Breton Mills

Breton Mills was bankrupt. Creditors were demanding repayment on total obligations that exceeded the small company’s assets by nearly a million dollars. This privately held corporation and its sole owner faced the biggest crisis in their 12-year history. At best the assets of the company would make good on 30 or 35 percent of the total debt.

As a corporation, Breton Mills had the option of liquidating its assets and paying its creditors whatever it could, based on a legal formula. But its owner was reluctant to do that. To understand the dilemmas he faced and the forces that shaped his thinking you need a little history.

He was born in 1910 in New York, the first child of recent immigrants from Eastern Europe. At the age of three his parents took him back to the “old country” for what turned out to be an extended visit. Shortly after their arrival, World War I began and it was nine years before they could escape their little village and return to America.

The family returned and he enrolled in public school. He completed almost eight years worth of schooling by the time the Great Depression hit and he, like thousands like him, left to seek work. He found a sales position in a small haberdashery - a shop specializing in men’s hats and accessories. His sales skills were prodigious and he did well.

Meanwhile, his father was working in a small factory that knit quality women’s apparel - sweaters, scarves and caps. Ten years later, now married with a small daughter and the depression nearly over, he pooled resources with his father and they bought that factory - Breton Mills. His father ran production. He was the salesman.

The war created a unique opportunity. Most of the larger mills were converted to wartime production - uniforms, blankets and other materials for the military. Breton Mills was too small to win government contracts but found themselves in a market niche with little competition.

Even during the war, there was demand for quality women’s wear through upscale department stores and specialty shops. Breton Mills prospered. In 1943 his father died, a second child was born and he hired a manager to run the factory. By the end of the war he was prosperous, had moved from the city to the suburbs and was living the good life.

Then, he struck it rich. He and his designers created the fashion sensation of the 1949 season - the “Facscinator” - a combination scarf and hat that caught the imagination of their traditional clientele as well as the mass market. It became “all the rage”. The full capacity of the mill was dedicated to producing Fascinators but it was not enough to keep up with demand. Stores were clamoring for more and were willing to pay top dollar to keep their shelves full and their customers happy. Copycats and knock-offs filled the mass-market outlets but the demand for the “real thing” was intense.

He was convinced that unmet demand was enough to carry the Fascinator through another season, despite the common wisdom that winter fads rarely had the “legs” to survive a summer. So in 1950 he went on the road, making his pitch to his traditional base of buyers. Their nearly unanimous opinion was that the fad had run its course. He remained unconvinced, and besides, had nothing else to offer. The mill was fully geared up to produce nothing else. There was no fall-back position - no other products to offer.

He found a compelling sales approach. He knew the Fascinator had another season of solid sales left in it so why not guarantee those sales to the stores. Eliminate the risk. Sell the full capacity of Breton Mills on consignment. What the stores didn’t sell, he promised to buy back at season’s end. The buyers were right. Fascinator sales were pitiful. Less than 25% of the production run found its way into customers’ hands, and much of that was at deeply discounted prices. The stores lined up for refunds on the Fascinators they returned.

Breton Mills made good on his promise for as long as reserves allowed. Then he had no choice but to declare the company insolvent and close its doors.

He consulted with his accountant and attorney. They advise that Breton Mills declare bankruptcy and distribute the resources of the mill as proscribed by law, estimating that each of the creditors would likely receive no more than 30-35 cents on the dollar. His personal assets would be untouched and he would be well positioned to start a new business venture if he chose. Of course, he could always retire and still live comfortably.

He disregarded their advice. In his mind he had made a promise. He had sold his products to reluctant buyers by offering his personal assurance, his word, that if the product did not sell Breton Mills would refund their money. But he was Breton Mills. They had agreed to buy his product because they trusted him to keep his end of the bargain.

Rather than hide behind the protections afforded by bankruptcy law, he chose to dissolve his personal fortune. He liquidated all of his investments, sold his house, his car, his yacht, his wife’s jewelry, furs and their small collection of works of art. He was able to return over 95 cents on the dollar to surprised and grateful creditors.

He was willing to start over, find a job and begin a more modest life. He would be back where he had started, but with his honor intact. He had made good on his word.

But there is a postscript to this story. In distributing all of his assets to Breton Mills’ creditors he ignored one of his creditors, the Internal Revenue Service. Among his now liquidated accounts was a set-aside intended to pay his corporate income taxes. Two months after he thought he had settled his affairs, the IRS notified him that he was in arrears for more than $250,000. When he explained that he had nothing left they were unmoved, but they promised to be patient. They would take 50% of all pre-tax income to redress his obligation, plus interest and penalties of course, until the debt was settled, no matter how long that took.

He and his family lived on the edge of poverty for the next 12 years. In 1963 he was laid low by a crippling stroke and with his wife, who suffered from Multiple Sclerosis, had no choice but to accept being placed in a Welfare/Medicade supported nursing home until his death in 1972. His wife survived in that home until 1988.

QUESTIONS:

He characterized his decision as the only ethical alternative available at the time - after all he had given his word.

1. Was his choice ethical?
2. Were there other ethical alternatives available to him?
3. If you had been given the opportunity, what advice would you have given this man?
4. What lessons should we draw from this case?