Hartmarx creditors sue banks over $12 million lease settlement

The creditors' committee for Hartmarx Corp. sued the secured lenders with a complaint asking the bankruptcy court to declare that $12 million resulting from termination of a store lease isn't part of the lenders' collateral.

The Chicago-based maker of men's suits, which filed for bankruptcy reorganization in January, had a Hickey Freeman retail store at 666 Fifth Ave. in Manhattan. With the rent below market prices, Hartmarx obtained bankruptcy court approval to terminate the lease in return for a payment of almost $12 million from the landlord and the return of a $2 million security deposit.

A dispute immediately erupted with the lenders, owed $114 million at the Chapter 11 filing, over whether the banks have liens in the lease settlement proceeds.

The committee takes the position that the lenders never had perfected security interests because they made no filings in the New York land records noting an interest in the lease.

Wells Fargo & Co., as agent for the lenders, made a preliminary objection to the planned sale of Hartmarx's business, saying it would generate only $56 million cash, or less than half the bank debt.

The Hartmarx petition listed assets of $483 million and debt totaling $261 million as of Oct. 9. Debt at filing included $114 million on a revolving credit, $15.5 million in industrial revenue bonds, $12 million in mortgages and $70 million owed to trade suppliers.

Manufacturing is performed in the company's own facilities and by contractors. Its brand names include Hart Schaffner & Marx and Hickey Freeman.

The case is In re Hartmarx Corp., 09-02046, U.S. District Court, Northern District Illinois (Chicago).