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Friday, March 17, 2000

Liberty House

IRS claim still
haunts Liberty House

The dispute could drag on
even though the retailer has
reached a partial settlement

By Peter Wagner


A multimillion federal tax bill that has sidetracked the Liberty House bankruptcy for half a year remains an obstacle to the retailer's reorganization despite new progress toward a negotiated settlement.

Attorneys for Liberty House owner JMB Realty Corp. yesterday disclosed in U.S. Bankruptcy Court a tentative agreement with the Internal Revenue Service to address $103 million of the $138 million total bill. But terms of the yet-to-be-signed settlement -- how much will be paid and by whom -- were not disclosed, to the chagrin of other parties in the case left out of JMB's private negotiations.

Ronald Marmer, attorney for Chicago-based JMB, said Liberty House would be responsible for a small part of the settled bill, a figure to be disclosed only after the agreement is signed, possibly in several weeks.

But the remaining $35 million, yet to be addressed, could take years to resolve.

JMB, which believes it owes nothing beyond the $103 million claim, hopes to convince the IRS its claim is wrong. Marmer yesterday suggested a mainland bankruptcy judge be called on to mediate the dispute because JMB and the IRS are rigid in their positions.

U.S. Bankruptcy Judge Lloyd King indicated mediation is a possibility of the parties can't settle issue problem soon.

"Let's get this matter moving," he said.

IRS attorney Carol Muranaka said the agency would not be rushed in its review but suggested an escrow account be set up in the interim covering the $35 million claim to allow the reorganization to proceed.

Attorneys representing Liberty House and its creditors were frustrated yesterday by JMB's tight grip on the negotiations.

"I'm not sure we're much farther along than we were a few months ago," said Jay Indyke, attorney for unsecured creditors.

Judge King last summer put a hold on reorganization efforts until the key tax issue is resolved. Without knowing who is responsible for the bill, he said, no reorganization plan can reasonably be considered.

Liberty House, a Bank of America-led lending group, and a committee of unsecured creditors last August were poised to submit a joint reorganization plan that would pay off smaller creditors, give big creditors majority stock in the company, and clear Liberty House of its debts.

But no such plan can be put before the court until Liberty House's tax liability is determined.

"Clearly, Liberty House is not off the hook until somebody pays that bill," said Stephen Karotkin, attorney for the group of major creditors headed by Bank of America.

Liberty House, Hawaii's oldest and largest retail chain, filed for Chapter 11 bankruptcy protection on March 19, 1998, listing assets of $284.2 million and liabilities of $248.4 million.

According to court documents filed this week by the lending group, Liberty House currently owes about $236 million -- $150 million to lenders, $46 million to smaller creditors, and the balance in administrative costs, interest and other claims.

Liberty House was once part of a group of subsidiaries whose taxes were paid by former parent Northbrook Corp. The IRS claim is for taxes owed by Northbrook but the IRS said any affiliate, including Liberty House, could be liable for the entire bill. Liberty House has argued its actual share of the bill is between $1.5 million and $3 million.

JMB, a major shareholder in Northbrook, has been negotiating with the IRS since August.

The Bank of America-led group, which values Liberty House assets at $200 million, says JMB should not be in control of the IRS issue because it no longer has equity in the company. JMB, however, has assessed Liberty House at $266 million.

According to IRS attorney Carol Muranaka, some $103 million in claims against Northbrook arise from a 1992-94 tax cycle.

The $35 million balance of the total claim includes tax years 1995 and 1996.

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