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Hearing set for
Liberty House
IRS case

A bankruptcy judge seeks
to resolve the $138 million
tax claim

By Peter Wagner
Star-Bulletin

Weary of a $138 million federal tax claim that has hung like a cloud over Liberty House since August, U.S. Bankruptcy Judge Lloyd King has asked all parties to meet on the issue next month.

The March 16 hearing is aimed at breaking a six-month silence in which Liberty House parent JMB Realty Corp. quietly has negotiated with the Internal Revenue Service to little apparent avail.

"What we want to know is, what are the prospects of getting this resolved?" asked King during a hearing in bankruptcy court yesterday.

Chicago-based JMB has been battling for control of Liberty House since a group of major creditors led by Bank of America appointed a competing board of directors for the company on March 19, 1998 -- the day Liberty House filed for Chapter 11 bankruptcy.

JMB is standing alone against other key parties in the case, including the lenders group, a committee of smaller creditors, and Liberty House itself.

The IRS in May filed a $138.2 million claim against Northbrook Corp., former parent of Liberty House and Amfac Inc. Liberty House was among a group of subsidiaries whose taxes were consolidated and paid by Northbrook before the retailer was spun off in 1997.

Liberty House, whose share of the tax bill has been estimated between $1.5 million and $3 million, says the liability belongs to Northbrook.

But the IRS has said any of the roughly 80 companies in the tax-sharing agreement could ultimately be liable for the entire bill.

While JMB, a major shareholder in Northbrook, has been mum on the tax problem, so has the IRS. According to IRS attorney Carol Muranaka, federal tax rules forbid disclosure of tax records beyond court testimony. Muranaka yesterday indicated that Liberty House's liability will be less than the total bill.

"Right now they're working on the numbers," she said. "I think the claim will be substantially reduced."

Growing restive, Bank of America last week charged JMB with foot-dragging in the 23-month-old case and asked the court to take the matter in hand.

"Simply put, the JMB entities are proceeding at their own glacial pace, the real economic parties in interest remain on the sideline in the dark, and Liberty House continues to linger in Chapter 11 while the business suffers and administrative expenses mount," say documents filed in bankruptcy court.

A JMB spokesman could not be reached for comment.

While a dispute over how much Liberty House is worth continues to divide parties in the reorganization, some sources say the tax claim is the biggest obstacle to a successful bankruptcy.

Judge King has refused to consider proposed reorganization plans for the company until the tax issue is settled.