Judge: Law firm
can’t work for
Liberty House

The ruling was a victory
for the retailer's
'old board'

By Peter Wagner
Star-Bulletin

A federal judge today ruled that a New York law firm could not work for Liberty House because it also represents some of the retailer's major creditors.

The decision was a victory for JMB Realty Corp., owner of Liberty House and backer of the company's "incumbent" board of directors. JMB's lawyers today argued that Cleary, Gottlieb, Steen & Hamilton should be disqualified as counsel for a competing board of directors appointed by bank creditors of the retailer's Chapter 11 bankruptcy.

"Liberty House can't be paying people who represent adversary interests to the company," said attorney Larry Wolfson, whose Chicago firm Jenner & Block represents JMB. "They are siding with the banks. Liberty House and the banks are not on the same side of things in this Chapter 11," he said yesterday.

U.S. Bankruptcy Judge Lloyd King ruled that the firm, Cleary, Gottlieb Steen & Hamilton, has conflicts of interest because it represents major banks and other creditors in the bankruptcy.

"This is a conflict and it must be recognized," said King, who in July had approved the hiring of the firm as a routine matter.

Cleary, Gottlieb, which has about 530 attorneys and whose partners charge up to $520 an hour, has submitted bills totaling $446,054.67 through Aug. 31. The billings are being contested by JMB and are subject to court approval.

Attorneys representing Cleary, Gottlieb today argued there is no legal basis for King to rescind his approval.

JMB argued Cleary, Gottlieb has a conflict because it represents creditors claiming more than $140 million in the Liberty House bankruptcy.

Those clients include Bank of America NT&SA; Merrill Lynch, Pierce, Fenner & Smith; Oaktree Capital Management LLC; Sanwa Bank; Capital Management LLC; and Canyon Partners -- creditors that appointed the new board.

"The question is whether Liberty House ought to pay for the bank board's defense of its position when that position is contested," said Wolfson. "The law is pretty clear that when a board's legitimacy is contested the estate should not be bearing the legal costs of that contest."

Wolfson said his own firm has built up fees of more than $400,000 on behalf of JMB and its appointed board, but is holding them in abeyance pending outcome of the board dispute.

That matter isn't likely to be resolved any time soon. Judge King last month put litigation in the civil case on the back burner until March 31. By then, Liberty House is due to have a bankruptcy reorganization plan before the court.

Liberty House filed for Chapter 11 bankruptcy on March 19, after defaulting on more than $170 million in loans by the Bank of America group. The company subsequently secured a $50 million financing package from the same lending group.

The retailer, which has closed 16 shops and specialty stores since this year, recently asked for a time extension -- from Nov. 13 to Feb. 28 -- to file its reorganization plan. King is to hear that request Nov. 2.