It was all over the news when it happened. Lionel, the train maker, filed Chapter 11 on Nov 16, 2004. But a lot of the news stories got some critical details wrong. It’s not the first time a Lionel bankruptcy confused people.
Lionel has been bankrupt before, but the company has changed ownership numerous times so it’s not the same legal entity that went bankrupt in the 1930s and 1960s. There have also been numerous rumors about bankruptcy after 2004. These are usually dealers trying to create artificial demand to clear inventory.
Lionel LLC vs Lionel Corporation
2004 was the first time Lionel, LLC has filed for bankruptcy. The original Lionel Corporation, which is the company that made the trains popular during your dad’s and grandfather’s generations, filed bankruptcy three times. The first time was in 1935, when the Great Depression had wiped out most of Lionel’s competitors and the aristocratic J. Lionel Cowen kept on making trains for millionaires’ kids when there weren’t many millionaires left. The last time was after the company left the train business.
Lionel’s two-pronged approach to getting out of bankruptcy
Lionel emerged from bankruptcy with a two-pronged approach. On the low end, they started selling $1 windup handcars featuring cartoon characters like Mickey and Minnie Mouse. Today’s hirailers do everything they can to argue that Disney didn’t save their beloved Lionel, but at the very least it made a significant contribution.
Lionel also started paying more attention to hobbyists, making diecast trains that were modeled after real trains, rather than hiring Italian designers to design elaborate, ornate, and some would say gaudy toys that looked like trains. Hirailers say this was what saved Lionel. Whatever.
At any rate, Lionel emerged from bankruptcy and survived the Depression, something only one of its other competitors from the 1920s managed to do. That competitor was Hafner. Heard of it? Probably not. Hafner made cheap windups. Attractive windups, but basically forgotten today. The American Flyer brand name endured, but only because the Coleman family gave it to A.C. Gilbert, of Erector construction toy fame, in exchange for a royalty against future sales. There was also that upstart Louis Marx, who actually made money during the Depression and used some of that money to buy a toy train line, but that’s another story.
Lionel’s Roaring 50s
Toy production of almost all kinds stopped during World War II because the metal and the production capacity was needed for the war effort. Those who couldn’t make war munitions and other such things made things like bottlecaps. Lionel made nautical equipment. They sold a paper foldup train one Christmas because they were still allowed to do that, but it required the patience of a saint and the coordination of a surgeon to assemble, and once assembled, it served only as a reminder of what kids wanted in the ’30s but the parents couldn’t afford and now that the parents could afford it, it was next to impossible to get (unless you happened to live in New York City and knew about Madison Hardware, which, again, is another story).
So the pent-up demand for toys exploded after the war, and toy trains became a huge fad, giving Lionel, Gilbert, and Marx a license to print money until about 1956, after which the general public decided slot cars would be the next big fad and the people who really liked trains decided they wanted to go to HO scale because they were a lot cheaper, a lot more realistic, and in some cases took up less space.
J. Lionel Cowen decided to retire in 1959 and sold out his share of the company to his grand-nephew, the infamous Roy Cohn. Yes, the lawyer. He didn’t mention this to his son, who was only on board because Dad wanted him to be anyway, so he sold his shares too, while they were still worth something. Roy Cohn sought to diversify and make the trains less expensive by using more plastic and less metal, but his main accomplishment was to show he had no business running a company. He dumped his shares and was voted out in 1963. By 1967 A. C. Gilbert was being liquidated. Lionel bought the American Flyer brand name and tooling but didn’t have the money to do anything else with it. Later that year, Lionel Corporation filed bankruptcy itself.
Two years later, Lionel decided its chances were better selling toys rather than making them. It sold its train line to General Mills, the cereal people, who also had some toy companies. Lionel opened a chain of toy stores on the east coast, and for a time was the second largest toy store chain in the United States, behind the behemoth Toys R Us.
General Mills kept the Lionel train flame alive, selling O and HO trains branded with the Lionel name throughout the 1970s and early 1980s. In 1979, it even located the old American Flyer tooling and brought those trains back as well. But in the early 1980s it tried to move manufacturing the Mexico, which angered a lot of Lionel fans. It reversed the move, but started looking for a buyer, shuffling the company around within itself and then palming it off to Kenner Parker, and then, in 1986, a Lionel collector who had made his fortune selling real estate in Detroit bought the company and started operating it as Lionel Trains Inc.
Lionel Corporation’s third bankruptcy
Back to Lionel Corporation. Remember them? In 1991, Lionel Corporation found its toy store chain just couldn’t compete with Toys R Us’ economies of scale, and filed for bankruptcy for the third time. Starting in 1993, it liquidated. It sold the trademarks to Richard Kughn, the owner of Lionel Trains.
The Lionel LLC era
Kughn sold controlling interest in Lionel Trains in 1996 to Wellspring and Associates, a holding company. Rock star Neil Young also purchased a 20 percent share. The new company was called Lionel LLC.
In the late 1990s, Lionel LLC started using Asian subcontractors more and more. Its biggest competitor (and former partner) MTH Electric Trains had been doing the same thing, and undercutting Lionel in price. By 2001, Lionel was manufacturing none of its own trains, and even outsourcing the design of some of them.
The MTH lawsuit
In 2000, MTH sued Lionel for misappropriation of trade secrets. A designer who had worked for MTH’s subcontractor did work for Lionel’s subcontractor as well, and the result was what some call an uncanny similarity between some of Lionel’s and MTH’s locomotives. Not having seen them myself–just like many of the people who call the similarity uncanny, no doubt–I don’t know. What I do know is that MTH and Lionel have had bad blood since the early 1990s, and that Lionel’s executives and financial backers conduct themselves in a much more professional manner in public than their MTH counterparts. That may or may not say something.
At any rate, the jurors who saw the evidence agreed with MTH and awarded it $40.8 million, which was more than MTH had sought. Then, on November 1, a judge upheld the jury’s findings and ordered Lionel to stop production of certain locomotives. Lionel then filed bankruptcy two weeks later. Looking over the filing, it’s easy to see why. They have $43 million in assets. They have substantial debt–including $30 million to what appears to be a South Korean subcontractor, not a financial institution like some news reports are saying.
MTH owner Mike Wolf and his buddy, Washington D.C. trash hauling magnate Tony Lash are hopping mad and accusing Lionel of trying to dodge justice by hiding behind Chapter 11. Considering the amount essentially amounts to the corporate death penalty, one would expect them to do whatever they can to appeal. It’s silly to expect a company to not want to stay in business.
In case you haven’t figured it out, my sympathies lie with Lionel. But it’s more out of a dislike of MTH than a love for Lionel, which has basically reduced itself to an importer. It farms out design and manufacturing to the lowest bidder, slaps its name on it, prices it for trial lawyers and heart surgeons, and wonders why nobody buys its stuff.
But MTH is the Rambus of the train industry. Or SCO. Take your pick. Starting in the 1970s, train enthusiasts started using electronics to control them. Eventually these efforts got combined and led to the creation of an open industry standard called Digital Command Control (DCC). Every major maker of HO and N scale trains uses it, and has been using it for years. MTH came along, and while it was developing its own proprietary train control standard called Digital Command System (DCS), patented some elements of DCC. Then it started suing selected companies who made use of DCC.
J. Lionel Cowen was a ruthless businessman and made a lot of enemies, but he had ethics and was proud of them. Not that that’s relevant because the Lionel he founded went out of business in the 1990s and has no direct connection to Lionel, LLC, as much as Lionel, LLC tries to make it look otherwise.
I’d like to see Lionel, LLC survive but I won’t lose sleep over it. Anyone can contract with Asian firms to design and manufacture trains, and to slap the Lionel name on it, all you need is the trademark. If someone other than Lionel, LLC ends up owning that trademark, I don’t see that it makes one iota of difference.
Unless that person happens to be Mike Wolf.
But Mike Wolf isn’t going to steal my hobby away from me. I buy mostly old stuff anyway. Why should I let the Rambus of Trains ruin my fun?
Lionel LLC also emerged from bankruptcy, and changed hands again, slightly, in the process.
I saw speculation from a lawyer who happens to be a member of the Train Collectors Association who pointed out that in bankruptcy, unsecured claims get paid according to a plan, which can sometimes be pennies on the dollar. He speculated that bankruptcy can turn MTH’s $40 million payout into a $10 million payout, spread out over the course of several years.
Makes sense. MTH can argue that the case needs to be turned into Chapter 7 (liquidation), but in that case, each asset goes to the highest bidder and MTH’s chances of getting the biggest prize–the Lionel name–aren’t real high because there are several likely bidders with deeper pockets than MTH.
Why do I have a feeling that Wikipedia has you to thank for the rather elaborate information about Lionel? 😉
Dustin D. Cook, A+
Oh, you’ll be sorry you brought that up. A few people on one of the magazine forums started critiquing it a couple of weeks ago, general consensus was that it was good but there were a few people who picked a nit here and there (and of course because my measurements of the track were off by 1/16 of an inch, the whole article was suspect–never mind that track measurements often varied by that much or more). I didn’t say anything; it’s a lot easier to rip an article for its shortcomings than it is to write it in the first place, and, evidently, easier to rip the author than it is to fix it.
Someone did annonymously make a few contributions. The quality was… suspect. Poor flow, a misspelling of the holding company’s name, massive duplication of information that was already in another article, and the like. The nice thing about Wikipedia is I could go back in and fix them.
The end result is a better article, but even the original version had a whole lot of information in it that wasn’t out there a year ago, or at best was buried on obscure web sites and in obscure books and magazine articles. The person who found an old train in the basement that has "Lionel" stamped on it and wants more information has somewhere to go now.