KB Toys' store sales draw objections from landlords, Texas districts

By Jeff Pines

Washington, Jan. 26 - KB Toys, Inc.'s proposed plans to have a liquidator sell off the assets of the 490 stores it plans to close drew objections from three groups of landlords.

In a filing with the U.S. Bankruptcy Court for the District of Delaware, the first group, which includes the Rouse Co., said it wants to find its own liquidator to sell off the affected stores' inventory.

The landlords understand that historically courts let the debtor hire a liquidator, but the sales should not interfere with the terms of the leases.

If the court does allow KB to go ahead with the sale, it should balance the company's interests with those of the landlords, the group said.

For example, the landlords do not want any banners or signs calling the sales "bankruptcy," "lost our lease," or "going out of business" sales.

In addition, the first and third groups ask the court to prohibit KB or the liquidator from abandoning property leaving the landlords to clean up the stores.

The second group, which includes five landlords from Michigan, Ohio and Wisconsin, want the window signs limited and kept to 5'x3' or smaller and interior signs to be smaller.

All three groups object to the liquidator adding inventory to the stores during the sale. The second group's motion cites a case in which a court ruled that doing so is a "fraud on the public."

The third group, which consists of landlords for properties in Massachusetts, Michigan, New York and Pennsylvania, want to the court to make sure the company pays on the leases from Jan. 14-31 and continue to comply with the lease.

In addition, the Texas ad valorem tax authorities are filing their claims. They conservatively estimate the company has a tax bill of $500,000.

In a separate filing, two Texas tax districts have also filed an objection on the store closing sales based on back taxes owed to them. They object because the proposed debtor-in-possession financing facility calls for the lenders to paid first before the tax districts. Texas' tax code gives preference to tax claims over other secured claims, according to the brief.

A final hearing on the motion to conduct store closing sales will be held Jan. 28.

All filings were made in court on Jan. 26.

Case cited

In re Carpetmakers Warehouse Ltd., 55 B.R. 102 (Bankr. S.D. Fla. 1985) that adding inventory constitutes "fraud on the public"

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