to capture the excitement of the growing airline industry. He rolled out colored luggage at a time when most baggage was a somber black or brown.
Henry Louis Kotkins also had an active civic life. He served as a Port of Seattle commissioner for 13 years, helping forge a relationship with China. That nation has since become one of Washington state’s largest trading partners. He was a devoted Rotarian and on the committee that helped stage the 1962 Seattle World’s Fair. He died in 2002, according to newspaper obituaries.
His son, Henry “Skip” Kotkins Jr., joined the company full time in 1972 and became CEO and chairman of the company in 1980. He, too, has a long résumé in civic affairs. Henry “Skip” Kotkins Jr. is currently chairman of the Seattle Metropolitan Chamber of Commerce and a director for the Seattle Branch of the Federal Reserve Bank of San Francisco. He is also past president of the Rotary Club of Seattle, past chair of the Washington Council on International Trade, and a former trustee of the Fred Hutchinson Cancer Research Center.
