By Andrew Gomes
Advertiser Staff Writer
The Internal Revenue Service yesterday agreed to cap a potential tax liability of Liberty House at $14 million, ending the kamaaina retailers three-year bankruptcy case.
"The deal is done. Congratulations to everyone," U.S. Bankruptcy Court Judge Lloyd King said after signing what should be the final order in the case.
The agreement also should speed implementation of the retailers reorganization from April to mid-February.
In the court gallery, smiling management executives of Liberty House who attended the final day of the confirmation process to witness execution of the judges order hugged and shook hands with their legal team, which handled the states largest Chapter 11 bankruptcy ever.
"Today is a turning point in the 151-year history of our company," said Liberty House President John Monahan.
The IRS had estimated the retailer could be responsible for $34 million in 1995-96 taxes as part of a tax-sharing group of 83 companies affiliated with Liberty House owner JMB Realty Corp. of Chicago.
An earlier $103.5 million estimated claim for 1992-94 taxes was settled by the IRS for $4.2 million. Liberty House ended up paying less than $500,000. Bruce Bennett, lead counsel for the retailer, said in court earlier this week that the company likely would end up paying none of the $34 million IRS estimate.
Carol Muranaka, special U.S. attorney representing the IRS, declined comment yesterday.
As a condition added yesterday to the final version of the reorganization plan, JMB agreed to pay the reorganized Liberty House $273,525 due under the tax-sharing agreement.
Also, Frank Arthofer, president of Nestles Chocolate & Confections Division, will join local developer Duncan MacNaughton as independent directors on the board of the reorganized company. Monahan and two executives of the investment firms to become Liberty Houses new owners round out the board.
Various transactions, including financing, need to be completed before the reorganization will take effect, and some 2,000 unsecured creditors with $40 million in claims get paid. Monahan said that should happen in mid-February.
Under reorganization, creditors owed more than $5,000 will receive 40 percent of their claims in cash and 50 percent in notes. Those owed less than $5,000 will be paid 100 percent in cash plus interest.
JMB and an affiliated company will receive about $12.8 million in cash and notes for claims of $21.9 million.
A few private investment funds will receive stock for $130 million in claims, becoming Liberty Houses owners and allowing the retailer to emerge from Chapter 11 debt free.
"That puts us on rock-solid footing going forward," Monahan said. The company has earned just under $9 million in each of the last two years. It will have to spend roughly $24 million in bankruptcy fees and claims upon reorganization.
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