Kmart, Penske reach compromise on shutdown of auto centers

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Posted 8:31AM on Wednesday, April 10, 2002

CHICAGO - Kmart reached an agreement Tuesday with business partner Penske on how best to shut down the company's auto service centers at more than 550 Kmart locations nationwide. The agreement was the product of hours of negotiations Monday and Tuesday between the two feuding partners. Penske closed down its auto centers over the weekend despite efforts by Kmart to keep them open, including a temporary restraining order issued Saturday by U.S. Bankruptcy Judge Susan Pierson Sonderby which attorneys said came too late. The closing left 4,000 Penske employees out of work and upset Kmart attorneys claiming that the unilateral action would hurt the image of their company as it tries to dig itself out of bankruptcy. Kmart, which had $37 billion in sales in 2000, filed for reorganization under chapter 11 in January, citing disappointing holiday sales, a scarcity of available cash and plummeting share prices. After presenting the agreement to Sonderby on Tuesday night, representatives of both Kmart and Penske declined to comment further. Under terms of the agreement, Penske has earmarked funds for closedown expenses, the two sides said in a joint statement. They said those expenses included facility restoration, removal of hazardous waste and materials associated with the winding down and money to support the future warranty needs of Penske Auto Centers customers. Penske Corp., which operated the auto centers through two subsidiaries, approved spending $10 million for salaries, severance and future medical expenses of center employees, the statement said. Penske also agreed to pay $6 million to Kmart under terms of a master lease guarantee. The auto centers rented space from Kmart. In addition, Penske agreed to waive a $5 million claim arising from Kmart's previously announced plan to close 283 of its 2,114 stores across the nation as part of its effort to restore its profitability. Penske raised eyebrows on Monday when one of its documents filed with the court said that Kmart had informed it of a plan under which the retailer might close down as many as 700 additional stores nationwide. Kmart executives immediately denied that there was such a plan. In the joint statement issued by the two companies, Penske said that the report "was not based on any business plan, memorandum or other documentation provided by Kmart to Penske." Kmart reiterated that it plans no additional store closings and that any in the future would be part of a blueprint due later this year for emerging from bankruptcy. The agreement document filed with the court also provided that the two companies would "release any and all claims against one another." Attorneys said that agreement effectively dropped a lawsuit filed by Kmart asking unspecified compensatory and punitive damages from Penske for the unilateral decision to close the auto servicing centers. The two companies said that over the next two days they will present the agreement to committees of Kmart's bankers and creditors and be back in court on Friday to report to the judge on their progress.