Carter Hawley Bailout Runs Into a Hurdle : Reorganization: A creditors committee urges that an offer from a Chicago investment firm be rejected. That could slow the retailer’s emergence from bankruptcy.

A committee of Carter Hawley Hale creditors said Monday that it has recommended the rejection of a bailout offer from a Chicago-based investment firm, threatening the $240-million bid designed to quickly pull the West’s largest retailer out of bankruptcy.

The committee, seeking a sweetened bid, said it “was not in a position to recommend” the offer from the $1-billion Zell/Chilmark Fund. If more than 20% of the creditors reject the offer it will die, and Carter Hawley’s bankruptcy proceedings could be prolonged as it struggles to satisfy creditors’ demands.

For the creditors, a rejection means turning down the only offer thus far proposed for their claims against the financially ailing retailer. Carter Hawley must wait to see what the creditors--individually or as a group--decide to do.

The announcement also provides an indication to other prospective bidders of what the creditors consider to be acceptable.

Attorneys for the creditors committee said in a one-page statement that they have had discussions with Zell/Chilmark “concerning the possibility of an increase in the price offered.”

Zell/Chilmark announced in July that it would pay creditors 40%, or an estimated $220 million, of the amount that Carter Hawley says it owes them. Zell/Chilmark subsequently increased its offer last month by $20 million to cover certain creditors’ claims above what Carter Hawley says it owes.

According to Carter Hawley Hale records, bondholders and trade creditors together possess more than $500 million in claims against the retailer.

Along with the offer, Zell/Chilmark would lend Carter Hawley Hale Stores $50 million to remodel its stores.

The current $240-million offer, scheduled to expire next Monday, would turn Zell/Chilmark into the retailer’s largest creditor. Many analysts expect that the fund would exact a high price for coming to Carter Hawley’s aid, perhaps a majority interest in the company.

Representatives of Zell/Chilmark could not be reached for comment. A spokesman for Carter Hawley, which sought protection from creditors in February under Chapter 11 of the U.S. Bankruptcy Code, declined comment.

Although individual creditors are free to accept the offer, lawyers for the creditors committee said the announcement could influence others not to accept.

Zell/Chilmark, headed in part by Chicago financier Sam Zell, is a “vulture fund” endowed with $1 billion to invest in ailing companies. Zell, known on Wall Street for his acquisitions of troubled firms, has called the offer for Los Angeles-based Carter Hawley “a financial investment.”

Andrew Bogen, a lawyer for the creditors committee, said creditors will be reimbursed by Carter Hawley--even if the current offer is not accepted--after the company emerges from bankruptcy court. But he added that the final amount that creditors receive in such a case could be below the current offer of 40 cents on the dollar.

Bogen said he did not know what reaction Zell/Chilmark would have to the announcement or even if its representatives had a copy.

Bogen also said he did not know whether other retailers were preparing a bid for part or all of Carter Hawley Hale stores. The creditors committee, in its news release, said “two parties have requested non-public information from Carter Hawley in order to consider submission of a proposal.” But Bogen, who declined to name the two parties, said he did not expect another offer to emerge before the current offer is set to expire Sept. 16.

On that date, attorneys for the Zell/Chilmark fund will appear before a federal bankruptcy judge seeking approval for the fund’s offer and for court assurance that they will be granted the same rights as current creditors. If the offer fails, Zell/Chilmark will try Monday to persuade the court that Carter Hawley should reimburse the fund for legal expenses, up to $1.5 million.

Carter Hawley owns 89 stores in five western states, including Southern California’s Broadway chain, Emporium Capwell in the Bay Area, Weinstocks in the Sacramento area and the Broadway-Southwest, in Arizona, Colorado, Nevada and New Mexico.

The announcement came after the close of trading on the New York Stock Exchange. Stock for the retailer closed Monday at $1.875, unchanged since Friday.