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Thursday, January 25, 2001

By Dennis Oda, Star-Bulletin
Shoppers at Ala Moana Center yesterday come in and
out of Liberty House, whose 3-year bankruptcy case
appears to be ending. The cost of its reorganization
will double that of previous record-holder
Hawaiian Airlines.

Liberty House
bankruptcy costs
exceed $10 mil

A Hawaii Retail Merchants
exec says the price was worth it
to save the troubled retailer

By Tim Ruel

Hawaii's largest and most costly bankruptcy is almost over.

Liberty House Court documents show that through Sept. 30, the reorganization of Liberty House has cost $10.28 million in administrative and attorneys' fees. By the time the nearly 3-year case wraps up, the figure should be more than double the cost of the previous record-holder, Hawaiian Airlines' 1993 bankruptcy, which totaled $5.4 million.

To Carol Pregill, saving Liberty House was worth the price.

"Liberty House downtown was where we always used to go at Christmastime," said Pregill, executive director of Retail Merchants of Hawaii. "I think the whole industry is very pleased."

The high expense largely derived from the complexity of the controversial case, experts said. However, much of the cost also came as an investment in remaking the kamaaina retailer, giving it a better shot at survival when it finally emerges debt-free.

U.S. bankruptcy Judge Lloyd King yesterday approved a final reorganization plan for Liberty House, whereby two mainland venture capital funds would control 80 percent of the company. In his ruling, Judge King also curtailed the largest roadblock to the settlement, a claim by the IRS for back taxes.

The IRS had wanted the bankruptcy case to remain open while the government completed an audit of the retailer -- a process that would have taken at least another year. Fearing more delays, Judge King weighed in and gave the IRS a week to settle its claim. Retail analyst Marty Plotnick said he expects the IRS to appeal. Technically, a successful appeal could reopen the bankruptcy case. Attorneys on all sides have declined to comment on that possibility.

According to John Monahan, Liberty House president and CEO, finalizing the case could happen as early as the end of April. The chain filed for Chapter 11 reorganization bankruptcy on March 19, 1998, listing $248.4 million in debts and $284.2 million in assets.

One reason the case has taken so much time -- and cost so much money -- is that the company has had to deal with two boards of directors competing for power, said John Candon, the court-appointed accountant who prepared the expense report. "That's a large ingredient."

One board represents the company's owners, Chicago-based JMB Realty Corp., while the other represents the lenders, led by Bank of America. A lawsuit brought by lenders to replace JMB's board originally helped trigger the bankruptcy.

Both boards have since combated each other in the case, offering their own plans for reorganization, and disagreeing over key issues. Only at the last minute -- the day of the bankruptcy confirmations hearings on Monday -- did JMB settle, agreeing to turn the company over to the lenders for a $13.6 million payout, which initially goes into an escrow account for possible IRS claims.

In comparison, the year-long bankruptcy of Hawaiian Airlines was far more straightforward, Candon said. "I don't recall that so much work had to be done."

Paying for attorneys to fly in from Los Angeles, Chicago and New York to battle over legal matters in Hawaii wasn't the only expense, Candon noted. A large part of the cost also came from the transformation that has taken place at Liberty House, he said.

In the past few years, the department chain has overhauled its business strategy and operations, closing dozens of its resort shops and refocusing on a local audience. That change has been key to the company's survival, said Monahan, who joined Liberty House in 1990 from the May Co. in Los Angeles. Hawaii's retail climate was much different back then, he said. "It was before the big-box mainland invasion. Liberty House wasn't facing anywhere near the competition then that we do now."

Monahan became president in mid-1997, less than a year before the retailer filed Chapter 11. At the time, many analysts had faulted the company for focusing too much on tourists and not enough on local residents.

To Monahan, changing the retailer was simply a matter of providing products best suited to kamaaina. "It's an understanding of how we live here," he said yesterday.

As a measure of success in remaking the company, he points to its recent earnings, which totaled $8.9 million last year, up from $8.7 million in 1999.

"They seem to be going in the right direction," said Pregill of Retail Merchants. "You can either change with the times or get blown away."

Providing unique merchandise from local vendors is also helping Liberty House avoid the recent troubles faced by mainland department stores, many of which are too alike, Monahan said. Just days after Christmas, Chicago-based retailer Montgomery Ward announced plans to close all of its outlets nationwide. "The department store business is a difficult business now," Monahan said.

Under the court-approved settlement, Monahan will remain president of Liberty House, keeping his management team. "We're going to investigate everything we possibly can to grow the business and make it stronger, but we will stick to our knitting, so to speak, as best as we can," Monahan said.

Since 1997, the retailer has slashed roughly 1,300 positions, leaving a current work force of about 3,000. It also closed 12 stores since the 1998 filing.

Monahan has noted that under the reorganization there will be no layoffs and that none of the 18 remaining stores will close.

There is at least one big change coming, however. Majority ownership of Liberty House is poised to take a major shift to two private investment firms, Oaktree Capital Management LLC of Los Angeles and DDJ Capital Management LLC of Wellesley, Mass. Some local analysts speculate that the two firms would sell the retailer in a few years.

But Monahan said he has no indication of plans from the two companies. "They look for good investments and I don't think there's any length of time for how long they hold a property," he said.

Stephany Sofos, a local retail analyst, said she hopes Monahan would purchase Liberty House along with other investors in a leveraged buyout. The company's strategic direction under Monahan has not only been good for the retailer, but for all the local vendors who get a large venue to sell their products, she said.

Liberty House's rebirth has even served as an inspiration to merchants, according to Pregill. "It's a measure for all of us."

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