SONARI GLINTON, HOST:
A few years ago, if you lived in Charlotte, N.C., and you'd bought your first house, there was a store you could go to get just about everything you needed - a dishwasher, a nice flat-screen TV, a refrigerator, even a mattress.
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RODNEY PLAYER: Hi, Roddey Player here with Queen City Audio Video and Appliances. You won't want to miss our blockbuster Labor Day...
GLINTON: Charlotte is known as the Queen City, and Queen City Appliances was an institution there. This family-owned business had 17 stores around town.
STACEY VANEK SMITH, HOST:
And then one day in 2012, word got around town that Queen City was in trouble. And on February 2, a story ran in the local paper - after 60 years in business, the store had filed for bankruptcy. This is something that happens every day in this country. Last year, we looked this up - 34,000 companies could not pay their bills and went bankrupt.
GLINTON: Bankruptcy seems and really feels like this terrible, icky thing, but some people will tell you it's one of the greatest things about this country.
Hello, and welcome to PLANET MONEY. I'm Sonari Glinton.
SMITH: And I'm Stacey Vanek Smith. Today on the show, the story of Queen City Appliances and bankruptcy. In this country, we are really good at going bankrupt, and it may actually be one of our economy's secret weapons.
UNIDENTIFIED WOMAN: This episode of PLANET MONEY and the following message are made possible by the new Scion iA and iM. Scion is proud to do things a little differently than the rest of the auto industry. That's why it's making premium standard features the new standard and taking haggling out of the buying process with pure price. Scion - weird, right? Learn more at scion.com.
SMITH: That cheery voice you heard at the top of the show selling you a washing machine for Labor Day, that is Roddey Player, CEO of Queen City. I went to visit him in Charlotte. He is super friendly and charismatic, and he kept offering to warm up my coffee.
RODNEY PLAYER: Want me to heat that up for you?
SMITH: Oh, thank you.
GLINTON: Making friends in Charlotte.
SMITH: I really like coffee (laughter). Roddey's dad actually started Queen City Appliances, and Roddey showed me an old photo of him at an early tradeshow, standing next to an actual celebrity.
RODNEY PLAYER: And then this is the picture back the '50s of my dad with Miss America, so that was kind of neat.
SMITH: And he's standing there with a TV.
RODNEY PLAYER: Yeah, he is. He's - I think that's a Filco television set. And he's still got his flat top from coming out of the service, you can see there, too.
SMITH: Roddey actually spent a few minutes examining this picture, and he was not looking at Miss America. He was looking at the old TV, trying to figure out what model it was. He's got this encyclopedic knowledge of televisions and appliances. He has been in this business a long time.
RODNEY PLAYER: I was sweeping the floors when I was 8 years old and working on the delivery trucks when I was 12 or 13 years old. And as soon as you graduate high school, you can get on the sales floor, so that summer I was on the sales floor.
GLINTON: Roddey eventually went on to business school, and when his dad died, Roddey became the CEO of Queen City. The family business was in his hands.
SMITH: And for a while, business was great. Charlotte was booming, and Roddey and his family did what a lot of business owners were doing at the time. They borrowed money and expanded. Actually, they borrowed a lot of money, and they expanded a lot. Queen City went from eight stores to 17 stores.
GLINTON: Then 2009 - you see where this is headed - the housing bubble burst. No new homes; no one was buying refrigerators, dishwashers, mattresses at the time.
SMITH: Sales kept dropping and dropping and dropping.
RODNEY PLAYER: I don't want to be called the eternal optimist, but I always felt it just couldn't get any worse and it couldn't get any worse and it couldn't get any worse.
GLINTON: And, well, it did get worse. The math just didn't add up anymore. The money from sales just wasn't enough to pay the bills. He was going to have to do the thing that had been deep in the back of his mind for a while, the thing that any small business is trying to avoid, especially a family business - bankruptcy.
SMITH: Bankruptcy is a grueling process. There are a lot of steps. The first thing you have to do is call a lawyer, and then you have to sign all of these papers with any of the other owners of the business. In this case, that was Roddey's mother, Frances Player, who was 83 years old at the time. And they went to the office together and filled out the paperwork. They filed for bankruptcy. And at that moment, when you file for bankruptcy, everything changes. I hadn't actually appreciated this, but when you file for bankruptcy, it's public, and all the details of your failure are also made public. It's there in the court papers for anyone to read - how much you owe, who you owe - it's all out there for anyone to see.
GLINTON: And just minutes after Roddey and his mom filed the documents, The Charlotte Observer published a short story online. Roddey's phone started ringing off the hook. His son, who was away at college, also saw the news.
RODNEY PLAYER: He knew things were difficult for us, but I don't - I think the actual filing hit the public airwaves and, you know, he sent me a text, a simple note - you OK?
SMITH: Roddey was not OK. In fact, even now when he talks about the bankruptcy, his whole demeanor changes. He looks down. He starts fiddling with things. He gets quieter. He told me that day that he filed for bankruptcy was one of the worst days of his life.
RODNEY PLAYER: You know, your friends, your neighbors, it's difficult to walk around town when you've got something like that hanging over your head.
SMITH: Roddey's mom, Frances, had an especially hard time with this. She had helped start this business 60 years before. She still worked there four days a week in accounts receivable, and for her, bankruptcy was just not something you did.
FRANCES PLAYER: I really did struggle with it, lost a lot of sleep over it, not easy to get up and go to church that Sunday morning. It really wasn't after it came out in the newspaper.
GLINTON: This was a terrible moment for Roddey and his family. And in most countries, this would have been the end of the story. The banks and the creditors would've come in and repossessed the ranges, the TV sets. Everything would've shut down and all the pieces of the business would've been sold off and that would've been it.
SMITH: But in the United States, there is another path - Chapter 11, as in Chapter 11 of the bankruptcy code. And it is a way for companies that can't pay their bills to not die, to keep going. And the idea predates appliance stores by a lot actually. It goes back to the railroads. And we learned this from historian David Skeel.
DAVID SKEEL: I have been studying bankruptcy about 30 years. I just fell in love. I fell in love and have not fallen out of love ever since.
GLINTON: In the 1800s, railroads were going bankrupt all the time.
SKEEL: In the 19th century, nearly every time we had a major economic crisis, a large number of railroads would fail. At one point in the late 19th century, almost 20 percent of all of the railroad track in the country had failed or had defaulted.
GLINTON: And one particular railroad got into big trouble - the Wabash Rail Line - and it ran from Buffalo, N.Y., out to St. Louis. And the owners had borrowed a lot of money to lay the track. Then the economy hit a bump. And suddenly, the Wabash Rail Line was in big trouble. It couldn't pay its debts.
SMITH: But nobody wanted the railroads to actually go out of business. If you'd loaned the money and they couldn't pay you back, sure, you could - I don't know - I guess go and seize a bunch of railroad track and melt it down and sell it or something. But really...
GLINTON: That seems useful.
SMITH: Yes, but what you really wanted was to have a functioning railroad. That's where the value was, carrying people and cattle and grain. And if that happened, if you get the railroad up and running again, maybe you could actually get your money back. And then you, and everyone really, would be better off.
GLINTON: Keeping the railroads open was in everyone's interest, so instead of, you know, shutting down the railroad or everyone rushing in to see what piece they could get, everyone got together, all the people who had loaned money to the railroads, the people who ran the railroads got together and worked out a deal, a way to forgive some of the money the railroads owed so the lines could stay open and they could eventually get more of their money back.
SMITH: Skeel says this was a major economic innovation
SKEEL: That was unprecedented in world history. No other country had had a system like this that was designed, not to shut down substantial businesses when they failed, but to reorganize them, to give them another chance in a sense.
SMITH: So what did the world think of this new kind of bankruptcy?
SKEEL: Well, they thought we were crazy, as they often do.
GLINTON: You can kind of see their point. If you set up a system where when companies sort of screw up and you forgive a bunch of debt and you let them keep going, then you might end up creating this whole environment where businesses just do crazy, risky things. You could end up encouraging the kind of thing you really want to avoid.
SMITH: Here in America, we came down on the side of allowing bankrupt companies to have a second chance. And when Roddey Player filed for bankruptcy, that's what he decided he wanted, to try and keep going.
GLINTON: When you file for bankruptcy, it's like hitting a big pause button. All the people you owe money to, for a moment, you don't have to pay them.
SMITH: But you do have to make a list for the court of everyone you owe money to - everyone. Roddey's list was 133 pages long. He showed it to me.
RODNEY PLAYER: The General Electric company's on here for, you know, $556,000. Here's a freight company - AAA Cooper - we owed $865,000 to. OK, here's a $40 customer refund
SMITH: In all, Roddey was millions of dollars in debt.
GLINTON: I mean - and this is a small business. That's a lot of washers and dryers.
SMITH: Yeah, and the odds for a company like Queen City Appliances emerging from bankruptcy are not good. For small companies, only about 20 percent make it out.
GLINTON: For Queen City Appliance to stay alive, Roddey was going to have to convince General Electric and Whirlpool and the banks - he owed a bunch of money to banks - that they would be better off if they allowed him to keep his doors open. He was going to have to convince them, and he was going to have to convince - and this is really important - a judge.
SMITH: The judge plays a huge role in bankruptcy court. We tried to talk to the judge in Roddey's case, and she wouldn't talk to us. That's pretty common with judges. But we did find a judge who would talk - a bankruptcy judge in California. Her name is Deborah Saltzman. And she ran through the obstacles that Roddey was facing. She says one of the reasons it is so hard for small companies to make it out of bankruptcy is that a lot of them go bankrupt for really good reasons.
DEBORAH SALTZMAN: Not every business is meant to reorganize. You know, I think about when I was a new lawyer, you know, back in the late '90s, the cases I was working on were music stores, like record store, CDs. That's just not a business anymore. So, you know, for a company like that, you know, bankruptcy isn't going to help a business that just fundamentally can't be successful in this economy.
GLINTON: Roddey was going to have to put forward a specific plan, and it would be painful, with cuts. In court, there would be an actual vote where all the people he owed money would decide yes or no. Should Roddey and Queen City Appliance be given a second chance? If they voted yes, then Roddey would actually have to make it work, meet specific earnings targets. And along the way, every little decision he was going to make had to be OK'd by Whirlpool and GE and everyone he owed money to. And Deborah Saltzman, the judge, says a lot of CEOs just really can't handle this part.
SALTZMAN: I think that for a CEO or someone who's used to running a corporation - and who's probably had a fair amount of success, given the fact that they are running a corporation - to find yourself in financial distress is already pretty jarring. If you find yourself in bankruptcy court, you have really a whole new world that you've never been prepared for. Suddenly, your decisions are subject to court oversight. They're public and any of your creditors can hear about what you're planning to do and object to it.
SMITH: So that is what Roddey was up against. After the initial filing, the court gives you a little time to get a plan together, a business plan, and for the moment, you can keep your doors open. But immediately after that, every decision Roddey made needed court approval. He had to get approvals to pay his electricity bill. He had to get a special approved loan to do that. He even had to get approval to put gas in the delivery trucks.
GLINTON: So this is a weird feeling. On the one hand, they'd filed for bankruptcy. On the other hand, they still had a hope. They could still be open for business. Bob Lund worked in customer relations answering the phone.
BOB LUND: Customers were actually calling us, having heard it on the news, and there were a bunch of concerned customers. And we just tried to assure them that we were still here working through it. We were answering the phones and the lights were on.
SMITH: Bob says some customers just called to say good luck, we're rooting for you. Thanks, he'd say, come on down. Come buy a dryer.
GLINTON: Roddey started to draw up that plan to submit to court and explaining how he was going to fix the business. He hired a turnaround expert who looked through his books and was very blunt.
SMITH: Mark told him you want to make it out of bankruptcy, you want to be profitable again? You're going to have to close some of your 17 stores.
RODNEY PLAYER: And I still have nightmares about that 'cause we, you know, had to eliminate a lot of jobs. And you're sitting across the table from somebody, telling them that you're going to have to let them go, you know, it can really - it really hurts you and it scars you, to be honest with you. And I still, to this day, think about those type things.
SMITH: How many stores do you have now?
RODNEY PLAYER: We've got four stores, yeah, so...
SMITH: Seventeen stores to four stores is a lot fewer.
GLINTON: But it's a lot more than zero, which would've been the alternative. Roddey had to lay off 130 employees, but 75 still got to stay with him.
SMITH: So Roddey filed his plan for how he was going to fix the company. All of his creditors, the people he owed money to, GE, the banks, the electric company - they all voted. And they said, OK, we'll give this a shot.
GLINTON: Not everyone was going to get their money back. The local newspaper that he'd advertised in when things were very good got a 10th of what they were owed. Whirlpool and GE, who were higher up in the pecking order, would get paid, but it would take a while. Roddey himself had put a bunch of money into the company, and he wasn't going to get that back.
SMITH: Roddey ran his four remaining stores as efficiently as he could, trying to cut costs at every possible turn, and also trying to sell as many stoves and refrigerators as he possibly could. Every week, he had to submit a progress report to the court to show how much money was going out and how much money was going in. Queen City Appliances was in bankruptcy for a year-and-a-half, but on August 27, 2013, it was over. Roddey got an official document from the court saying his company was no longer in bankruptcy. Actually, he was waiting for it for a few days.
RODNEY PLAYER: Take a few extra days than I thought it was, but...
SMITH: Were you checking your email, like, every two seconds?
RODNEY PLAYER: Sure, sure, and calling, looking for it and all kinds of stuff, but that was the highlight of the process.
SMITH: It is, like, the shortest legal document I have ever read. There's this big official-looking court seal in one corner and there's just one sentence. It says the Chapter 11 case of the above-named debtor is closed.
Roddey threw a party for his staff. He showed them a documentary about Captain Ernest Shackleton and his crew surviving winter in the South Pole. He handed out Queen City Strong bracelets. He still wears his every day.
GLINTON: And that was that. Queen City was back.
SMITH: Queen City Appliances has been out of bankruptcy for two years now. And Roddey says the company's doing really well. Profits are way up. He took me to the back of one of his stores into the warehouse.
So you can show me around some of the appliances.
RODNEY PLAYER: I'd love to, love to.
SMITH: During the bankruptcy, Roddey tells me it was almost empty back here. Now there are huge boxes stacked to the ceiling.
RODNEY PLAYER: So dishwashers five-high, you know, laundry products are four-high, row after row of appliances - that just makes you feel good.
SMITH: He shows me one type of new refrigerator, and I start to get the feeling he's trying to sell it to me.
RODNEY PLAYER: They've got a hideaway shelf that actually breaks away and then you hold your wine right there. You're a wine drinker, aren't you?
SMITH: (Laughter) Why do you say I'm a wine drinker?
RODNEY PLAYER: (Laughter) You can put your wine in there, too. And bottom freezers, you know, this is - this has become the most popular type of refrigerator.
SMITH: Looking back on this, though, Roddey doesn't exactly see bankruptcy as one of America's greatest inventions. He seems to see it as a huge pain.
GLINTON: His mom, though, who at first thought bankruptcy was not a thing that good solid people did, has turned around. She's actually kind of a fan of it.
FRANCSE PLAYER: I think it's a very, very good way for a company to continue
SMITH: So you - your mind was changed about bankruptcy.
FRANCSE PLAYER: Yes, it really was. It would've broken my heart if we'd closed (laughter).
GLINTON: And around town, Frances says people were surprisingly accepting of the whole thing. They didn't see it as a failure or them as a failure, like that first Sunday morning after they filed for bankruptcy and she was so nervous about, you know, going to church.
FRANCSE PLAYER: All of our friends, everybody, was very supportive.
SMITH: So you went to church and it was OK.
FRANCSE PLAYER: It was OK. It was. Same seat (laughter) same seat for how many years (laughter)?
SMITH: In the U.S., we've decided we want an economy where the CEO of an appliance store can dream big, expand really fast, and if it doesn't work out, we have a system for dealing with the mess so the business can keep going.
GLINTON: And a lot of companies out there today that are healthy now have been through this process. You know, a couple of companies that I cover - General Motors, Chrysler, United Airlines, heck, almost every airline, Marvel Comics, the Texas Rangers - I mean, this is something embedded in our system.
SMITH: In fact, other countries have started looking at our bankruptcy laws, in part, because of what happened during the last recession. Hundreds of thousands of companies went bankrupt in the U.S. and some of them made it out.
GLINTON: And economists say this is one reason that our economy bounced back a bit faster than others. If the economy crashes and a company just has a bad moment, it can, you know, eventually shake it off. It doesn't mean the end.
SMITH: France, Ireland, Germany, Spain, Italy - they've all modified their laws to make them a little more like our Chapter 11. They decided they like our system of second chances.
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RODNEY PLAYER: So by local and save more at Queen City, where you'll always find the right product, right price and real answers, guaranteed.
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GLINTON: We want to know what you think of our program. Email us at planetmoney@NPR.org or tweet us, @planetmoney. Our episode today was produced by Frances Harlow. Thank you, Frances. It was edited by David Kestenbaum, and we got help from Jess Jiang. Thanks also to Craig Barbarosh of Katten Muchin Rosenman for helping us understand the creditor's point of view in all of this. And if you're looking for another show to try, NPR recommends the brand-new "Hidden Brain" podcast. It's all about social science, and in a sneak peek, you can learn about why arguments sometimes sort of get derailed. Find the "Hidden Brain" podcast at NPR.org/podcasts or on the fabulous NPR One app. I'm Sonari Glinton.
SMITH: And I'm Stacey Vanek Smith. Thanks for listening.
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