Reporter's notebook: company executes promise to purge - Kmart appears in bankruptcy court

DSN Retailing Today, March 10, 2003 by Laura Heller

CHICAGO -- Kmart appeared in bankruptcy court for its Omnibus hearing on Feb. 25 and began pointing fingers at former management even as it sought approval for its disclosure statement and amended plan of reorganization filed that morning.

As a result of its stewardship review begun last year, Kmart concluded: "Mr. Conaway failed to perform his duties as ceo to adequately supervise and direct other Company executives who reported directly or indirectly to him," read the documents. "And Mr. Conaway permitted Company executives to receive millions of dollars in retention loans and other payments that they would not have received had all the material information been disclosed."

Kmart's board of directors found that former management participated in a series of events contributing to the cash crisis in the fall of 2001 and leading Kmart into Chapter 11, including deceiving the board itself regarding the $24 million in loan guarantees.

But Kmart makes it clear in this new statement that the board believes there is enough evidence to pursue possible claims against Conaway, who at press time denied any wrongdoing.

"Chuck Conaway poured his heart and soul into trying to turn around the giant retailer," said Conaway's attorney Scott Lassar in a statement. "At all times he acted honorably and in the best interests of Kmart's employees and shareholders."

Conaway also petitioned the court to lift an automatic stay allowing him to make claims against the retailer's liability insurance to pay court costs. Kmart and the creditors committee objected to the request as a number of former executives were also entitled to access the policy, requesting that judgment wait until the reorganization plan was confirmed.

Attorney's representing both Kmart and the creditors committee also lost no time in pointing out how much money Conaway had received from the retailer showing that he was well positioned to pay his own expenses out of pocket at least until the policy kicked in.

"Mr. Conaway has or should have the resources to pay these people," said Jack Butler, Kmart's lead attorney. Judge Susan Pierson Sonderby agreed, continuing the motion until April 14.

Sonderby also approved the amended statement and sent the plan on to the creditors committee for its approval.

Kmart is still seeking the repayment of millions of dollars made in loans to former executives and the findings of the stewardship investigation have now been turned over to a creditors trust, which in turn will try to "monetize the claims," explained Butler. "This is now in the hands of the trust, whose job it is to make it into money." Any funds recovered go into the trust to repay creditors.

Additionally, Kmart revealed in the document that ESL Investments and Third Ave Value Fund--the primary providers of the company's key post petition financing--could own in excess of 50% of Kmart stock after the reorganization.

During the hearings scheduled for April 14 and 15, the retailer hopes to receive final approval for the plan and exit bankruptcy on April 30, a mere 15 scandal-filled months after entering.