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2 years later,
Liberty House still
untangling cash woes
The biggest Chapter 11 bankruptcy
By Peter Wagner
in state history has been complicated
by a $138 million IRS tax claim
Star-Bulletin
Liberty House will mark the second anniversary of its bankruptcy on Sunday, a somber milestone for the Hawaii retailer as lawyers continue to argue the basics of how much the company owes and how much it is worth.
With its burgeoning legal tab -- $9 million as of December -- Liberty House long ago eclipsed Hawaiian Airlines as the biggest Chapter 11 bankruptcy in the state's history. But Hawaiian, which settled its 1993 bankruptcy in 13 months at a cost of $5.3 million, was tame by comparison.
"There was never a dispute over who controlled the company," said James Wagner, former attorney for Hawaiian in its bankruptcy now representing thousands of small creditors in the Liberty House case. "And Hawaiian Airlines conceded early on (that) there was nothing at all in the company for equity."
Liberty House has been a brawl since March 19, 1998, the first day of its bankruptcy. Lawsuits, battling boards of directors, and a high-stakes dispute over how much the company is worth are part of the tangled picture.
While Liberty House parent JMB Realty Corp. argues it has nearly $100 million in equity in the company, secured creditors say the company is "under water." JMB has appraised Liberty House at $266 million while secured creditors led by Bank of America peg the figure at $174 million -- about what Liberty House owes.
But all this would be over, Wagner said, if it weren't for the discovery last year of a $138 million federal tax claim against Liberty House and former parent Northbrook Corp.
"Had we not had the tax claim problem, Liberty House probably would have been resolved last summer," said Wagner, noting the bankruptcy court would likely step in to settle the valuation dispute if warring parties can't agree.
Last May, the Internal Revenue Service filed a $138.2 million tax claim against Northbrook, which owned Liberty House parent Amfac Inc. from 1988 to 1997. Northbrook filed consolidated tax returns for a group of subsidiaries including Liberty House. JMB is a major shareholder in Northbrook, which still operates Amfac Hawaii and other former Amfac holdings.
Liberty House, whose share of the bill has been estimated between $1.5 million and $3 million, says the liability belongs to Northbrook.
The status of the claim, in quiet negotiations between the IRS and JMB since August, will be discussed in U.S. Bankruptcy Court tomorrow. Many key parties in the case -- creditors large and small and the company itself -- are anxious to learn what's been going on behind closed doors for the past six months.
"We are not happy with the pace of the case," said Wagner, whose clients are owed anywhere from $100 to $300,000 for goods and services delivered before the bankruptcy. "We're not happy with the progress of resolving the tax claim. But that's something we have very little control over. It's frustrating."
What lies ahead for Liberty House is anybody's guess.
Wagner predicts the bank-led lenders will end up with the company and thereafter put it up for sale. "The most likely new owners are venture capital type lenders," he said. "They will need to recover their investment and the only way is to sell the company. I doubt they have plans to hold the stock forever and get paid in dividends."
Industry analyst Stephany Sofos, president of S.L. Sofos & Co. Ltd., said Liberty House is ripe for takeover by a national chain.
"Historically, regional department stores have not survived over the long term" said Sofos. "They merge with nationals."
Sofos said she believes Liberty House also will have to lose some of its holdings, either its resort shops or its department stores, in order to focus on a specialty.
"It's a 150-year-old regional department store that tried to be all things to all people," she said. "That cannot continue."
Having closed 18 stores in a slimming-down program since bankruptcy, Liberty House has made substantial headway. Its work force has dropped to about 3,000 from about 4,500 in 1997.
The company, now operating 10 department stores and 12 resort shops, has shed about $60 million in assets.
But specialty stores like The Gap and value retailers like Wal-Mart are chipping away at Liberty House's decades-old foundation.
Joseph North, vice president of Retail Strategies, agrees Liberty House is from another age.
"Liberty House had its own way for a long time and this is a wake-up call, not only for Liberty House but for everybody," said North. "It's a new world and if you can compete, great, but if not, you're going to lose."
North applauds Liberty House's efforts to win back alienated customers. But notes that nearby Neiman Marcus and other competitors are nibbling at the retailer's bottom line.
"It would be a terrible thing if Liberty House went down," North said. "There could be upwards of 5,000 people losing jobs, depending how far up the distribution chain you go."
Here's a look at the Liberty House Chapter 11 bankruptcy. Bankruptcy at a glance
Filed: March 19, 1998.
