Thursday, May 6, 1999

Liberty House
is hit with
$138 mil claim

The retailer doesn't expect
its liability in the IRS dispute
to exceed $1.5 million

By Russ Lynch


Liberty House The Liberty House retail chain has been hit with a claim for $138 million in allegedly unpaid taxes and interest, adding a new difficulty to its already complex bankruptcy reorganization effort.

However, the company's Los Angeles attorney, Bruce Bennett, said the Internal Revenue Service claim is really against a group of companies of which Liberty House is only one part and even if the claim is approved by the courts the Liberty House liability should not exceed $1.5 million.

"This claim has no impact on current operations," Bennett said today. "Every relationship with every vendor remains the same" and the same is true of the retailer's relationships with customers and others businesses, he said.

Bennett said the claim will be challenged.

Meanwhile, however, it will complicate matters. "It is going to demand time, effort and attention to adequately deal with the assertions of the IRS claim," he said. While some of the tax matters can be dealt with after a reorganization plan is adopted, some will probably have to be dealt with first, he said.

Liberty House was brought into the tax dispute because it is one of several parts of Chicago-based JMB Realty Corp. which consolidated their tax returns. The IRS is claiming that each of the companies, which include Amfac Inc. and Northbrook Corp. as well as Liberty House, is equally liable for the full amount, Liberty House said. Bennett said that under the tax agreement with the other companies, Liberty House is protected against loss except for about $1.5 million. Also, he said, Liberty House paid its full tax obligation to Northbrook for many of the years covered by the IRS audit.

Meanwhile, Liberty House said it is performing well and had first-quarter operating earnings, before taxes, depreciation and restructuring expenses, that were more than four times those of the first quarter of 1998.

A spokeswoman for Liberty House said the company is encouraged by having had such a good quarter, in which results were 50 percent above what it had anticipated in its business plan.

The company said in a statement the IRS claim deals with events before Liberty House filed its bankruptcy petition and has a lower priority than all the other obligations incurred since the chain filed for bankruptcy court protection in March 1998.

"Liberty House will continue to operate its business as usual and customers will not see any changes as a result of the IRS action," the statement said.

JMB Realty, which acquired Liberty House in 1988 through it purchase of the retail chain's parent Amfac, filed a reorganization proposal in bankruptcy court Friday, calling for the issuance of stock and notes that it said would satisfy almost all the claims against it.

A group of lenders, led by Bank of America and including investors who bought up some of the Liberty House loans at a discount, would get about a 70 percent share of the chain's ownership.

The lenders' own plan, filed earlier, would give them almost complete ownership but pays many unsecured creditors -- including businesses that sold goods to retail chain -- only about half what they are owed, according to Liberty House.

Liberty House itself will work with its creditors to see if it can come up with a mutually acceptable reorganization plan as well, according to John Monahan, the retailer's president. Monahan said Friday that there are "significant unresolved issues" and Liberty House does not feel it is appropriate to file a reorganization plan at this time. He also noted that the JMB plan has not been accepted by the creditors.

Liberty House, which has 11 department stores in Hawaii, one on Guam and eight specialty stores on Oahu, said in its original bankruptcy filing that it had debts of $248.4 million and assets of $284.2 million. The company said it was struggling from the 1990s slowdown in the Hawaii economy, the arrival of new competition and more recently, the drop in tourist arrivals from Japan.

Liberty House said it was forced to file under Chapter 11 of the bankruptcy law when its lenders refused to make adjustments to get it through the hard times.

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