MANHATTAN DA’S OFFICE SAID TO BE PROBING BARNEYS BANKRUPTCY
Byline: Edward Nardoza / Vicki M. Young / David Moin
NEW YORK — Barneys’ bitter, high-stakes bankruptcy case has caught the attention of Manhattan District Attorney Robert Morganthau’s office, according to a law enforcement source and a source close to creditors.
While a spokesman for the DA’s office declined to confirm or deny that an investigation exists, these sources indicated the probe is ongoing and centers around activities that led to the retailer’s dramatic bankruptcy filing in January 1996.
The bankruptcy stemmed from the much-publicized dispute between Barneys New York and its Japanese partner, Isetan Co. Ltd., over the nature of their partnership, specifically whether Isetan is Barneys’ landlord or an equity investor.
At stake in the Barneys-Isetan battle is more than a reorganization and payout to creditors: The future of Barneys, its ownership and the possible accountability of the Pressman family for millions of dollars in personal loan guarantees are all caught up in a tense, complex web of legal proceedings.
Reports of a government probe into the affair have persisted in industry circles for months and while few details have emerged, a law enforcement source described the DA’s investigation as “open.”
Legal sources indicated that such investigations can stretch over long periods of time, with no assurance a given case will end up in a grand jury’s hands or that any wrongdoing will be uncovered.
Barneys, through a statement on Friday, acknowledged that there had been government inquiries in 1996: “The preliminary inquiry commenced 14 months ago by the Manhattan District Attorney’s office resulted from the Chapter 11 filing by the company at that time. We have fully cooperated with the DA’s office and have been advised that neither the company nor its officers or employees are targets of the preliminary inquiry.”
One source close to the bankruptcy speculated that Isetan executives are turning to the DA with renewed claims that Barneys defrauded them to influence the judge’s upcoming summary motion decision on the landlord-versus-equity question. A hearing is scheduled for Thursday.
“They [Isetan] want to beat the motion through fraud allegation,” the source speculated. “It’s a desperation move. If they lose the real estate, it means a massive asset write-down.”
Barneys has a 499-year lease on the Madison Avenue flagship, and 99-year leases on the Beverly Hills and Chicago stores, with long-term renewal provisions.
Attorneys for Isetan at Hughes, Hubbard & Reed refused to confirm or deny knowledge of a government probe. And Isetan’s attorneys told WWD they “categorically deny” instigating any investigation.
But at the time of the Barneys Chapter 11 filing, there was plenty of ill will to go around, from Isetan to a string of angry vendors and other creditors.
The bankruptcy filing immediately followed Isetan’s demand for January 1996 rent of $1.25 million, and in the earliest days of the proceedings, Isetan officials publicly cried fraud, claiming they were misled into investing upwards of $600 million for Barneys’ expansion onto Madison Avenue and into Beverly Hills and Chicago.
According to court papers, Isetan claims it first learned in November 1995, in a meeting with Barneys co-chairman Robert Pressman, that “Barneys had in fact been incurring substantial operating losses, at least since 1993.”
Shortly after the filing, Barneys went to court for approval on $20 million of a total $100 million debtor-in-possession financing. Irwin Rosenthal, Barneys’ senior vice president and then chief financial officer, told the court at the time that Barneys needed the financing to insure shipment of spring merchandise. He illustrated the serious nature of the situation when he testified that the company had $937,000 cash on hand.
As for Isetan’s claim that it was deliberately misled, Barneys fired back, angrily denying the charges, stating that newly installed management at Isetan did not understand the nature of the partnership between the two companies.
Barneys has also countered Isetan’s charge of fraud with an independent audit by Ernst & Young of Barneys’ fiscal 1995 and 1996 that concluded that the company’s financial statements were “free of material misstatement…in conformity with generally accepted accounting principles.”
Since the bankruptcy filing, many major creditors have sold their Barneys holdings to vulture funds. Republic National Bank, for example, reportedly sold a claim of $25 million to a vulture fund for 38 cents on the dollar. But since last fall, the value of Barneys claims have shot up, as reports of a possible investor or buyer began to emerge. Donna Karan Co., for example, sold its $4.4 million claim for 75 cents on the dollar. Currently, Barneys claims are said to be worth 75 cents on the dollar.
The possibility of an ongoing DA probe is one part of a very complex case that has taken many twists and turns over the course of the year.
Currently before the bankruptcy court is the issue of whether the leases on three Barneys flagships are “true leases,” establishing Isetan as a landlord, or an equity partner. U.S. Bankruptcy Court Judge James L. Garrity, who continues to push for all parties to work out a negotiated settlement, may rule on the status of the leases soon. If Isetan is declared a landlord, it can collect sizable amounts of rent from Barneys that will put a cash squeeze on the bankrupt retailer. And Isetan would also have a more favorable position if Barneys’ assets were dispersed.
However, if ruled an equity partner, Isetan would be reduced to the same position as the Pressmans as owners. In a bankruptcy proceeding, it is possible for the court to find that the equity is worthless because equity holders are the last to be paid after all other creditors.
Also pending is a ruling in New York State court on whether Isetan can collect at least $160 million in personal guarantees by Barneys’ co-chairmen, Robert and Gene Pressman, on loans to a Barneys’ real estate affiliate. A ruling adverse to the Pressmans could force them into personal bankruptcy.
And a dispute between Barneys and Isetan over rights to the Barneys Asia license still is unresolved. Barneys declared the license terminated on Sept. 23, 1996 and that dispute was submitted to bankruptcy court and to the American Arbitration Association. A source familiar with the arbitration said a preliminary meeting with the panel of international arbitrators is set for March. The panel is composed of an individual from London, one from Paris and one from Vancouver. Isetan continues to operate two Barneys stores in Japan and one in-store shop in Singapore.
In another twist, Barneys is also suing Isetan for royalty payments it claims it is owed under the license. Isetan is trying to stay the court action on grounds that the dispute is the subject of the pending arbitration. A hearing had been scheduled for Feb. 14, but was adjourned until Feb. 27 after much huddling among the attorneys in Judge Garrity’s chambers.
Meanwhile, sources said Saks Fifth Avenue, Neiman Marcus and Dickson Concepts have stepped up their interest in Barneys. One of these suitors could make an offer to fund a Barneys reorganization, which would trigger new talks among Barneys, its creditors and the investor in order to work out a reorganization plan satisfactory to all.
An offer from one of these interested parties could be put on the table within a few weeks.
As reported, last month Barneys said it is in “sensitive negotiations” with three potential investors.
On Jan. 30, Neiman Marcus filed court papers to be put on the list to receive documents filed in the bankruptcy case.
Saks had indicated its interest in Barneys last summer when it entered into an agreement with Isetan to explore the possibility of pursuing a joint plan of reorganization for Barneys. That agreement has already expired.
Sources said Dickson Concepts expressed an interest in Barneys as early as April 1996. It made a preliminary offer of $350 million last year, which reportedly did not include the value of Barneys’ Asian license. That license, according to credit analysts who follow Barneys’ trade debt, has a value of $100 million.
Dickson lost its bid to keep its identity secret and in December won bankruptcy court approval for up to $1 million in advance reimbursement of its due diligence costs.
Factors contacted either did not return phone calls or refused to talk about the Barneys bankruptcy. Sources said factors are in somewhat of a holding pattern, waiting either for a decision in the state court action regarding the Pressmans’ liability under their personal loan guarantees or for official bids to be put on the table for Barneys.
Dickson Concepts, a holding company with licensing and royalty arrangements in Europe and Asia and a string of stores in the Far East, is believed to be the investor of choice for the Pressman family. The Pressmans are hoping for an investment structured on friendly terms that would allow them to hang on to their jobs and maintain an equity stake in the business.
Dickson plans to open 50 stores in the Far East over the next few years, including Joan & David, Ralph by Ralph Lauren, Escada and Perry Ellis units. The company owns the luxury goods firm S.T. Dupont and Harvey Nichols.
Barneys could be another expansion vehicle in the Far East for Dickson, as well as its entry into the U.S.
Isetan currently operates two Barneys stores in Japan — in Tokyo and Yokohama — and a Barneys shop inside one Isetan store in Singapore. The overseas Barneys stores are said to be successful, and Isetan has indicated it wants to continue to run them.