Tower Records sued over lease sales

Tower Records, the bankrupt 46-year-old music retailer, may have given away $10 million worth of equity when it sold 87 leases to a group of investors last year, lawyers for the company’s creditors said Thursday.

Six weeks after a group of companies bought the leases for $2 million, the consortium resold 37 of them for a $10-million profit, Lawrence E. Rifken, a lawyer for Tower’s main creditor panel said during a hearing.

The transaction was “a shocking return of over 500% on their investment in a mere six-week period of time,” Rifkin said in court papers filed in U.S. Bankruptcy Court in Wilmington, Del. Tower’s $2-million lease sale may justify a lawsuit against its current management, he said.

Tower Records won permission from U.S. Bankruptcy Judge Brendan Linehan Shannon to begin soliciting support for its plan to close the company and distribute about $34 million to creditors owed about $175 million. Tower and its major creditors, including Bank of New York Co., can’t agree on who should control the music retailer as it winds down operations, company attorney Mark D. Collins said in court.

West Sacramento-based Tower declared bankruptcy Aug. 20 and quickly won court approval to sell its assets and close the company. Tower and a group of its vendors want to hire retired bankruptcy lawyer Duane Morse to oversee the distribution of the company’s remaining cash. The main creditors’ panel proposed that a board of directors should run the company, Rifkin said.

Tower’s parent, MTS Inc., had tried to sell the chain since the last time it emerged from bankruptcy in 2004. MTS filed for bankruptcy again in August after competition from online retailers, Internet downloads and discounters caused same-store sales to fall 9% in a year.