FEATURE STORY: Why don’t big Chicago companies use the bankruptcy court here?

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Out of seven companies with headquarters in Chicago that filed for bankruptcy protection in 2009, six of them, including Merisant Worldwide Inc., Sun-Times Media Group Inc., General Growth Properties Inc. and Tribune Co., filed elsewhere, seeking to gain an advantage that favors the company.

Companies may choose to file for bankruptcy protection where they are headquartered, where they are incorporated or where they have operations.  According to experts, this permits what lawyers call “forum shopping,” the practice of choosing a court believed to be more hospitable to your case.

“The companies won’t admit it, but it is forum shopping,” declared Sumner Bourne, chair of the Commercial Banking and Bankruptcy Section of the Illinois State Bar Association. “It’s not a stretch to say Delaware is more corporate friendly.” Three of the four Chicago companies filed there.

“I think it’s clearly forum shopping,” agreed Ronald Barliant, chair of the Bankruptcy and Reorganization Committee of the Chicago Bar Association. “They are taking advantage of the provisions in the law that allow filings other than where the business is. “They’re definitely choosing between alternative forums.”

The practice flies in the face of the “fine professional reputations of the judges of the Chicago court, which serves the Northern District of Illinois, and of the sizable contingent of experienced bankruptcy lawyers here.” Barliant said, “I’ve practiced all over the country. Chicago bankruptcy bar is the best in the country.”

On a mid-sized case, Barliant added, “a Chicago company filing outside Chicago adds hundreds of thousands of dollars to each case.”

So why do big companies here perceive an advantage in going to Delaware or New York, where General Growth filed?

Bankruptcy experts attribute the trend to a federal appeals court decision after the big Kmart Co. bankruptcy case here in 2002.

A Chicago bankruptcy judge allowed the big retail chain, in settling with its creditors, to give payment priority to critical vendors, certain suppliers deemed vital to the company’s future but considered unwilling to do business with a customer that hadn’t been paying its bills.

Capital Factors Inc., a Kmart unsecured creditor that was not deemed critical, appealed this decision.  In 2004, a three-judge panel of the Seventh Circuit Court of Appeals, housed in the same Dirksen Federal Building as the Bankruptcy Court, ruled that there was insufficient proof that it was necessary to prefer the critical vendors, and therefore Kmart should not have been permitted to do so.

Kmart was required to recover payments already made to critical vendors in order to pay all unsecured creditors more equitably, in accordance with the appellate court ruling, which does not apply beyond the four-state Seventh Circuit.

Lawyers say the ruling doesn’t mean that critical vendors cannot be preferred in the Chicago Bankruptcy Court. Barliant declared, anyone that looks at the issues and understands that issue knows it’s still possible to pay critical vendors. It’s just a question of doing it the proper way.

However, Barliant explained, “some debtors avoid the district [Northern District of Illinois] because of a misunderstanding of this. For others it’s an advantage because they have an excuse not to pay their critical vendors.”

Barliant argues that the single most important factor in this forum shopping is whether the interpretation of federal bankruptcy law in the filing state is favorable to what the company wants to do in the case.

Critical vendor law is an example of how two courts interpret the law differently, said Bourne.

“Though companies still may favor critical vendors in the Northern District of Illinois, the type of evidence [required here] is not something you can do quickly,” Bourne went on.  But in Delaware, he said, “there’s a lot of discretion for the debtor. The debtor doesn’t have to come up with much reasoning at all.”

Lynn M. LoPucki, a bankruptcy expert currently teaching at Harvard Law School, believes the bankruptcy courts have been corrupted by competition for big cases.

He said in an interview, “the Chicago judges initially thought they could compete, but competition requires a willingness to ignore the law and put a thumb on the scale for the lawyers, managers and DIP [Debtor in Possession] lenders who bring cases to the court.  I think that after Kmart, the Chicago judges simply realized that they were not willing to do what it took to compete.”

Since 2004, 11 out of 13 big Chicago-based companies headquartered in Chicago that filed for bankruptcy protection chose New York or Delaware. The two that filed in Chicago were the smallest of the lot, with fewer employees and lower revenues.

In May, LoPucki told the House Judiciary Committee that the Delaware and New York bankruptcy courts must be doing something to attract 70 percent of all bankruptcy cases filed under Chapter 11, which provides for corporate reorganization, usually meaning reduction of debt enabling the company to continue operating.

The result, he testified, is that Chapter 11 is evolving a bias, a bias that is in favor of the people who control the choice of the court: the managers of the company, the professionals who represent the company, and whoever finances the bankruptcy. But every bias in favor of someone is a bias against someone else. And the people on the other side of this bias are the creditors, the suppliers, the employees, the landlords, the tax authorities, the dealers, the communities, literally hundreds of thousands of people. It is not a level playing field for the rest, LoPucki averred.

Chicago companies provided watery responses when asked why they filed outside the Northern District of Illinois.

Gary Weitman, senior vice president of corporate relations of Tribune Co. said, “This wasn’t a difficult decision and involved no deliberation. Tribune Company is incorporated in Delaware, hence any filing has to be done there.” In fact, that’s not a requirement of bankruptcy law. Kmart was not incorporated in Illinois.

Tammy Chase, director of corporate communications for Sun-Times Media Holdings LLC, said of the company’s Delaware filing, “Judges are experienced, the courts are experienced.  You know you’re going to get a judge that knows that law.” Chase expects the process will be smooth and expeditious in Delaware.

Merisant spokeswoman Katie Wood said, “The debtors in possession [companies in bankruptcy] are all based in Delaware. The judges are specialists in this area.”

Jim Graham, a spokesman for General Growth Properties, said, “Most companies that file bankruptcy have a number of choices for where they can file bankruptcy. In making a determination, many factors are considered, including but not limited to, the business of the company, the legal issues that need to be addressed in the bankruptcy, the existing bankruptcy law in the various jurisdictions, the expertise of the judges in the various courts, and the location of the parties involved. These factors, and others, lead companies to choose Delaware, New York and other jurisdictions for filing.  He did not specify which factors led General Growth Properties to file in New York.

I’m sure the debtor would give a canned response,” commented Bourne of the Illinois State Bar Association, “because they don’t want to make it look like they’re forum shopping. At the same time,” he acknowledged, “they can make a choice.”

Many companies incorporate in Delaware because its law is known for being corporation-friendly and it has a well-respected court system experienced in handling business disputes.

To Kenneth Ayotte, associate professor of law at Northwestern University, the bankruptcy-filing trend is “most likely a case of forum shopping for expertise. A minor screwup can kill off the firm.

However, he added, Chicago has dealt with these cases. I’m not really sure why it’s happening now.

The big global, theoretical problem with it is that it distorts the legal system, said Barliant. “In every other area of law we require cases be decided in the location where they have some connection other than just the filing of articles of incorporation. It’s inconsistent with all other areas other than patent cases. Even in patent cases any district court can hear them.  We just don’t do this with any other area of American law.

FEATURE STORY: Sears Holdings Corp. struggles to compete and lacks concise strategy

In the midst of the holiday shopping season during a recession, Sears Holdings Corp. is plodding along compared with other retailers.

Analysts say more cost-cutting looms if Sears fails to solidify a competitive strategy.

William Dreher of Deutsche Bank AG said Sears has made progress with Internet sales, but “unless they start selling thousands of stores, they’re going to have to figure out something to do with them. The survival and success of their stores cannot be accomplished through the Internet alone.”

Sears Holdings operates Kmart and Sears stores domestically and in Canada, with 324,000 full-time employees.

In the year ended January 2009, Sear’s same-store sales were down 11 percent, after declines of 4.5 percent and 3.1 percent in the preceding two years.

Gross margins, which improved in 2004 following Sears’ merger with Kmart, have since been stagnant between 23.36 and 28.66 percent, ahead of low-margin Wal-Mart Stores Inc. but not competitive with other large retailers.

According to Tom Aiello, division vice president of public relations, Sears is focusing on innovative Internet sales strategies, including the ability to buy products, from small items to large Craftsman tractors, via smartphone using the Sears2Go application.

In a press release Dec. 8, Sears announced that it was ranked third by Experian Hitwise in overall Web traffic for a multichannel store retailer for the week ended Nov. 28, 2009, which included Black Friday, the big shopping day after Thanksgiving.

So customers are visiting Sears’ site, but are they buying?

Revenue decreased to $10.2 billion in the third quarter ended Oct. 31 from $10.7 billion in the year-earlier quarter, a decrease of 4.4 percent, still beating analyst expectations.

Sears net loss in the third quarter narrowed to $127 million, or $1.09 per diluted share, compared with a net loss of $146 million, or $1.16 per diluted share in the same quarter a year prior.

“Sears is a strange one because they really don’t communicate,” said Dreher.

“Their strategy is not traditional. They make little to no effort to communicate what that strategy is,” he continued. Dreher noted that Sears is buying back shares, focusing on expanding its margin, and playing with store prototypes such as mygofer.com, where customers order products online and pick them up at a warehouse.

What Sears is not doing, said Dreher, is bringing in new brands and exciting products, making investments and solidifying a permanent CEO–all signs that Sears is stagnant, in his view.

The lack of new brands “leads us to the conclusion that brands don’t want to do business with Sears,” said Dreher, who believes chairman Edward Lampert might be moving towards taking the company private.

They seem to be all focused around assets and not around operations,” said Dreher.

What Sears might do, analysts suggest, is eliminate stores that are under-performing and solidify a strategy to differentiate itself from competitors like Wal-Mart Stores Inc. and Target Corp.

“Everyone recognizes Sears as a turnaround,” acknowledged Tom Aiello, division vice president of public relations. There are things we’re doing that are unique and customer-driven that we believe are the right things to do in the market.”

Kim Picciola, analyst for Morningstar Inc., believes Sears will continue to experiment with things like online shopping and new kinds of promotions and services like lay-away. Also, Sears will continue to try to leverage its Kmart stores base, said Picciola.

However, she added, I don’t think they have the formula figured out quite yet and they’ll continue to work on it. It’s going to be an uphill battle. I think it’s very hard to compete with Wal-Mart on price so Kmart really needs to have something that differentiates them in consumers minds.”

According to Ayat Shukairy, managing partner of Invesp Consulting, “Sears.com has gone through a number of changes throughout the years, but increasingly they are trying to position themselves as a retailer that is the one-stop shop for all the family needs. Although Target and Wal-Mart still provide the grocery element, Sears has also carved the niche of providing large appliances in addition to toys, clothing, electronics, etc. That’s a big distinction that sets the companies apart.”

Sears began its holiday sales much earlier than other retailers, starting after Halloween.  “Black Friday was a very positive day,” said Aiello, with very strong customer traffic.”

Picciola said, “It’s going to be a difficult holiday for them. Retailers are being very competitive on price and consumers are responding to promotional activity. That will be a challenge for Sears over the next month or so.”

Customers are as undecided on Sears as the analysts are.

“We grew up on Sears,” said Daphne Bennett during a shopping trip to Sears on State Street. Sears has been around, I think they’re gonna stay around.”

Another shopper, Gail Katz said, It’s expanded, it’s not a mom and pop shop anymore.” Katz says she usually finds good deals at Sears, particularly when it has sales and specials, but worries how the store will do given the economy.

While customers like Bennett and Katz find the appeal of Sears in its history, other customers, like Larry Simmons, find the prices too high or do not find what they need at Sears. Simmons said he believes the prices have increased through the years and chooses to shop elsewhere.

Picciola said, “When it comes to Sears, some of their hard-line brands still have strength.” With the merger of Kmart and Sears, the company routed some of its reputable brands, like Kenmore appliances, to off-mall Kmart stores.

Analysts surveyed by Yahoo Finance have mixed recommendations. Three rate the stock buy or outperform, three rate it sell or underperform, and one rates it hold or neutral.

Analysts polled by Zacks Investment Research estimate earnings of $1.27 per diluted share for the current year ending in January, but look for $1.60 per share next year.

Sears trades around $71, compared with a 52-week high of $79.75 and a 52-week low of $34.27.

FEATURE STORY: Long-time Illinois manufacturer avoided bankruptcy

It was an American success story, until the family divided.

Max Gerber immigrated to Chicago from Poland in the early 1900s. Though without a plumbing background, he took a leap and started a plumbing distribution business in 1929 called simply Max Gerber. In 1932 he opened his first factory in Kokomo, Ind. His company, now called Gerber Plumbing Fixtures LLC, was expanding quickly. A few years later he bought a company that he moved to Delphi, Ind., a third business in Woodridge, N.J., and a fourth in Alabama.

When Max Gerber died in 1953 at 56 years old, his family inherited an extraordinarily successful business. Harriett Lewis, Max’s daughter, ran the company until her death at age 84 in 2001. Ila Lewis, her daughter, then took over, relinquishing her role in 2008.

Lewis says the “beginning of the end” was in 1999. The family received a $75 million offer for the business but refused it. Some family members decided they wanted out of the business, so the company bought them out for $30 million. This buy-out required the company to borrow $15 million from its bank.

“When a company spends a lot of money it should be for the benefit of the company, but it put the company in tremendous debt,” Lewis said.

In 2002, Gerber was well known as a trusted distributer to industry professionals. It focused on two business segments: vitreous china, 65 percent of sales, and brass faucets, 35 percent. Lewis said that, around this time, sales were between $111 million and $114 million, but profit was “an ever-moving factor.”

“That number [profit] looks great until you look at the balance sheet, and then it really doesn’t matter,” she said.

Burdened by debt, Gerber had to close a factory in New Jersey and lay off more than 150. The family was struggling while Gerber’s investment banker searched for an equity injection or a buyer.

Stanley Dreyfuss, director of purchasing at SG Supply Co. in Calumet Park, has been a distributer for Gerber for over 25 years. “I knew that there were some financial problems,” he said recently. “I didn’t know the extent of them. The Lewis family, it was their livelihood, it was their history, so they were doing everything they could to keep things happening.”

In 2003, Globe Union Group Inc., an international manufacturer of plumbing products headquartered in suburban Woodridge, purchased nearly all of Gerber’s assets, paid off its debts and retained many of the employees, investing more than $30 million over the next four years.

The buyout came just two weeks before Gerber was going to file for bankruptcy protection.

The president of Globe Union, Michael Werner said, “They didn’t know they were in trouble until after they were in trouble.”

Dreyfuss commented, “I think what they realized is that whatever level of financial problems they had were things that the new owner could help them with: an infusion of cash and ideas; and I think in the long run, it was the best thing for them.”

Globe Union closed the Delphi, Ind. factory and the Alabama pottery, opened a new factory in Laredo, Texas and moved most production to China. The Kokomo, Ind. plant was converted to a distribution center, until mid-2009, when it was closed.

Mitchall Rasky, turnaround team leader with The Private Bank and Trust Co. in Chicago, said that even after the buyout he felt anxious about the company’s hesitation to close factories, and believed that Werner left the Kokomo factory open about 18 months longer than he should have in a desperate attempt to preserve as many jobs as possible.

Under Globe Union, Gerber developed a three-fold strategy. It globalized the manufacturing to reduce costs and improve quality. It introduced over 800 new products, including its gravity-fed Lynx and Viper toilets, “High Efficiency Toilets” like the Avalanche, and hundreds of “green” water-saving faucets and toilets. In an August 2009 issue of Consumer Reports, two Gerber toilets were rated as “best values among top performers.” And finally, Gerber focused on helping its customers sell more by setting up more distribution centers and simplifying the ordering process.

Globe Union’s revenue was approximately $125 million in 2002 before it decided to take on foundering Gerber. Werner banked on two strengths of Gerber: its professional brand reputation and its customer list.

In 2009, Gerber’s sales will be a little over $100 million, with Globe Union’s total revenue exceeding $750 million. Though Werner did not provide exact numbers, he said Gerber’s sales grew nearly 20 percent and multi-million dollar profits were posted between 2003 and 2009.

Russell Atchetee is the kitchen and bath business unit manager at Coburn’s Supply in Texas a firm that has ordered Gerber toilets for over 40 years. Atchetee said Gerber could easily sell its products in “big box” stores like Home Depot or Lowe’s, but it supported the wholesaler instead. “Having done business for so long,” he said, “they become part of the household and you always assume they’re gonna be there. Their emphasis is still on the professional.”

“Like all manufacturers,” Atchetee continued, “they’ve had some production issues over the years. I think initially when they were purchased by Globe Union, they had quality issues, but they did address them.”

Globe Union is dealing with the recession with resilience and surprisingly, success. Kevin McJoynt, director of marketing at Globe Union said, “A depression is a terrible thing to waste.”

Gerber products are typically considered second to lines like Kohler. In this recession, more customers are buying Gerber because it is sold more cheaply to wholesalers, according to Werner. Distributers of Gerber products make more money on their sale and customers buy a product highly rated by Consumer Reports but less costly than the top-line brands.

Werner says 2009 will be Gerber’s most profitable year.

Gerber now has manufacturing facilities in Laredo, Texas, Shenzhen, China and Weifang, China and distribution centers in Bridgeton, N.J., Woodridge, Ill, City of Industry, Calif, Montreal, Canada and Weifang, China.

“Our goal was to take a company with a great heritage and to resurrect it, revive it, and we’ve done that,” said Werner.

Jack in the Box Inc.’s quarterly and annual profits rise

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Jack in the Box Inc.’s fourth quarter profit increased 51 percent, soaring above analyst expectations, but sales dropped and the company expressed caution about 2010. The stock dropped 7.6 percent.

The San-Diego based restaurant company that operates Jack in the Box and Qdoba Mexican Grill franchises, four of which are in Chicago, had net income of $40.6 million, or 70 cents per diluted share, in the quarter ended Sept. 27.  That compared with a net income of $26.9 million, or 47 cents per diluted share, in the same quarter of the prior year. The estimate by analysts polled by Yahoo Finance was 55 cents per diluted share.

Quarterly sales were $540.3 million compared with $582.7 million in the year-earlier quarter, a decrease of 7.3 percent.

In the fourth quarter Jack in the Box initiated two promotions, including offering two of its burgers for $1.00 each.  It continued its rebranding plan including menu innovation, enhanced facilities and improvements in guest service.

“We do know that we need to offer compelling value especially in this very competitive market place.  We want to offer value that doesn’t erode our margins.  It’s really about profitable sale,” said Linda A. Lang, Jack in the Box’s chief executive officer and chairman of the board, in a conference call.

Lang said of expanding the Qdoba business, “We don’t want to go into these retail centers without tenants being adjacent to us. When the economy improves, we will ramp up growth.”

R.J. Hottovy, an analyst with Morningstar Inc., said, “I’m pleased with the fourth quarter results. They did a good job navigating a tough environment. The thing that I liked was the reimaging program: revamping the interior and exterior of stores. This might have a meaningful benefit, maybe not next year but the year after.  I look at that as a positive.”

Jack in the Box expects earnings of $1.90 per diluted share to $2.10 per diluted share for the year ending in September 2010. Analysts polled by Yahoo Finance estimate earnings of $2.32 per diluted share, and sales of $2.44 billion.

Net income in the 52 weeks ended Sept. 27 was $118.4 million, or $2.05 per diluted share, compared with $119.3 million, or $2.01 per diluted share, in the year earlier. Revenue fell 2.7 percent to $2.47 billion from $2.54 billion.

Jack in the Box’s stock closed Thursday at $18.50, down $1.53.

Burr Oak Cemetery for sale

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CHICAGO | In a bankruptcy court hearing Tuesday, Judge Pamela S. Hollis gave permission for Perpetua-Burr Oak Holdings of Illinois, L.L.C., owner of Burr Oak Cemetery in Alsip, to sell the cemetery that became infamous this summer for a grave desecration scandal.

Perpetua filed for bankruptcy protection in September in the wake of a criminal investigation. The company told Hollis it had hired American Cemetery/Mortuary Consultants Inc. as a consultant to assist in selling the cemetery.

Attorney Robert Fishman, of Shaw Gussis Fishman Glantz Wolfson, in Chicago, said Perpetua doesn’t yet know of any buyers but hired a consultant with expertise in cemeteries.

“All the pressure of the world is on us,” said Fishman during the hearing, when Paul J. Gaynor, chief of the Illinois attorney general’s Public Interest Division, expressed concern too much money is being spent on court costs.

Gaynor said he wants to ensure “as much as possible for victims. The state is concerned about people and families.”

Burr Oak Cemetery opened its gates at 9 a.m. Monday to more than 50 lawyers representing claimants in the grave desecration scandal. The cemetery has been closed to the public since the scandal broke this summer.

Attorney Larry Rogers Sr. of Chicago firm Power Rogers Smith, representing claimants, said the goal of opening up the cemetery for legal counsel was to provide the opportunity to locate family gravesites for his clients.

He lamented it was difficult to find anything useful because many graves are unmarked and a database being compiled by the sheriff’s office is not yet complete.

The cemetery has a primarily black clientele. Among prominent Chicagoans buried there are Emmett Till, Dinah Washington along with Negro League baseball players Jimmie Crutchfield and John Donaldson.

Bankruptcy filings on the rise

Chicago bankruptcy filings increased 38 percent in September from a year earlier. There is no sign of decline.

“I can only predict there’s more to come,” said Kenneth Gardner, clerk of the Northern District of Illinois Bankruptcy Court.

In September 4,302 cases were filed, compared with 3,121 a year earlier and only 1,884 cases in September 2007. Last month’s Chapter 11 filings, mostly used by corporations seeking to reorganize while protected from creditors, increased the most. There were 34 Chapter 11 filings in September 2009 compared with 14 in September 2008.

This jump could be attributed to the increasing number of individuals forced to utilize Chapter 11 bankruptcy because of their high income or large debt, a result of the 2005 amendments to the Bankruptcy Code. “I think this is going to continue until the recession runs its course,” said Chicago bankruptcy attorney Jay Fortier.

Chapter 13 filings by wage-earners, however, decreased to 992 in September from 1,052 in September 2008. In Chapter 7, liquidation, 3,152 cases were filed last month, compared with 2,055 a year earlier.

Bankruptcy filings peaked in 2005, in anticipation of the tighter restrictions on bankruptcy enacted that year. After a sharp decline in 2006, filings have increased each year at an annual rate of about 40 percent.

Kara Krystavel, public service team trainer at the Chicago Bankruptcy Court, said that on the last day of September alone, 481 new cases were filed.

Paul Bach, a bankruptcy attorney in Chicago, said there’s no simple answer for why there is an increase in bankruptcy filings, but he agreed with Gardner’s comment that bankruptcy filings won’t decrease anytime soon.