Bad Debt

by Sandra Dinsmore

The first floor of this building on the Chelsea, MA waterfront was the buying station for the Live Lobster Company headquartered there. The company managed to leverage this into $3 million in debt in an attempt to build a processing facility in Prospect Harbor, Maine. Fishermen’s Voice photo

Bad debt comes in two forms: people or companies that have to declare bankruptcy because they can’t pay people or companies to whom they owe money; and people or companies that have a record of not paying for what they buy. Bad debt has always been a problem in the lobster business because so much money is involved in almost any transaction. Just about everyone in the lobster business has taken a hit or two.

In the spring of 2012, Antonio Bussone’s Live Lobster went under partly because of a large check that bounced months before, but also partly because many felt the business didn’t have sufficient financing to cushion the loss of that $50,000 check. A veteran industry insider said Live Lobster’s bankruptcy created “bad debt for all sorts of people and companies from Massachusetts to Maine and right on up to Canada.” He called it one of Maine’s biggest dollar amount bad-debt stories.

The Pigeon’s Cove Fishermen’s Co-op, in Rockport, Mass., then selling its catch to Live Lobster, avoided getting caught in that bad debt. Despite Live Lobster having made good on its first bounced checks, the co-op met with Bussone well before there was any mention of possible bankruptcy, but members decided their co-op was too small an outfit to survive a large loss. The weekly check for the co-op’s lobster could come to $45,000. Co-op board member Bob Morris explained, “We simply did not hear what we needed to hear to remain in agreement with that company.” He said the co-op acted to protect itself and within hours ended the business arrangement with Live Lobster, took on another buyer, and “got the tanks emptied without skipping a beat.”

Since 2008, bad debt seems to have become more common. As East Coast’s vice president, Spiros Tourkakis, said, “Bad debt is a big issue for the industry despite the fact that there is receivables insurance nowadays. [Bad debt] affects sales, pricing, and inventory movement in a complicated, but important, way. Millions are lost on bad debt.”

But a real scam artist not only hurt a lot of lobster companies from New York to Maine in the early 1990s, he drove at least one Maine company out of business. One of those lobster dealers hurt included Jonesport’s Sid Look, of the Look Lobster Company. The scam artist owed Look around $35,000 for lobsters he’d purchased but not paid for, and a company the scam artist forced out of business by not paying his debt owed Look $81,000. Look was out a total of $116,000, thanks to this guy. Look wanted either his money or his lobsters back, and he came up with quite a plan.

Because the scam artist’s wife was a fan of novelist Stephen King, who lives in Bangor, Look spread the word around that King’s friends planned a surprise party for him, for which they needed 60 or 70 crates of old-shell lobster. (Look knew there was very little old-shell product by late summer.) The scam artist told the “friend” supposedly setting up the surprise party that he had plenty of old-shell product, and drove to New York, where he bought firm-shell shedders from Hart Lobster, owned by a friend of Look’s. He then bought a number of crates of old-shells from the Port Clyde Fishermen’s Co-operative and some more from William Atwood Lobster, and mixed them up, with the old-shells on top of the hard shedders, so the crates looked as if they were all old-shell. The scam artist was determined to supply the lobsters for this imaginary surprise party, but as Look put it, the guy couldn’t even play the game straight for his wife’s hero.

Look then planned to have the scam artist bring the lobsters he’d bought for the party to Dysart’s truck stop just outside Bangor. In the meantime Look and some compatriots timed how long it would take for the scam artist to get from Dysart’s through downtown Bangor and out to the Oriental Jade restaurant at the Bangor Mall, where the fictitious surprise party was to be held. Look had the scam artist picked up by a limousine and taken, in theory, to meet King at the Chinese restaurant. The trip took 20 minutes, which gave Look’s team that much time to move the lobsters from the scam artist’s truck to one of Look Lobster’s. (The guy’s truck driver was to wait for a call telling him where to deliver the lobsters. Look spoke to the driver and explained his plan. As it turned out, the driver’s father had worked for Look, and had spoken well of him, so the driver let Look remove the lobsters, saying he knew his employer was a shady character.)

Look had four of his trucks pull in to Dysart’s on their way back from delivering lobster to Boston. Look and crew transferred the scam artist’s crates of lobster to one of the Look trucks and sent it to Jonesport by a circuitous route; Look sent the other trucks home the regular way.

When the scam artist discovered he’d been had, he was furious and had police stop every lobster truck on the road. Two of Look’s empty trucks got stopped, but the one filled with the illicit lobsters reached Jonesport unmolested.

But Look approached the scam artist that night and explained, “All I’m asking is, I want my money back. I’ll give you your lobsters back.” The scam artist would have none of it. He sued Look for kidnapping his lobsters.

Look lost his case, of course, but said, “I’ll never forget the judge after we got done. He said, ‘Mr. Look, if you pay this off, we will take you off probation.’ So I said I’d write the check right away.

“The lawyers for the state said, ‘Don’t, for God’s sake, pay him that money. We’ve done enough of a background check on this gentleman. Don’t write him a check. He’ll not pay anyone. We know that.’ They said, ‘Would you please write the checks to each of the individual people involved?’” Look replied that he would and then said, “I’ll tell you boys something you don’t know. I called every one of these people involved before the trial: Hart Lobster in New York, the Port Clyde Co-op, and William Atwood Lobster. I told them, ‘I am the guy who took your lobsters and I will make sure that you’re going to be paid.’” (The scam artist’s checks to these companies had bounced.)

Word got around about Sid Look kidnapping the scam artist’s lobster. Although he lost in a court of law, Look won in the court of public opinion, and the adverse publicity drove the scam artist out of the lobster business.

Although several other Boston lobster companies went under in that period—the failures of Paul’s Lobster and Bay State Lobster caused big hits to businesses to which they owed money—Look concluded, “Bad debt is worse now than it was in the ‘90s. It’s getting bigger and bigger. Thank God you can purchase insurance for receivables.” He said back in the ‘90s the only insurance a lobster dealer could get would be to go to Lloyd’s of London. “None of us in the seafood business that I knew of ever heard tell of receivables insurance. I think it’s only been available for 20-odd years.”

But New Bedford’s Liberty Lobster owner, Skip Manchester, sees a problem with receivables insurance. “The insurance companies make it so difficult to qualify customers for receivable insurance,” he said, “the only customers we are able to insure are the ones who pay quickly and who really don’t need us to insure them. Therefore, we are forced to take chances with the undesirable companies just to try to keep the wheel spinning.” In addition, he added, “We have customers that we have to float 60 to 120 days over the winter because business is so slow.” When warm weather returns, Manchester hopes to recoup his money. Worst of all, he has had to sue customers who had not paid for what they bought. “We win the judgment in court,” he said, “they are ordered to pay, and they still don’t pay.” He’s thinking of having his lawyer put a lien on the residence or business property of the next lobster company he has to take to court.

A Rhode Island dealer thinks bad debt has increased so much it’s become part of the industry and, like Manchester, feels forced to take chances selling to iffy customers.

The problem of all this buying lobster and paying for it, and selling lobster and getting paid for it, has to do with the thousands of dollars involved. Some seafood processors operate in partnership with a seafood broker where product is produced, marketed and sold on a consignment basis. Nova Scotia processor Osborne Burke, who manages Cape Breton’s Victoria Fishermen’s Co-operative, buys and sells outright.

Burke explained, “Typically we’re buying 40,000 pounds of lobster. Every load is 40,000 pounds, which on average is at a cost of C$200,000. If the shore price is C$4 or $4.10 per pound, you’re talking over C$5 per pound picked up, so you’re looking at a cost of over C$200,000 per load by the time you pick it up and pay your freight to return to the plant.” Burke pays for what the co-op buys in a matter of a few days and he expects most customers to pay the co-op for what they buy in fewer than seven days.

When you’re talking that kind of money, a word often used is “conservative.” John Gallagher of Boston Lobster, after describing his company that way said, “We take a lot of measures to prevent our ever having to deal with significant amounts of bad debt. We use trade insurance. Beyond that, when it comes to working with broker-type customers—people who don’t have a lot invested in the industry—we tend to require 100 percent pre-payment.”

Tom Flanigan, of Kittery’s SeaView Lobster, said, “For a small place like ours, we don’t have the margins to accept any significant debt.” Fifteen or 20 years ago, Flanigan recalled, there were places shipping lobsters where the margins were such that it was worth taking “a significant amount of risk.” These days, he said, “We have to sell to overseas markets for the same prices as we do domestically because they’re all very competitive markets.” But, he made clear, “I would rather take our lobsters and dump them off the end of the dock than send them to somebody I don’t think is going to pay us.”

Like the other dealers interviewed, Flanigan admits to having taken some hits in the past, but said besides being very conservative, his company uses credit insurance and has subscribed to Seafax for 20 years. He concluded, “There are a lot of people in this industry willing to take more risk than I am.” He said, “We definitely spend more effort on trying to collect on receivables than we had to five or 10 years ago.” He added, “It’s not necessarily all adversarial; it’s people working off your money.” He summed up dealing with receivables by saying, “It’s a balancing act, that’s for sure.”