The Demise Of Transcon

Lenny Pelullo got control of a failing firm with millions in assets for $12 in cash – 19 days later, it was out of business. At one time, Transcon Lines was one of the biggest trucking companies in Southern California, but it was running on fumes when Lenny Pelullo took the wheel in the spring of 1990. Based in Los Angeles, Transcon Lines employed 4,000 people, had 247 terminals in 45 states, and its assets were over $85 million. Unfortunately, its liabilities totaled almost 120 million, and although their revenue for 1989 was $226.5 million, the company ended the year with a net loss of about $31.6 million.

The company was in bad shape. Losing about $5 million a month, Transcon tried in vain to compete with such industry giants as Roadway and Yellow Freight, but it was late paying its bills and one of its unions had sued to collect an overdue pension payment. Only a patient investor with deep pockets could reverse its downhill slide. Don’t look to Lenny Pelullo – he hit the accelerator. Just 19 days after Pelullo’s associates bought the company from its parent, Transcon Inc., on April Fool’s Day in 1990, it was out of business. Many of its 4,000 workers lost their jobs.

Hundreds of trucking companies shut down that year – victims of high fuel costs and the vicious rate wars that have plagued the industry since it was deregulated. The war for survival in trucking may have benefited consumers by keeping shipping rates low, but it wiped out the profits at many trucking firms, rendering them almost worthless.

Amid the wreckage, Transcon – with over 3,500 trucks and terminals in 45 states – still stands out. A bankruptcy trustee in L.A. had claimed in court that companies linked to Pelullo picked up Transcon Lines for almost nothing and then siphoned millions of dollars from it in just a few weeks. An unintimidated Pelullo denied the charge and said words can’t hurt him. “I always make the distinction between allegations and alligators,” said Pelullo, a brash Miami businessman who led the group that acquired Transcon Lines.

This was not the first time accusations of fraud had been hurled in Pelullo’s direction, but previous allegations had failed to stick. The year before, a court-appointed bankruptcy examiner in Miami said in court papers that he suspected fraud involving yet another money-losing Pelullo company, Royale Group Ltd. of Miami, but lacked the evidence to make charges. In another case, a federal grand jury in Cincinnati indicted Pelullo for his role in an alleged 1984 bank fraud but a jury acquitted him. But Pelullo had other problems, too. He was suing the state of New Jersey over a 1985 study by its Commission on Investigation which called him a “key organized crime associate,” an allegation Pelullo denied.

It would be many months before what happened at Transcon Lines became clear. Pelullo said the failure of Transcon Lines was unavoidable. The company was near dead – “on the gas pipe,” as he put it – when his associates purchased it for the token price of $12 cash on April 1. The acquisition was the first step in a series of ill-fated deals intended to build a trucking powerhouse, Pelullo said. While arranging to buy Transcon, Pelullo and his associates also entered into negotiations to purchase PIE Nationwide, a rival trucking firm based in Jacksonville, Florida.

Pelullo said his associates wanted to combine the operations of Transcon and PIE to form one strong trucking firm, but the plan ran into problems. Pelullo said Transcon’s lender wouldn’t work with his group. And, he said, “There was some trouble with the unions.” The trouble was that the unions, sensing Transcon was on the brink, wanted it to keep up on its pension contributions. The Teamsters’ Central States Pension Fund, in fact, said it was owed $4.1 million in overdue contributions. A federal court in Chicago ordered Transcon Lines to pay the Teamsters’ fund $40,000 a day.

Facing a cash flow crunch, Pelullo said, he had to act fast to preserve Transcon’s business. The trucker’s routes and trucks were sold or assigned to related companies, which then turned the assets over to PIE Nationwide. Lacking routes and trucks, the essential components of a trucking operation, Transcon was essentially out of business.

Pelullo said, in an interview, he was directly involved in negotiations but only as a consultant, not as an investor. He is not an officer of any company, he said. However, his associates held many key positions at Transcon Lines and other firms involved in the transactions, and Pelullo’s dad, Peter Pelullo, was a shareholder in the companies that acquired Transcon and PIE Nationwide.

Take Growth Financial was the company that acquired Transcon Lines. Its chairman was Edmund A. Abramson, a Miami investor and former Oldsmobile dealer who once tried to buy financier Victor Posner’s Royal Crown Cola. He met Pelullo in 1989, when Pelullo tried to get Abramson’s support for a takeover of Posner’s DWG Corp. Abramson turned him down, and Pelullo’s takeover attempt fizzled. After that, records show, Abramson stepped forward to help bail out Pelullo’s failing Royale Group Ltd.

The company that bought PIE was named Olympia Holdings and its president was Manuel Ferro Jr. He was also senior vice president-finance for Royale Group. David G. Hellhake, vice president of two Pelullo-owned companies and president of a third, is vice president and secretary-treasurer of Transcon Lines and parent, Growth Financial Corp. PIE’s board was also packed with Pelullo’s associates. Royale Group Vice President John W. Cooney sat on PIE’s board, as did Royale Group Executive Vice President Jacob der Hagopian. Abramson and Pelullo were also on PIE’s board.

Lawyers and many others involved in discussions over the trucking companies say it is clear to them that Pelullo was in charge. “Pelullo called the shots,” said Thomas C. Nyhan, general counsel for the Teamsters Central States Pension Fund. Records on file in bankruptcy court suggested that the demise of Transcon Lines was more than a simple business failure. “Within a few weeks of Growth’s acquisition of Transcon, it became a shell,” trustee Leonard L. Gumport said in court papers. “Though the liabilities remained, virtually all of Transcon’s assets, other than the accounts receivable, were gone.”

Documents filed in court indicate that two days after a firm linked to Pelullo acquired Transcon Lines, the company’s bank accounts started to shrink. In a series of transactions, the documents stated, $1.875 million was transferred to trust accounts at law firms in Rhode Island and New Jersey. It isn’t known where all the money went. Records showed that $280,000 went to a New Jersey printing company that Pelullo runs. Other testimony indicated that $355,000 went to a consulting firm that Transcon Lines hired the day it was sold. The bankruptcy trustee alleged that the consulting firm, Growth Investments of Miami, was linked to Take Growth Financial, Transcon Lines’ new owner, but the president of Growth Investments denied that in court.

Hellhake, vice president at Transcon, said $600,000 was distributed to lawyers, truck lessors and others. What happened to the rest of the money is still unknown. Gumport, an attorney with Hufstedler, Miller, Kaus & Beardsley, contended in court documents that $400,000 was used by the Miami investors to buy PIE Nationwide. But Pelullo associate Edmund Abramson denied that the money was used for an acquisition.

Other court records state that the cash transfers made it even harder for Transcon to pay its bills. James Fox, a Transcon Lines executive who remained with the trucking firm as a consultant after the sale, testified that he warned the firm’s new president that paychecks might bounce if money wasn’t returned to Transcon’s bank accounts. Fox said that on April 3, Transcon Lines’ new president, Herbert Lefkowitz, transferred $1.7 million from a Transcon Lines account to the Rhode Island law firm trust account, leaving just $33,000 in the Transcon account. “Before this, Transcon Lines was already unable to pay its creditors,” Fox said in court. “After the transfer, my concerns increased. On April 4, the Rhode Island account wired to Transcon Lines $1 million. Hellhake later testified that the $1 million was a loan because the $1.7 million had been “a partial payment for some services rendered to Transcon.”

Nonetheless, the company closed down on April 20 with lightning speed, according to a former Transcon driver. Gary D. Peterson said that by nightfall, the company’s terminal in West Valley City, Utah, had been cleaned out – there was no freight, no spare tires, no repair tools – nothing. The trucks were gone, too. Peterson stopped going to work. “It was pretty clear I had no job,” he said. Two weeks later, he got a layoff notice in the mail.

On May 1, 1990, the Transcon Lines’ creditors – including the Central States Pension Fund – placed the company in bankruptcy proceedings. The creditors, citing Pelullo’s links to Transcon and his alleged ties to organized crime, among other things, asked that a trustee be appointed to run the company. With its assets listed at $85.24 million and liabilities at $119.25 million, Transcon was now being liquidated.

Transcon’s creditors and its trustee then raised questions about the sale of the trucker’s routes and trucks to a group of interrelated companies. They alleged that the other Pelullo-related firms paid very little to take over Transcon Lines’ assets. Moreover, some truck lessors demanded the trucks back. One lessor, Chrysler Capital Corp., argued in court that its lease with Transcon Lines was broken when the company was first sold. And it wasn’t easy to round up Chrysler’s 170 tractor-trailers. In fact, the people at PIE Nationwide said, at first, that they couldn’t even find many of the trucks!

Transcon Lines creditors and employees weren’t the only ones unhappy that the company collapsed so abruptly. The seller, Transcon Inc. of Beverly Hills, was angry as well. Transcon Inc. Chairman Orin Neiman said that when he agreed to sell the company for $12, he presented Pelullo and Abramson with one absolutely non-negotiable demand – the buyers would have to take on Transcon Lines’ huge truckload of debt. Call it a leveraged sellout. “They promised to assume the lease agreements on the trucks, to make payments to the lenders, and so on,” said Neiman. What happened next? “They forgot to pay everyone, so now everyone is suing us.”

Transcon Lines didn’t do very well after a Pelullo-related company bought it, but what about PIE (where I started my career in trucking as a bobtail driver back in the 1965), the successor to Pacific Intermountain Express? PIE inherited most of Transcon’s routes, undelivered freight, trucks and other equipment. It got Transcon’s customers, too. But the new business didn’t help – PIE sought bankruptcy protection in mid-October of that same year. It also laid off 2,600 of its 7,800 workers and dropped some of its out-of-the-way destinations. At that point, the firm’s chances to survive were doomed.

Having two disasters in six months, you would think that this would pretty much have ruined Lenny Pelullo’s taste for the trucking business. Not by a long shot. His sights were now fixed on Landstar Systems Inc., one of the nation’s largest trucker holding companies. According to a lawyer who had seen the letter of intent between Pelullo and Landstar parent IU International, Pelullo was planning to buy Landstar and transfer its trucks to a new company that would also own PIE’s trucks. “It was incredibly complicated,” a lawyer said. “It took three of us nearly a whole day to figure it out.” But that is a story for another day.

Meanwhile, there was a Transcon driver who figured that the company owed him $17,486 in back wages, unpaid vacation and sick days. He also figured he may have to file bankruptcy to keep his three bedroom ranch home – especially since the Coca-Cola plant nearby wasn’t hiring drivers. Last I heard, he was driving a truck for a delivery company, but that wasn’t paying him enough to make ends meet. And the funny thing – this driver had never even heard of Lenny Pelullo.