Reporter's notebook: Bankruptcy Court - for Kmart - Brief Article

DSN Retailing Today, Feb 25, 2002

Heller, Laura

CHICAGO -- There were so many lawyers present at the recent Kmart bankruptcy Omnibus hearing that the lawyers themselves were uneasy. With such a huge showing of bodies and briefs, proceedings had to be moved to a larger courtroom to accommodate them all. And with all of those lawyers--and all of their billable hours--the cost of a day of litigation would undoubtedly purchase a very nice home on the posh North Shore of Chicago.

That so many lawyers would appear before Judge Susan Pierson Sondedrby in the U.S. Bankruptcy Court for the Northern District of Illinois on Feb. 13 should not come as a surprise, though. Kmart's case is, after all, the largest retail bankruptcy ever.

Although none of the pressing issues, such as compensation packages and store closings, were on the docket, the legions of lawyers very quickly became bogged down in the intricacies of reengineering the nation's fifth largest retailer as it tries to finalize the conditions of Chapter 11 bankruptcy protection.

A group of lawyers representing unsecured creditors shared a table with the group representing financial institutions. And U.S. Trustees squeezed in amongst the lawyers representing Kmart, including John Butler Jr., lead counsel for the chain. Boxes and boxes of legal documents were wheeled in on carts, lining the courtroom walls. There is so much paperwork involved that Judge Sonderby requested Kmart provide her office with additional personnel to help handle the tonnage.

Kmart asked for and received permission from the judge to pay its liquor suppliers, many of which are required by individual state law to halt shipments if payment is owed. Kmart claimed liquor was critical in maintaining customer traffic in its stores, and the judge agreed.

Kmart also was granted permission to pay $6.4 million of outstanding debt to its trash hauler, ensuring the retailer's sites will remain garbage free.

And Kmart received permission to pay the legions of financial advisors, consultants and lawyers needed to help it navigate this restructuring.

Bankruptcy, it seems, is very costly in its own right. The only objection to these fees came from the U.S. Trustee program, which acts as a watchdog over the bankruptcy process and voiced very strong objections over granting indemnity to Dresdner Kleinwort Wasserstein Inc., the investment bankers and financial advisors Kmart seeks to steer it through restructuring.

To deny the firm indemnity, thus protecting it from future litigation related to Kmart's restructuring, would be highly unusual and the government's objection is quite possible a result of the recent Enron scandal. A U.S. Trustee stated in court that the program's objection is indeed part of a tougher stance to ensure accountability. Sonderby was expected to rule on the issue Feb. 20, after DSN Retailing Today went to press. But the denial of indemnity could certainly stall the restructuring process, as Dresdner Kleinwort Wasserstein indicated it may choose not to accept the assignment should indemnity be denied.

What played out in the courtroom amongst all those lawyers was largely procedural as the parties tried to set guidelines for Kmart's restructuring. The real excitement won't begin until next month when issues of store closures, executive compensation and employee retention plans are scheduled to be addressed.

Let the fireworks begin.