The trick, of course, was somehow removing the lawsuit from bankruptcy court in Houston to Laureta’s sanctuary on Saipan. Hillblom still had no doubt that it could be done. Folse and Peter Donnici, however, thought otherwise. So Hillblom ultimately did what he had always done when a legal conundrum presented itself: he went back to school.
Waiting for him at the Boalt Hall law library was a familiar face—the elderly professor and author Stefan Riesenfeld. Hillblom and Kroll had taken Riesenfeld’s real property course in law school and both practically worshipped him. “Riesenfeld was a famous figure at Berkeley,” Kroll recalls. “He was small and Jewish-looking. He had a hooked nose, he was thin and wore glasses. We would see him in the library writing, surrounded by stacks of casebooks. He was like a piece of performance art!” Thanks to one of the books he’d researched at Boalt Hall, Riesenfeld was also one of the world’s foremost experts on bankruptcy law. When Hillblom presented himself at Riesenfeld’s office on a gloomy day in 1985, explained his situation with Judge Roberts—including the likely possibility that he would be sent to jail if the standoff went on much longer—the old professor shook his head. “No student of mine is going to prison!” he declared. After some consideration, the professor came up with an elegant solution: Hillblom should declare bankruptcy himself.
Larry fell in love with the idea immediately and called Saipan, where Riesenfeld’s bold gambit fell to Bob O’Connor to execute. O’Connor would have to convince Laureta that Hillblom’s People of Micronesia was, indeed, bankrupt. Since the company had no debts, he had to be creative. He was. Continental, O’Connor soon argued, was a huge corporation attacking a tiny one in multijurisdictional litigation. Therefore, since POM’s only assets were the UMDA shares, it would inevitably run out of funds with which to fight. “We filed bankruptcy on People of Micronesia in the U.S. District Court on Saipan,” O’Connor explains, “causing an automatic stay of all actions and orders against People of Micronesia. So the Houston Court’s order to cease and desist was stayed.” In other words, by declaring bankruptcy himself, Hillblom had canceled out Continental’s bankruptcy and removed his original lawsuit back to Saipan. O’Connor then returned to Laureta’s courtroom and entered default judgments in the full amount of the complaint, $149 million, against Lorenzo, Barry Israel, President Nakigawa, and the others when they failed to respond to People of Micronesia v. Lorenzo et al. (Their lawyers at Carlsmith, believing them all to be protected under the bankruptcy law’s safe harbor provision, had advised them not to.) Instead of responding to Hillblom, they had simply waited around Houston for Hillblom to appear. How, they figured, facing huge fines and possible jail time, could he not?
By the time that Frank Lorenzo and his codefendants realized that Roberts’s cease and desist order did not protect them from an order issued by another federal court, no matter how small the jurisdiction, it was too late. When their expensive attorneys finally flew to Saipan to have the default judgments tossed out, Hillblom was waiting. O’Connor explains, “Larry found a case that essentially said, ‘If you allow your default to be entered for strategic reasons, you’re stuck with it.’” He flew Peter Donnici in from San Francisco to argue the motion. Donnici prevailed. “The settlement negotiations with Continental,” O’Connor recalls, “began immediately after that.”
“When I told Larry that Barry Simon, Continental’s general counsel, had called me wanting to settle,” Parker Folse tells me, “Larry was ecstatic. ‘I’m not going to make this easy for them!’ he warned me over the phone. ‘They’re going to have to meet me on my ground!’ he said, ‘and I’ve got some things planned for Barry!’”
Folse suppresses a laugh. He too was ecstatic, but more than that, he was relieved. The young attorney had pleaded with Larry to come to Houston and been rebuffed. Then he had tried to convince him not to file the default judgments, fearing they might send Judge Roberts over the edge (and that such a flagrant disregard for a federal bankruptcy judge might have ramifications for his own fledgling career). Now, not only had Hillblom gotten his default judgments, Folse’s appeal of Roberts’s contempt order had also been reversed. Larry’s confidence, which had seemed arrogant just a few weeks ago, now looked prophetic.
When Folse, accompanied by Barry Simon, touched down at SFO several days later, Hillblom emerged, Houdini-like, out of the fog and escorted them to a dirt-splattered Range Rover. He had a mischievous smile on his face as he helped them with their bags. Then he started to ramble, but Simon was not in a conversational mood; Continental’s general counsel was still stunned by the appellate judge’s reversal of Judge Roberts’s injunction. Not only had this judge scolded Roberts for improperly issuing the sanctions against Hillblom, he’d excoriated Continental and its attorneys for improperly using the bankruptcy court as a sanctuary from which to launch hostile takeovers. He had also reminded Simon and his boss, Frank Lorenzo, that a federal judge in Saipan did not take orders from a bankruptcy judge in Texas. From now on, it was clear that Continental was to have no refuge in Judge Roberts’s bankruptcy court, nor would Hillblom’s lawsuit be litigated in Houston.
Fifteen minutes later, Hillblom turned his SUV onto the long, rough driveway that led from Highway 1 to his ranch in Half Moon Bay. Then he hit the accelerator, transforming hundreds of ponderosa pines into a green blur. They passed an American sedan with a smashed windshield overturned in a deep ravine, which Larry casually mentioned he’d crashed a couple of weeks earlier—on the way to his fortieth birthday party. Every time Folse sensed the back wheels fishtailing, his teeth clenched and his eyelids slammed shut. He realized that his right fist had melded with the plastic grip bar above the glove compartment.
A few feet behind him, he could feel Simon gripping the back of his seat as the forest flew by and Larry blathered on about how he’d acquired the ranch and excavated the road himself. When the Range Rover finally came to rest in front of a series of Mission-style structures anchored by a modest two-story house, Folse and Simon descended from the SUV, knees buckling beneath them as their feet touched pavement. Folse took a deep breath.*
Inside the main house, Pete Donnici awaited. When the four attorneys finally sat down in the living room, Folse stole an empathetic glance at Simon. The man had probably never been subjected to such disrespect in his life—at least not in his years as general counsel of a Fortune 100 corporation. The executive must have been furious but he maintained a poker face as Larry recited a long list of demands, capped by Frank Lorenzo’s PS-1 pass, the CEO perk that allowed him a first-class seat anytime, on any flight, even if a paying passenger had to be bumped to accommodate him. Not only that, however. Hillblom demanded that Lorenzo personally hand the pass over to him.
“Let me get this straight,” Simon interjected angrily. “You want Frank Lorenzo’s pass?”
Hillblom nodded. “If there’s only one seat on the plane, and it’s between me and Frank,” he said, “then I have to come first.”
That night, Hillblom, Folse, Simon, and Donnici dined at the posh Beau Rivage Inn on Skyline Boulevard, where waiters in crisp tuxedos treated Hillblom like royalty. Simon and Hillblom both ordered abalone, a rare agreement. Continental’s general counsel was impressed with Hillblom’s balls—that anyone would ignore a federal judge’s contempt order was, he thought, unbelievable—and he was even more impressed with the young litigator who had won the stinging reversal of Judge Roberts’s contempt order. But Hillblom’s demand that he take Lorenzo’s PS-1 pass grated—proof, he thought, that big cases often turn on idiotic issues. The next morning, Simon flew back to Houston without even the seeds of a deal.
Nevertheless, negotiations continued sporadically on Saipan and elsewhere for months. There was too much at stake not to settle. “Lorenzo finally asked if I would go out and provide a second opinion as to whether we should settle because the lawyers were recommending that we settle,” says a Continental executive who had dutifully flown to Honolulu and sat through a day of tense discussions before Hillblom fin
ally arrived in typical attire: dirty blue jeans, a San Diego Surfing Association T-shirt, and Keds. “Without a great deal of effort,” the executive remembers, “he takes command of the conversation. He’s so on top of the facts and the law, and I called Lorenzo immediately and said, ‘Frank, I don’t know the facts, but I’ve met our adversary, and based on that, I think we should settle.’”
Not long after, Frank Lorenzo entered a Houston conference room and deposited his PS-1 pass into Hillblom’s outstretched palm (Larry remained facing the boardroom table so that the two never actually had to face one another). His lifetime dream of owning an airline—a feat achieved by Howard Hughes in his early thirties—had been accomplished at forty. No one could seriously argue now that he was not the most powerful human being in Micronesia—an area as large as the United States and its gateway to Asia. Hillblom’s promise to give the UMDA shares he’d amassed to the governments of Micronesia had apparently expired at some point during the negotiations with Continental. Instead, he made himself its president.
Air Mike was now King Larry’s airline, just as Saipan had become his island and Micronesia was to become his empire via UMDA, which he reimagined as a resort developer, cable television broadcaster, and of course, casino operator. The Continental settlement would provide millions in cash flow and UMDA could buy property outright. But Hillblom needed someone to help him navigate Micronesia’s Byzantine political and tribal bureaucracies. Of particular interest were cable systems and resorts. “I’m not investing in anything without land attached,” he confided to a friend.
Joe Lifoifoi was the obvious choice, though he was reluctant when Hillblom summoned him to his office shortly after the Continental settlement was signed. Like most islanders, he had worked only for the government and never for private enterprise. Taking a job at UMDA would be a tremendous paradigm shift—from working for the Great Father to the Great Bird.
“I said, ‘No. It won’t work,’” Lifoifoi recalls. But Hillblom persisted. When Lifoifoi asked him what his job would entail and where his office would be, Hillblom told him not to worry about such things. They would travel as they had during the war with Continental Airlines. It would be another great adventure.
Lifoifoi did not ask about compensation; he just said yes. But when he received his first paycheck a week later, he assumed it was a mistake. Larry was paying him $100,000 a year—more than six times what he had earned as Speaker of the House. Lifoifoi went back to his friend and said that it was too much, but once again, Hillblom brushed him off.
“Don’t worry.” He grinned. “Your time will come.”
Lifoifoi was stunned. He had introduced Hillblom to a few people, drunk a lot of beer, and shared a lot of stories. In San Francisco, he’d done little but sit in a chair and chew betel nut while Larry and his attorneys argued in language that flew over the islander’s head. In New York, he’d helped read “Self-Determination Realized” into the record, but that had yielded nothing so far, and most of Lifoifoi’s friends were convinced that Larry’s views on the Covenant were a little nutty anyway.
“What do you mean,” the islander finally grumbled, “my time will come?”
Twenty-Two
Strings
“Larry must have been everything to those islanders,” Patrick Lupo muses. “He was kind of like their connection to the outside world. He was huge.”
Lupo relaxes his tall rancher’s frame into a comfortable couch in the solarium that overlooks his generous swimming pool. Decades ago, he might have heard George Harrison or John Lennon jamming at one of their nearby mansions. He tells me how Hillblom visited occasionally in those days, loaded with several DHL pouches packed with vitamins. When Lupo’s children opened the refrigerator for their morning cereal, they would instead find dozens of bottles of pills and colorful capsules. They invented a nickname for their father’s boss: Larry-the-weird-guy-with-all-the-vitamins.
Unlike Peter Donnici, Lupo never followed Hillblom to Saipan. Instead he was summoned here to run DHL’s operations in North and South America. Lupo’s immediate boss was a former Lever Brothers executive named Bill Walden, who worked out of a brain trust in Belgium called Management Resources International. Hillblom and his top executives had devised MRI as an outsourced chairman’s office—an arrangement that not only saved the company from paying taxes in the United States, but kept the corporation’s nationality purposefully ambiguous. His immediate challenge was making DHL competitive in the United States, where it had fallen to a distant third in the express market, behind Federal Express and UPS. While FedEx was already a household name, most Americans still had no idea that DHL even existed.
“It really bothered Larry that DHL still wasn’t successful in the U.S.,” Lupo says, though it certainly was not for lack of trying. After telling Lupo that he had seen the seeds of DHL’s demise in the fax machine, Hillblom had insisted that they open fax offices in major cities where customers could send their documents instantly across the country or across the world via satellite machines the size of mainframe computers. The idea was to leapfrog FedEx, but as Japanese companies like Canon and Sharp rolled out cheap, landline-based fax machines, companies simply bought their own and DHL’s fax business fizzled. Lupo then hired popular The Far Side cartoonist Gary Larson to create an expensive—and offbeat—ad campaign to reintroduce DHL to the United States. The campaign won awards, but no new customers. Hillblom then flew to Memphis to discuss a merger with Federal Express’s founder Fred Smith, but Smith, who had served in Vietnam as a marine, had joined the ultra-exclusive Skull and Bones society at Yale, and was on the verge of taking FedEx public on the New York Stock Exchange, did not hide his contempt for his disheveled rival. “Chalk and cheese,” Lupo observes. Jim Campbell, who set up the meeting, explains: “They were just very different, strong-minded people. . . . Fred is more polished and civilized, traditional sort. Larry was a Fresno kid who worked his way up through high school and Berkeley and just a different kind of fellow.”
In desperation, Hillblom even brought back the dreaded office of the presidency—empty since Curt Carlsmith’s ouster—and hired a succession of executives, including Larry Roberts, a brilliant GTE engineer who would later become known as one of the fathers of the Internet. But despite his genius, Roberts proved as short-lived as Carlsmith.
“Hillblom flew to San Francisco,” Lupo remembers, “and told Roberts, ‘You’ve just got to improve the publicity. You’ve got to improve our awareness.’ And Roberts says, ‘Well, what do you suggest we do?’ And Larry says, ‘Do something! Any news is good news. Any headline is good news!’ And Roberts says, ‘Like what?’ So Hillblom thinks a moment and goes, ‘Why don’t you jump off the Golden Gate Bridge? ‘Chief Executive of DHL Jumps Off of Golden Gate Bridge!’” Lupo gesticulates a newspaper headline and roars. “That was the end of Larry Roberts!”
Hillblom finally offered DHL’s presidency to Joe Waechter, a thirty-one-year-old executive who had worked for the company since college. Waechter had run the stations in New York, Houston, and San Francisco. He was known as someone who could motivate employees and solve problems. But as smart and talented as Waechter might have been, the title that Carlsmith had once held remained a dubious one. (“I didn’t know what it meant,” Steve Kroll says, “except being a front man for Larry.”) Yet in many ways, the loyal and grateful Waechter, who had originally been hired by Hillblom’s half brother, Grant, proved himself more than up to the task. When Hillblom decided that DHL needed to go toe-to-toe with Federal by flying its own planes, Waechter built a hub in the Midwest and started leasing jets. The airline would turn out to be the most disastrous of the succession of failures in the United States. The domestic company, which had managed to eke out a profit in the early eighties, suddenly began to hemorrhage red ink.
By the time Bill Walden called Patrick Lupo into his office in Belgium and offered him CEO, there was only one solution remaining. “You’ve got two absolutely first-class, well-capitalized, entrenched compani
es in Federal Express and UPS,” Lupo explains. “And we could get an element of market share from them but other than that, forget it.” Since DHL had already tried merging with Federal, they would now have to approach UPS, which obviously meant that Hillblom would have to give up control. Instead of being the puppetmaster of DHL, he would be a major—but still a minority—shareholder in an iconic American corporation. And he would be fabulously wealthy. But Hillblom had other ideas.
The Flying Tiger Line had been awarded its first route authority by the Civil Aeronautics Board two decades before the founding of DHL, making it the first scheduled cargo airline in the United States. Started by ten pilots from the First American Volunteer Group, the quasi-mercenary air force that had defended China from Japan in the first stages of World War II, and known by the AVG’s nickname, “Flying Tigers,” the company had grown to serve fifty-eight countries on six continents and had surpassed Pan Am as the world’s largest cargo operator in 1980. Its impressive fleet of aircraft, including several 747s, was flown by an army of 1,000 pilots, using route authorities accumulated over more than three decades. In addition to its cargo business, Flying Tigers ran passenger flights on a charter basis and had won a number of military contracts over the years, acting as one of the U.S. Army’s first private contractors.
Acquiring Flying Tigers, Hillblom figured, would instantly make DHL a major player in packages and freight. Tigers had scale, airplanes, and the permission to fly them all over the world. Lupo loved the idea. “I think this is Larry’s genius,” he tells me, “as the big picture guy, looking at something completely transformational. . . . His argument was change or die.” But Hillblom’s audacity was equally obvious. Tigers was a huge, publicly traded corporation. DHL might have had offices in twice as many countries and an impressive client roster, but it still had virtually no assets. At any other time, Hillblom’s strategy might have been DOA. Not so in the roaring eighties. In fact, there was an investment bank in New York that was doing such “gnat versus Goliath” deals, as Lupo terms the takeover of Tigers. By 1986, it had become the most profitable investment bank in American history, thanks mainly to a workaholic genius named Michael Milken, who had pioneered the use of so-called junk bonds in order to finance hostile takeovers such as the one that Hillblom and Lupo were now contemplating. The name of the firm was Drexel Burnham Lambert.
King Larry Page 15