Judge approves liquidation of California retailer Gottschalks

WILMINGTON, Del. — A U.S. Bankruptcy Court judge on Wednesday approved the liquidation of Gottschalks, a storied California-based department store chain whose inventory will now be sold lock, stock and barrel to pay off crushing debts.

The liquidation sale approved by Judge Kevin Carey following last-minute negotiations will begin Thursday and last an estimated 10 weeks.

"It's very tough," said Gottschalks Chief Executive James Famalette, pausing to wipe away tears. "If we could have had more time, we could have saved" the company.

Even as a consortium of liquidators moves in to sell off the inventory from 55 department stores and three specialty stores in six Western states, however, Famalette held out some hope Wednesday that some version of the 105-year-old Fresno, Calif., company might yet arise out of Chapter 11 bankruptcy. Famalette said that a Chinese company, Shandong Commercial Group, remains potentially interested in keeping the stores open after some fashion.

Famalette said he remains "in communication" with the Chinese firm. Potentially, attorney Stephen Warren told the court Wednesday, Shandong could be in a position to buy the Gottschalks' name as well as some of its store properties, which are being sold separately from the stores' inventory.

"I'm sure the employees would be in favor of that," Carey said.

A consortium of liquidators, including SB Capital Group of New York, Tiger Capital Group of Boston, Great American Group of Los Angeles and Hudson Capital Partners of Newton, Mass., beat out one other competitor Monday. The Monday auction lasted 12 hours and went through "dozens of rounds," said Warren, of Los Angeles-based firm O'Melveny & Myers, which represents Gottschalks.

The winning consortium guaranteed a 98 percent return on Gottschalks' inventory costs, which are valued at about $106 million. An additional $3 million was offered for fixtures and equipment. Warren and Famalette called this a good price. The revenues will be used to pay off the stores' creditors, whose names are spelled out in more than 500 pages of court documents.

"All of the parties were quite pleased," Warren said, adding that the bid should mean "a very robust dividend to the unsecured creditors."

James L. Schaye, the president and chief executive of Hudson Capital Partners, said Gottschalks' customers will see "going out of business signs" and "progressive discounts" starting Thursday. He said he'll strive to "keep the integrity of the store" alive even as the sale proceeds.

"We will sell everything," Schaye said.

Famalette, who has served as Gottschalks' CEO since 1997, added that "you're auctioning off history" with the sale of everything the store has to offer. He expressed sorrow, as well, for some 4,000 store employees, a number of whom he said have been e-mailing or writing him in recent days.

But Gottschalks' real estate holdings, including its headquarters, are being sold separately from the stores' inventories. Carey set a May 15 date for an auction of the company's leases, and a July 7 date for an auction sale of the chain's San Luis Obispo, Calif., store. The other real estate property will be auctioned sometime later.

Shandong wasn't able to clear Chinese government regulatory hurdles in time to offer formal bids at the Monday auction.

"It's a little bittersweet, to say the least," Gottschalks attorney Warren said. "This is a company that has faced incredible obstacles over the past six months."

Judge Carey formally accepted the liquidation proposal, following an off-and-on hearing in his fifth floor courtroom that lasted several hours. During an extended break, negotiators huddled in small groups, confided over cell phones and tapped on their BlackBerrys while they worked out final agreements. One of the last hurdles, finally resolved, was how to handle the inventory from Estee Lauder, which doesn't want its brand hurt by having prestige products sold at a discount.

"We need to protect the brand," said attorney Jeremy Ryan, representing Estee Lauder. The cosmetics maker will repurchase most of its inventory.

Famalette composed himself after the hearing ended, citing "the emotional drain of the last three or four months," even as he expressed hope that the Chinese business group might yet keep the Gottschalks' name alive.

"We're going to do everything we can to keep them interested," Famalette said.