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Judge OKs
Liberty House
settlement

He rejects an IRS claim that
the retailer owes $35 million
in back taxes

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By Tim Ruel
Star-Bulletin

A federal judge agreed to the Liberty House bankruptcy settlement today, denying an IRS objection that threatened to prolong the nearly 3-year-old case.

The settlement, announced Monday between the retail chain's lenders and its Chicago-based owners, will allow Liberty House to emerge from debt as early as April. The company's current management, led by President John Monahan, will remain the same.

"We've been hung up for several years and we have to move forward," U.S. bankruptcy Judge Lloyd King said before ruling today. "Confirmation has been delayed at least since mid-1999 by the claims filed by the Internal Revenue Service." King noted he did not want to risk new problems arising down the road.

The deal was briefly on hold after a hearing yesterday in which an attorney for the IRS objected to a proposal that Judge King estimate how much Liberty House owes the IRS.

In a hearing this morning, King overruled the objection and let the settlement plan go forward.

The IRS claims Liberty House owes $35 million in back taxes for 1995 and 1996, when the retailer belonged to a tax-sharing group of companies affiliated with its parent company JMB Realty Corp. The IRS had previously estimated the group's debt at $138 million, but later settled $103 million of the claim for $4.2 million.

Liberty House disputes the IRS' claim, arguing that it owes the government nothing in back taxes because of the previous settlement.

The plan to reorganize Liberty House represents a settlement that would turn ownership of the retailer over to its lenders. Under the settlement, current owner JMB would take a $13.6 million payout in cash and notes, which would initially go into an escrow account to cover the potential IRS claims.

Without the court's estimate of the back taxes, however, the plan would not have worked because there is no way to provide for a future claim by the IRS against Liberty House, said Bruce Bennett, attorney for Liberty House management.

Judge King said today he will estimate the IRS claim after meeting with the parties involved.

The IRS did not want the court to estimate the claim.

IRS attorney Carol Muranaka said ending the bankruptcy case now would hurt the government's right to collect later on. Furthermore, she argued, bankruptcy courts have never given such an estimate of an IRS claim before, leaving little legal precedent to work with.

But Judge King overruled the IRS objections. It was unclear after the hearing if the IRS would appeal. Regardless, over the next week, the IRS will be discussing a settlement of the claim with Liberty House while the reorganization moves forward.

Attorneys supporting the plan voiced frustration with the possibility of another delay. "We've worked extremely hard to get to this point," Stephen Karotkin, attorney for the Bank of America-led lenders, said yesterday.

Bennett yesterday said the plan provides an escrow account to cover the IRS' claims. Moreover, he said, bankruptcy law allows the court to estimate tax claims.