More Merry-Go-Round claims paid

Bankruptcy trustee to distribute funds from $185 million settlement


June 23, 2000|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

The bankruptcy trustee for defunct clothing chain Merry-Go-Round Enterprises is preparing to disburse funds from a legal settlement to pay the claims of some former employees and vendors.

Deborah Hunt Devan, the court-appointed attorney who handled the chain's liquidation, said she soon will seek court approval to distribute $8 million of the $185 million that accounting giant Ernst & Young LLP paid last year to settle a lawsuit against it.

The lawsuit, filed by Devan and settled in April 1999, alleged that the accounting firm's bungling led to the chain's downfall.

The next round of disbursements will cover mainly severance, vacation and sick pay for employees.

Ernst & Young paid the settlement late last fall. In January, a federal bankruptcy judge approved $71 million in legal fees for Stephen L. Snyder and two lawyers in his Pikesville firm who represented Devan in the suit. Under a previous agreement with the trustee, the attorneys had been entitled to 40 percent of the settlement amount.

Court costs took about $2 million, and income taxes still must be paid, which could amount to some $10 million, Devan said.

Creditors, who range from suppliers to former employees, are being paid according to priorities determined by bankruptcy statutes. For instance, secured creditors, such as lenders holding mortgages or liens on vehicles, were the first paid. Some of those payments came from the $70 million brought in by the sale of the company's assets, such as its warehouse and other real estate, cars, merchandise and equipment.

Employees who remained with the company longest have a higher priority than those who left before them.

Some employee claims have already been paid or at least partially paid. Many employees received their severance pay when they were let go - most before 1996. And most employees received their 401k benefits within six months of being laid off, as well as bonuses from going-out-of-business sales.

So far, at least $10 million has been paid to the 1,400 employees who filed claims in 39 states, and they will likely get a total of $20 million.

Those claims are only a fraction of the entire 10,000 claims.

Devan hopes to seek court approval within the next month to distribute the next $8 million to employees, most of that for severance, vacation and sick pay. She estimates the money would reach the employees by late fall.

"The bulk of the 1,400 had valid claims," Devan said. "Anyone who had a valid claim will get paid the full, allowed amount of the claim."

That means, for instance, that an employee might claim to be owed three weeks vacation, but might actually be owed two weeks, according to employment records. In such a case, the employee would get two weeks, she said.

Devan said she expects to take another year to completely settle all claims.

She and her staff have been in contact with most employees and other creditors and have gotten few questions from them.

But "the biggest question is from former stockholders, and the answer is no, there is not enough to make payments to the stockholders," she said. "They are the lowest priority and there won't be enough funds to pay anything to them."

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