Spinning a Yarn

Let’s travel back 10 years to September 2000.

All Business.

O. Max Gardner III dug up a novel approach to burying a business as payback for workers — and his grandfather.

When Shelby Yarn Inc. shut down in January of 2000, 650 people lost their jobs. Mill closings are nothing new to North Carolina, but rather a ritual repeated since industrialists first harnessed streams to power looms and spindles. Then, as now, these ventures frequently fell victim to shifts in markets and economic conditions, shortages of capital, advances in technology and, perhaps as often as anything, mistakes made by their managers and owners.

As a textile town, Shelby, lying one county away from where Michael Schenck built the first cotton mill south of the Potomac in 1813, was no stranger to the phenomenon. But the hostility expressed by Shelby Yam’s jobless workers was something unseen in most mill towns since the General Textile Strike of 1934, when the specter of class warfare loomed over much of the South. And it was directed at one man, Sidney Kosann, the septuagenarian who had come from New York to run Shelby Yarn.

State Rep. Debbie Clary, the Cherryville Republican whose district includes Cleveland County, got a lot of phone calls about him. Kosann, she was told, had raided the health-insurance fund to build himself a lake-front house, sticking them with more than $1 million in unpaid medical bills. He had taken a luxury cruise while the mill was going under, then scurried back to file for unemployment benefits. And he had insulted the whole town, calling the locals stupid. “My only thought was that one of those ‘dumb’ Southerners was going to float him up at Moss Lake,” Clary says, referring to the reservoir where many of the city’s affluent live and Kosann built his house. “There were a lot of slurs thrown around for awhile. As I was listening to it on my phone, I had a fear of it becoming extremely volatile before it ended.”

Kosann retreated to New York. But before he did, a rumor started, one that would have far-ranging repercussions, leading to criminal investigations and a bankruptcy proceeding so rare that national experts say they have never heard of anything like it. A local lawyer was representing three workers facing personal bankruptcy. The lawyer is white. All three of the workers are black. When he began asking questions about Shelby Yarn, the lawyer says, three people told him they had heard from other people that Kosann had called him a name.

Nigger lover.

It’s a phrase with a long, potent history in North Carolina. It was used against Frank Porter Graham in the virulent 1950 Democratic primary that lost the former president of the University of North Carolina his U.S. Senate seat. Thirty years before that, opponents of O. Max Gardner’s bid for governor distributed a picture purporting to show him with his arms around a black woman and a white woman. Gardner had been one of the first mill owners in the state to hire blacks. He lost the Democratic primary to Cameron Morrison, who had begun his political career with the Red Shirts, white supremacists who kept blacks away from the polls in the elections of 1898 and 1900, which led to their disfranchisement. Gardner would become governor in 1929 and go on to establish the “Shelby Dynasty” and a place in the history books as one of the most-influential North Carolina politicians of the 20th century. He was, in addition to being an industrialist, a lawyer, a trade followed by the grandson who shares his name.

Yes, O. Max Gardner III admits, the rumor about Kosann’s slur was just that, a rumor. At best, a third-hand rumor. No, there’s no proof Kosann said it or any indication that he is a racist. Still, it was a powerful motivator. “It was something that caused me to get more …” He pauses, hunting for the proper, measured word, then adds, “… energized.”

Energy is something Gardner has lacked in recent years. Eight years ago, he was diagnosed with prostate cancer.  He then contracted a rare bacterial intestinal infection, Whipple’s disease, which requires medication to control. A gaunt 6-footer with sunken cheeks behind a bristly, gray beard, Gardner, 55, says he has never regained his vigor. Shelby Yarn, he admits, is his comeback, a high-profile case with legs like his most famous one, another simple bankruptcy that evolved into a spectacular lawsuit.

In the late ’80s, he filed personal bankruptcy for Marjorie White of Grover to reorganize a few thousand dollars of psychiatric bills from Duke University’s medical center. He turned it into a juicy malpractice suit against Duke and Dr. Bernard Bressler, the psychiatrist White claimed had sex with her during therapy. The suit was settled in 1987 for an undisclosed sum. The story of the case caught the attention of Myra McPherson, a Pulitzer  winning reporter for the Washington Post, who subsequently wrote a series of articles entitled “Max Gardner vs The City of Medicine.”

Gardner, despite his blue-blooded lineage, fancies himself a defender of the underdog. As Clary notes, “When I first talked to one of the lawyers in town, saying something’s got to be done for these people, the response was that unless Max Gardner does it, no one will. Max works to the beat of his own drummer, not anyone else’s. He is his own person.”

Mary McCombs, a line worker at Shelby Yarn, had come to him for help reorganizing her debts last year after the company started cutting back hours. It became a much bigger case when the company collapsed.

Though Shelby Yarn lasted less than three years, its roots are much deeper. Dover Mills Inc., Cleveland County’s oldest textile maker, started in 1906 and grew into a company with 3,200 employees and spinning and weaving plants in both Carolinas. It changed its name to Doran TextilesLLC after a leveraged buyout by managers in 1986. But the heavy debt crippled it when women’s fashions changed and cotton prices spiked. Doran filed for Chapter 11 bankruptcy protection in 1996.

Its plight caught the attention of Recovery Equity Investors LLC, a San Mateo, Calif., “vulture fund,” so called because it specializes in buying into distressed companies, turning them around, then selling them. The two lawyers who run it — Jeffrey Lipkin and Joseph Finn-Egan — turned up in Shelby to size up Doran. They stayed at Webbley House, an 11,000-square-foot, colonnaded mansion built by the Webbs, the family the original Max Gardner had married into. Gardner and his wife were then running it as an inn.

Lipkin and Finn-Egan (neither they nor anyone connected with REI would return phone calls for this article) struck him the way they did others around town who encountered them: highly intelligent, businesslike, secretive. “I’ve seen Finn-Egan take a 500-page, hardbound text and read it in three hours and understand everything in there,” Gardner says. To help them evaluate the company, Finn-Egan and Lipkin hired a consultant. So Gardner got another guest: Kosann. Kosann could not be reached for comment, and his Charlotte attorney, James Wyatt, says Kosann will not respond to press inquiries. He also says he knows almost nothing about his client’s background. But other textile executives, along with a short biography in the 1979 edition of Who’s Who in Business and Industry, provide a rough outline of his career.

Born in New York City in 1922, Sidney Harold Kosann earned a bachelor’s in chemistry from Syracuse University. After serving in World War II, he married Norma Beckenstein, whose father, Murray, owned New York-based Murbeck Knitted Fabrics Co. Kosann started his career in textiles there in 1947. In 1953, he formed Stevecoknit Textile Co., later shortened to Stevecoknit Inc., in New York City. It knitted fabric for golf shirts and other apparel. In the ’70s, he was also president of Bridgeton Dye & Finishing Co. in Bridgeton, N.J., and ran S.K.T. Exchange Co. in New York City.

During the ’70s and ’80s, he often bought yarn from North Carolina mills. Dover Mills counted him as one of its best customers, according to Hoyt Bailey, who was Dover’s executive vice president. “I always enjoyed working with Sidney because you always knew where he stood. Sometimes we would get into a hassle over price of yarns. He was a tough bargainer. He was very astute.”

His assessment is shared by other North Carolina businessmen who knew him during the ’80s: intelligent and savvy when it came to technology and marketing but with an overbearing ego and disdain for his peers. He also had an unusual sideline: investing in silver. During the ’70s, he minted sterling tokens the size of poker chips bearing his likeness and the Stevecoknit name, which he gave to business associates. Bailey still has a collection. Kosann was investing in silver when Nelson Bunker Hunt tried to corner the market, driving up prices until they collapsed, forcing the Texas billionaire to declare bankruptcy. How Kosann fared is unknown, but he sold Stevecoknit to New York-based J.P. Stevens Co. — now Georgia-based WestPoint Stevens Co. — in about 1983.

When Kosann and his wife arrived at Gardner’s inn, they immediately rubbed him the wrong way. They were finicky and constantly complained about the hicks they had to endure, the sloppy restaurant service they experienced and Shelby’s general lack of sophistication. “He claimed to have a farm in Connecticut, a town house on the Upper East Side of Manhattan, more antiques than Sotheby’s,” Gardner recalls. “He made representations that he was worth 70 to 80 million. When he told me he was going to move here as CEO, I was shocked.”

His personality might have put people off, but his proficiency in textile technology was impressive. (He received a patent, along with Neil Wright of Cherryville, last year for a continuous wet-dying process for cotton fiber.) REI had considered investing in Doran but instead bought the yarn-spinning operation, consisting of two mills in Shelby and one in Cherryville, in 1997. (A separate investor bought the weaving mill in Shelby, which continues to operate under the Doran name). Kosann became chairman and CEO.

The new company opened its headquarters in a two-story, brick building, and Kosann moved from the inn into a rented house. He installed a commodity ticker in his office to track the price of cotton, which he bought, restarted the spinning machines and got employment up to 650. But the business was sputtering: Sales lagged as Shelby Yarn burned through REI’s money. In 1999, he went looking for a top sales executive.

Paul Petrov spotted Kosann’s ad for a sales and marketing executive in Women’s Wear magazine. Calling the phone number it listed, he got a recorded message from Kosann himself. “It was pretty strange. It said, ‘If you’re not willing to relocate to Shelby, N.C., don’t call back.'”

As it happened, Petrov, now 57, was only too happy to move to Shelby. A Connecticut native, he is married to a Shelby native he met when he worked there about 20 years ago. An engineer with an MBA from The Wharton School, he had started in the aerospace industry, then moved into venture capital before settling into textiles and apparel. While working for L&K Inc. (now Shelby Dyeing and Finishing Inc.), which he had helped secure financing, he met his future wife, who was the controller. They moved to New York when he landed a job running the menswear division of Manhattan Industries Inc.

A few years later, Manhattan was gobbled up by Salant Inc., which promptly went bankrupt. Petrov jumped to Warnaco Inc., another menswear company, but left two years later for National Spinning Inc. Hired as senior vice president of marketing, he claims he was in line to be president and CEO. But after two and a half years — and no indication the aging top executive was in any hurry to leave — he hooked up with Victor Kiam, the investor who controls Remington Products Co. LLC, and tried to buy one of the Salant divisions. When the deal fell through, he started Xmnet Inc., a business-to-business Internet company specializing in textiles and apparel. After burning through $1 million in a year, he shut it down.

He was working as a consultant when he spotted Kosann’s ad. Again, he saw a chance to position himself to succeed an aging CEO. “One of the reasons I came down was, the guy was old.” After interviewing with Kosann and with Finn-Egan and Lipkin in California, he was hired as executive vice president of sales and marketing and signed an employment contract running from July 1999 to December 2004. He claims he was promised he would get the CEO job when Kosann retired. Arriving in Charlotte, he met with controller Hugh Crawford to go over monthly financial figures. “The controller said, ‘You’re not allowed.'” Kosann, Petrov discovered, had decided he didn’t need to know the financial situation — at leastnot yet. It didn’t take long to get the picture. There was maybe enough business for two mills, he says, but not the three Shelby Yam was running. The company had old equipment and systems geared to producing huge lots. But customers were demanding smaller lots and quick turnaround of special orders. He suggeste d cutting costs and modernizing. Kosann’s response was that Petrov needed to peddle more yarn. “He’d tell me, ‘We don’t have a cost problem. We have a sales-volume problem.'”

Whichever way you look at it, the company had a money problem. Petrov joined Kosann on a trip to California in September for a crisis meeting with REI. On the flight, he finally got a look at the company’s books. He figured RET had invested about $10 million. After the meeting, it agreed to kick in $1.5 million more, he says. But within three months, that, too, was gone. So was REI’s patience. Shelby Yarn closed for the holidays the week before Christmas with plans to reopen in January. According to Petrov, it was clear Shelby Yam couldn’t continue unless REI came through with another infusion. It asked for $1 million. According to Wyatt, Kosann got his answer Jan. 12: no dough. The next day, Shelby Yarn announced it would not reopen, putting all 650 employees out of work. On Feb. 25, Kosann resigned as chairman and CEO.

The closing was painful but not unprecedented. With Cleveland County’s unemployment rate running just over 4%, many workers soon found other jobs. Most who didn’t retired or moved. The collapse of Shelby Yarn would have faded quickly from memory if another problem hadn’t emerged.

Employees had been covered by a self-insured health plan under which the company had deducted premiums from their paychecks and contributed a like amount into a fund that paid claims. Purchase, N.Y.-based American Group Administrators Inc. reviewed the claims and submitted approved ones to the company for payment AGA says Shelby Yarn stopped paying claims when it dosed for the holidays. Wyatt says there was simply no money left to pay claims.

Unpaid claims started mounting, quickly reaching $500,000. “Most of these employees thought there was a real insurance company here,” Gardner says. “They didn’t understand how this was set up. I think that situation certainly has created more pain and suffering in the actual and literal sense than anything else that has happened. If the company had just put enough money in to pay these claims and given some notice before closing down the plant, I don’t think anybody would have pursued anything.” Gardner says unpaid medical bills have now reached $1.6 million. Among those stuck was McCombs, who approached Gardner and asked if there was anything she and other workers could do. Gardner, who was already handling her personal bankruptcy, agreed to re-examine her situation and that of two other workers who were bankruptcy clients.

It was around this time that he heard about the alleged slur, which made him dig harder. He filed suits against Kosann and Shelby Yarn as part of the individual bankruptcy cases. Then his research uncovered something intriguing: Bankruptcy rules give any creditor broad rights to force a debtor company into bankruptcy using Chapter 7 of the federal bankruptcy law — even if the company has not filed for bankruptcy protection. Gardner found no case law to support his use of this tactic for his clients. But he also found nothing to prevent it.

In March, he used the three individual cases to request that Shelby Yarn be forced into bankruptcy, creating a fourth case, this one under Chapter 7. He asked that his clients and other workers be paid what they’re owed for medical bills. He also argued they are due $1.6 million in back pay because the company had failed to give 60 days’ notice it was closing, as required by federal labor laws. Bankruptcy experts say that employees using Chapter 7 against their employers may be a first. “Three line employees as petitioners — particularly where they are in bankruptcy themselves — that may be unprecedented,” says Michael H. Reed, a Philadelphia lawyer who has been practicing bankruptcy law for 28 years and chairs the subcommittee on labor and employment law for the American Bar Association’s business-law bankruptcy committee. “There is no case that comes to my mind where I have ever heard of it.”

Gardner began working his way up the management ladder, looking for anyone who would divulge information he could use or pass along to other investigators. “We were running down every lead we could. That’s how we got Paul’s name. His name kept coming up.” Petrov, it turned out, was a fountain of information, and he was ready to spew. His contract ran to 2004, but the company’s collapse meant he would get nothing. He agreed to join Gardner’s case as an employee looking for back wages — he claims he is owed more than $200,000 in severance pay.

On March 16, Petrov gave a six-page deposition Gardner filed as part of the Chapter 7 case. Kosann’s contention that he didn’t know the company would fold, which prevented him from giving employees advance notice, doesn’t square with what Petrov says he saw. In September, when RET advanced the $1.5 million, the money went not to the company but to GMAC Commercial Credit LLC, its primary lender. “Mr. Kosann explained to me that the method by which REI provided these funds was designed to shield these funds from creditors in the event of a bankruptcy on the part of the company,” Petrov says in his statement. He also claims company officers began destroying documents at the end of February.

Two days after filing Petrov’s statement, Gardner went back to court with bank records that he said proved $75,000 had been wired from Shelby Yarn to an unknown location in December, indicating the company might have been trying to get money out before the business shutdown. He requested that the court seize the company and its records. Judge Marvin R. Wooten ordered federal marshals to padlock the plants and secure the records, then appointed Gastonia lawyer Wayne Sigmon as trustee for the company under Chapter 7.

Gardner didn’t stop there. He called District Attorney Bill Young to pass along information and tips he had collected about possible wrongdoing. Young called in the State Bureau of Investigation. Soon a pack of investigators was sniffing around, including some from the FBI, U.S. Department of Labor, N.C. Department of Insurance and the Employment Security Commission. Young expects the SBI probe to end sometime this fall. Then he’ll decide whether the evidence warrants criminal charges.

Much of the investigation revolves around the house Kosann had built. The 4,000-square-foot brick home with a commanding view of Moss Lake sits empty. Kosann, who never lived there, is trying to sell it for $448,500. Wyatt says Kosann built it with his own money and a loan from BB&T. Investigators turned up one invoice for $8,000 that had been sent to the company, which paid it. It was a billing error, Wyatt contends, adding that Kosann repaid the money when he learned of it.

Petrov tells a different story. In his court filing, he says his conversations with other employees and review of documents and bills convinced him that “more than $125,000 of Shelby Yarn money was improperly used in the construction of Mr. Kosann’s house.” Clary, the state representative, says she believes Kosann intended all along to plunder the company to build the house, then sell it to get the cash out. “He was building that house for nothing but resale. He built that house on Shelby Yarn health-insurance money.”

Comments like that are rampant in Shelby these days, Wyatt admits. “Mr. Kosann tried to do what he could to keep the company in business as long as possible. He enjoyed working with the people at Shelby Yarn and enjoyed living in the community.” What brought him to Shelby was the challenge of proving he still had what it takes to run a company. “Sid landed on the beaches of Normandy during World War II. He is not one to shy away from challenges.” Yes, Kosann took the cruise as the company was sinking, but Wyatt says his children paid for it. Yes, the company filed for temporary unemployment benefits on his behalf, but it was part of a batch filing for all employees. Kosann has offered to return the two checks he received, his lawyer says.

As for Gardner? “Max is, I’m sure, representing his clients to the very best of his ability. He has made a number of claims in court that are, however, factually not accurate.”

What brought Shelby Yarn down, Wyatt says, was brutal competition, particularly from “cheap imports from Asia.” But the U.S. Labor Department, in response to a petition for funds to retrain employees, found no evidence that the company had lost sales from customers switching to yarn from Asia or Mexico. In other words, the business it lost was to domestic competitors.

One yarn spinner that started about the same time as Shelby Yarn has made money churning out the same kinds of cotton yarn. Clover, S.C.-based Four Leaf Textiles LLC is run by David Roberts, the former president of Doran who oversaw the dismantling of that company and met with Kosann and the REI executives when they were negotiating to buy it. He took some Doran executives with him, landed venture financing and bought a vacant mill Doran once owned. Installing new, state-of-the-art spinning machines, Four Leaf opened in 1998, selling head-to-head against Shelby Yarn.

Different company, different result: Four Leaf was making money four months after its launch, Roberts says. Within a year, it bought a second plant in Spindale. When Shelby Yarn went bankrupt and GMAC Commercial Credit took over the buildings, Roberts bought one of the mills he had run for Doran. He has since restarted operations, with plans to have about 150 people working there by the start of next year.

As for Shelby Yarn, there’s not much left for the employees, even if they win the case. GMAC, which says it was owed $9.8 million and held the buildings and machinery as collateral, foreclosed and took control of the mills at courthouse auctions in Cleveland and Gaston counties. That left Shelby Yarn as a corporation with no assets. In June, the trustee held a meeting at Shelby High School to update employees and creditors on the case. What Sigmon told them wasn’t encouraging. To recover any money, he would have to prove that funds had been diverted, then sue to get them back. That would take at least two years.

In July, Gardner voluntarily dismissed the three original lawsuits used to get the Chapter 7 proceeding started, saying they were no longer needed. While the workers may never see any money from the case, it has at least restored O. Max Gardner III’s reputation as a feisty maverick. And, he believes, it would have made his grandfather proud. “If he was here today, he would be involved in this case.”

Irwin Speizer is a Rock Hill, S.C.-based free-lance writer.

Post-Mortem:  Gardner eventually settled the Shelby Yarn case for more than $2.5 million dollars, thereby recovering the $1.6 million for the former Shelby Yarn employees.