SANTA ANA — A bankruptcy court judge Tuesday ordered that National Lumber & Supply Inc. be liquidated by a trustee, a move that means one of Southern California's oldest retail chains will soon disappear.
Judge James N. Barr approved a motion to convert the home-improvement company's Chapter 11 reorganization petition to Chapter 7, under which company assets will be sold and the proceeds distributed to creditors.
Attorneys for company President Melvin Jaffee, whose father founded the once-vigorous Fountain Valley chain in 1942, sought the liquidation after creditors attempted in court to take control of the company and remove Jaffee.
Alan Pedlar, attorney for National Lumber, said the company had no choice but liquidation because it was unable to secure more financing from its biggest creditor, Fidelcor Business Credit Corp.
"We don't have the money to continue to make payroll," Pedlar said.
The court's action marks a slow, painful death for National Lumber, which once operated more than 20 stores and whose advertisements featuring the fictional characters Shorty and Cheap Chicken were widely recognized.
National Lumber filed for Chapter 11 bankruptcy protection from creditors in early April, saying that it was hurt by a slumping housing market and that it could no longer compete effectively against volume warehouse home-improvement chains, such as Atlanta-based Home Depot and Fullerton-based HomeClub.
The company attempted to reorganize by closing unprofitable stores, selling off merchandise and developing a new marketing strategy. But the losses continued to deplete the company's resources and creditors pushed for the liquidation.
When it filed for bankruptcy on April 3, National Lumber had 21 stores. It slowly began to close the outlets and lay off its more than 1,200 employees. Last week, the company had moved to shut all of its stores except two--those in Cathedral City and Encinitas.
Despite the cutbacks, the chain was unable to stave off its losses. In July, National Lumber reported that it lost $18.5 million in 1989 and $6.5 million in the first quarter of this year. In May the losses were running $300,000 to $500,000 a week.
The firm noted in a July filing with the Securities and Exchange Commission that unless it could increase sales and reduce losses "it may have to cease operations and liquidate."
The company even hired some veterans of the home-improvement business to guide it through the tough times. It hired Martin C. Schaeffer to be executive vice president and Max Robuck as merchandising chief. Schaeffer and Robuck resigned last week.
In trying to turn itself around, National Lumber found itself in a dilemma: When it lowered prices, its gross profit margins fell; when it raised prices, sales fell.
Even though Southern California is the largest market for home-improvement centers in the nation, it is also the most competitive. The top five chains operate more than 200 outlets in the state.
The competition was not so keen when Sol Jaffee opened the first National Lumber store in Bellflower 48 years ago. The store thrived on the economic expansion after World War II as many veterans settled in Southern California.
Melvin Jaffee, who has operated the company since 1965, directed the company's expansion into one of the nation's first full-service home-improvement chains. The company was once considered an innovator in the industry.
Melvin Jaffee, 56, watched the bankruptcy proceedings attentively Tuesday, but declined to comment afterward.
The failure of the company will be costly to Jaffee, who as recently as a year ago controlled 50% of its stock. He also recently made a personal loan of $2.5 million in an attempt to help save the firm.
Jaffee and Fidelcor are the company's two largest secured creditors. They were owed $13.3 million at the time of the filing.
The conversion to Chapter 7 means that the U.S. Trustee's Office will appoint an independent trustee within 20 days to run what is left of the company and liquidate its holdings.
In the court hearing Tuesday, the creditors sought to oust Jaffee as president and chief executive officer and appoint their own trustee to sell off the company.
Mark Beilinson, attorney for the creditors' committee, said that creditors were frustrated with the company's efforts to revive the chain and that they wanted a chance to control the sale of the company's valuable leases, which are roughly valued at $1 million each.