Building Up From Ground Zero
By BARNABY J. FEDER
Published: January 15, 1995
MOTT, N.D.— HERE in southwest North Dakota, the population peaked decades ago and signs of economic decline are as commonplace as winter blizzards. Farmers abandoned vast reaches of marginal cropland during the 1980's in return for Federal conservation payments, the latest in a long line of blows to farm equipment dealers, hardware stores, fuel supply companies and other local businesses. Most high school graduates move away to find work.
In towns like Mott, which has 950 or so residents, commercial districts are pocked with empty storefronts and the surviving merchants cobble together diverse enterprises to make ends meet. The laundromat here is also the television repair shop. The florist rents tuxedos to bridegrooms and high school graduates.
"This is Ground Zero for Buffalo Commons," says David Crane, a local lawyer, referring to a theory popularized in the 1980's by Frank Popper, a Rutgers University land specialist who suggested that large portions of the Western Plains be returned to the buffalo. "Mott is where NBC brought him to film a newscast on it."
But Mr. Crane and Thomas Secrest, a lawyer 40 miles away in the town of Hettinger, have a brighter future in mind. It is based on what legal scholars say is an ingenious plan that could save Mott and many similar rural communities from the slow death that looms before them. The two lawyers have been hunting in bankruptcy courts around the nation for small manufacturing companies that could benefit from moving some or all of their operations to an area like this, where land, labor and tax costs are low. The men's strategy: arrange for investors from several of the area's towns to settle the debts, buy control of the companies and then move them.
"We are not interested in starting up companies," says Mr. Secrest. "These little communities don't have time for that and starting up takes more money."
The Dakota Management Corporation, the two lawyers' year-old enterprise, originally set out seeking a 20 percent equity stake in each imported company, plus a management fee, with at least 31 percent of the remaining equity in the hands of the townspeople. Ideally, the transplanted companies would be in related industries, and the corporation would, for a fee, enable them to share accounting, marketing, distribution and other operating costs.
"It sounds fabulous," says Elizabeth Warren, a bankruptcy and commercial law professor at the University of Pennsylvania Law School. "Small business bankruptcy is an overlooked segment of the U.S. economy."
"It's a very creative idea," agrees Mark E. MacDonald, a Dallas lawyer who is chairman of the Chapter 11 subcommittee of an American Bar Association group of lawyers specializing in bankruptcy. (Chapter 11 is the section of the Federal Bankruptcy Code that allows companies to stay in business with court protection from creditors while they try to settle their debts.)
But, Mr. MacDonald warns, Chapter 11 is a world rife with shady entrepreneurs. In addition, there is so little information available on small companies in Chapter 11 that finding attractive candidates could be an insurmountable challenge.
So far, Mr. MacDonald's concerns seem right on the mark. Efforts to bring three companies here have flopped. For their labors, Messrs. Crane and Secrest have more than $45,000 in legal bills and administrative debt, a pending lawsuit filed against them seeking damages of up to $1 million and scores of disappointed neighbors. And they have an albatross of a business partner: William J. Vaughan 3d, a 33-year-old high-school dropout from California whose attempts to build a career reorganizing underperforming businesses have been accompanied by an unnerving number of legal irregularities and financial problems.
Companies looking for a respite from the difficulties and costs of urban America have been moving to North Dakota's biggest towns, like Bismarck and Fargo. But despite economic incentives offered by the state, luring businesses to the 175 or so communities five miles or more from the handful of communities with more than 10,000 residents has proved much harder.
With the help of advanced telecommunications systems, small companies and individual entrepreneurs in some of the nation's rural communities can now compete on a more even footing with urban and suburban rivals based closer to customers and suppliers. But the new technologies also allow traditional employers like utility companies and the Agriculture Department to close local offices and serve customers from regional centers, driving many small towns further toward oblivion.
"Geography matters, despite the fanfare that the information-age economy is no respecter of places," says Tim R. Smith, a senior economist at the Federal Reserve Bank of Kansas City, Mo. Mr. Smith has studied the 25 percent of rural counties that have grown faster than the nation's metropolitan areas and how they differ from the majority that are losing ground.
A high proportion of the winners are near urban centers. Those prospering in remote areas tend to be especially scenic, like counties in the Rocky Mountains or the Ozarks, or crisscrossed by interstate highways and rail lines. That reality explains why relocating established but bankrupt businesses might look promising to less fortunate regions, especially if several towns can coordinate efforts.