Tuesday, June 29, 1999

Liberty House
bankruptcy to
drag on for months

A claim by the IRS
postpones proceedings

By Peter Wagner


Liberty House A $138.2 million federal tax bill owed by a group of companies that includes Liberty House has become a stumbling block in the retailer's ongoing bankruptcy, entering its 16th month with little promise of speedy resolution.

U.S. Bankruptcy Judge Lloyd King yesterday postponed a scheduled hearing on two disclosure statements -- proposed reorganization plans for Liberty House -- until Aug. 17, noting neither adequately addresses the thorny tax issue.

"I don't know if either of the disclosure statements is going anywhere and I don't know if we need to waste any time on them," said King, whose characteristic equanimity seemed shaken at times during yesterday's proceeding.

Sponsors of the two plans -- Liberty House owner JMB Realty Corp. and the Bank of America-led creditors group -- are at odds over the value of the retailer's assets. JMB thinks the company is worth about $266 million while the lenders put the figure at $174 million.

That gulf could become yet another major obstacle in the case, delaying approval of any reorganization plan until a compromise figure can be found.

Liberty House in a recent financial report listed assets at $225.27 million and liabilities at $241.15 million. The company in March 1998 filed for Chapter 11 bankruptcy protection with $284.2 million in assets and $248.4 million in liabilities.

The company seemed on the last leg of its long and contentious bankruptcy when the Internal Revenue Service in May filed a $138.2 million tax claim against Northbrook Corp., former parent of Liberty House and Amfac Inc.

Northbrook, which bought Liberty House parent Amfac in 1988 and remained owner until the retailer was spun off in 1997, filed consolidated tax returns for a group of subsidiaries, including Liberty House. JMB Realty is a major shareholder in Northbrook, which still operates Amfac Hawaii and other former Amfac holdings.

The IRS claim, about $103 million in back taxes and $35 million in interest, was based on audits between 1992 and 1996. Liberty House, whose share of the bill has been estimated between $1.5 million and $3 million, says the liability belongs to Northbrook.

But IRS attorney Carol Muranaka yesterday disagreed, saying any of the roughly 80 companies represented in the tax-sharing arrangement with Northbrook could ultimately be responsible for the entire bill if others don't pay their share. She also indicated Liberty House's share of the bill might be more than $3 million.

JMB attorney Daniel Murray said Northbrook has had similar battles with the IRS in the past and won significant reductions through the agency's appeals process. He cited a $50 million claim in 1981 subsequently reduced to $1 million after appeal.

"The key here is cooperation among all the parties," Murray said.

Liberty House attorney Bruce Bennett, however, warned that Northbrook's current tax appeal could drag on for years, putting Liberty House's bankruptcy on the back burner. He urged quick resolution of the appeal saying the bankruptcy is taking a toll on Liberty House. Bennett noted Liberty House is "doing great," ahead of recovery projections and on track for a successful reorganization. "There's no doubt this company is going to be successfully reorganized," he said.

According to Liberty House President John Monahan, net earnings so far this year are $4.2 million, nearly a $6 million swing from the negative $2.4 million recorded in the same period last year. Sales are down, he said, but earnings are up because of stronger margins, tighter expense control and other adjustments the company has made since filing bankruptcy.

King said the two-month delay in considering reorganization plans will give Northbrook time to work toward a settlement with the IRS. Meanwhile, the sparring reorganization plan sponsors were asked to revise their plans to show what Liberty House's tax liability is and how it will be handled.

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