Kmart Trust Questions RSI Billing, MarketFoods Files for Bankruptcy
by February 14, 2005 12:00 am 408 views
MarketFoods Ltd. of Rogers, which owns The Market at Pinnacle Point, filed for Chapter 11 bankruptcy protection on Jan. 24 and closed its upscale grocery store near Chicago.
In the meantime, Retail Strategies International Inc. of Rogers, a sister company also owned by Richard Donckers, is under fire for billing Kmart Corp. $2 million in “suspect” consulting fees as the ailing retailer careened toward the largest bankruptcy in U.S. retail history.
“We’re looking for money that was diverted to RSI before Kmart filed for bankruptcy in January 2002 — probably $2 million,” said Richard Chesley of Chicago, attorney for the Kmart Creditors Trust.
David Montoya is at the center of the investigation. He’s one of six former Kmart execs that the Trust sued for “gross mismanagement” and taking lavish perks as the retailer’s 2002 bankruptcy loomed. He’s also vice president of operations for MarketFoods.
“We brought an action against David Montoya for his conduct with Kmart, which included his dealings with RSI,” Chesley said.
Neither Donckers nor Montoya returned our telephone calls requesting a comment.
Kmart Suit
In a lawsuit filed in November 2003, the Trust said Mark Schwartz, Kmart’s former president and chief operating officer, hired “friend and crony” Montoya in 2001 as an RSI consultant to work at Kmart’s Troy, Mich., headquarters. The move was apparently an attempt to circumvent a non-compete agreement with Big V Supermarkets of Florida, N.Y., where both men previously worked.
Big V found out, and Kmart paid more than $430,000 to settle the non-compete dispute.
Afterwards, in September of 2001, Kmart went ahead and put Montoya on the payroll as executive vice president of store operations. Kmart fired Schwartz a few days before filing for bankruptcy in January 2002. Without Schwartz there, Montoya was demoted to senior vice president of special divisions on Feb. 2, 2002, and fired on March 22 of that year.
The Trust said Montoya and the five other execs — including former CEO Charles C. “Chuck” Conaway — squandered $1 billion in the two years before Kmart filed for bankruptcy. The frills including things like nannies, dental work, Jaguar automobiles, $2 million for Schwartz’ moving expenses and a flight for 60 to Las Vegas — all at Kmart’s expense. BusinessWeek magazine referred to the six as the “Kmart frat boys.” The U.S. Attorney’s Office, FBI and Securities and Exchange Commission have all been involved in the investigation.
Besides the $2 million paid to RSI, the Trust wants to recover $28.8 million in retention loans made by Kmart to the six executives, including a $750,000 loan to Montoya.
On Feb. 15, 2002, one month after Kmart filed for bankruptcy, James Adamson, Kmart’s chairman, received an anonymous letter urging him to look into RSI’s relationship with Kmart, according to a July 23, 2002, article in the Detroit Free Press.
“Cronyism was one of Mr. Schwartz’s tools used extensively in many different ways,” the letter stated. “Mr. Schwartz entered contracts with closely held companies relating to personal friends. RSI Consulting is an example. Expenses associated with that contract should be carefully reviewed.”
Kmart said it had hired RSI to help with expansion. Since the troubled retailer was no longer in expansion mode, it no longer needed RSI. Kmart cancelled its three-year contract with RSI in April 2002, a month after firing Montoya.
In June 2002, Donckers hired Montoya to work for MarketFoods, which is operated by RSI.
Both Montoya and Donckers worked with Schwartz when the three were employees of Wal-Mart Stores Inc. of Bentonville in the early 1990s.
Donckers founded RSI in 1998 as a consulting firm to national retailers. Donckers has an impressive resume in the field. He was hired by Sam Walton to develop a plan for selling groceries in Wal-Mart Supercenters, which has been a phenomenal success. Donckers worked for Wal-Mart as a vice president from 1987 to 1993.
The same month Donckers hired Montoya at MarketFoods, Kmart lawyers contacted Donckers to discuss the work he had done for the retailer and his relationship with the company, according to the Free Press. “Investigators are questioning whether Donckers was paid more than businesses with no ties to Kmart insiders,” the Free Press reported.
Donckers disputed the allegations of cronyism, saying he was hired by three Kmart executives to help the retailer develop strategies for its supercenters, food distribution and logistics, and international markets.
“I traveled at their direction all over the country and the world, trying to develop real estate locations and store designs, new store prototypes,” Donckers told the Free Press. Donckers said he was paid a couple of million dollars before Kmart filed for bankruptcy, owing him about $510,000 in fees and expenses from the fourth quarter of 2001, making him a creditor in Kmart’s bankruptcy. He said Kmart also owed him another $120,000 for the first quarter of 2002. Donckers said the balance of his contract was worth $1.4 million and was to expire in fall 2003.
Red Flag Special
RSI filed a $2 million claim against Kmart in the bankruptcy court for “services performed,” sending up a red flag to the retailer’s auditors. That’s in addition to the $2 million the Trust believes Kmart already paid RSI before filing for bankruptcy. Chesley said he doesn’t believe RSI was paid for the remaining $2 million billed to the bankrupt Kmart.
“While Montoya was working for Kmart as an RSI consultant, neither Schwartz nor anyone else monitored RSI’s bills, nor did anyone monitor the work allegedly performed by RSI,” according to the Kmart suit. “In less than a year, RSI billed Kmart over $4 million for work performed solely by Montoya and one other employee [Richard Donckers]. RSI never produced any reports, memorandum or other written work product to substantiate this enormous sum that was paid by the company.”
Kmart emerged from bankruptcy in May 2003, but the Trust is pursuing the lawsuit on behalf of former Kmart vendors.
Last November, Kmart announced that it is buying Sears, Roebuck & Co. in an $11 billion deal.
Montoya, who is still with MarketFoods, is scheduled for an arbitration hearing in the spring of 2006 involving his stint at Kmart.
“These aren’t my favorite people,” Chesley said. “Mr. Montoya and the individuals he worked with at Kmart left a significant legacy of billions of dollars in debt.”
Donckers told the Free Press that RSI’s books are open for Kmart’s auditors to review.
“To my knowledge, I have never heard that,” Chesley said, adding that the Trust hadn’t reviewed RSI’s books as of Feb. 7.
Chesley said the Trust has settled with some of the executives who received loans, but the returns amounted to a “very small” percentage of the original loans.
When deposed on Dec. 4, 2002, by Kmart’s attorneys in Michigan, Montoya invoked the Fifth Amendment and refused to comment when asked about RSI, according to a Feb. 17, 2003, article in The Detroit News.
The newspaper said Donckers was one of three people deposed by the lawyers in 2002 who were not former Kmart employees. The Detroit News quoted Donckers earlier in 2002 saying RSI had been retained in 2001 by Kmart to assist in plans to expand in markets such as the Dominican Republic, Trinidad, Guam and Alaska. Donckers said Montoya worked for RSI as a consultant before he joined Kmart.
“David did work for me,” Donckers told The Detroit News. “He was working in the Caribbean for me.”
Besides Conaway, Schwartz and Montoya, the lawsuit also names David Rots, Kmart’s former chief administrative officer; John McDonald, former chief financial officer, and Anthony D’Onofrio, former executive vice president and chief supply chain officer. None of the former executives have been accused of any criminal wrongdoing.
The lawsuit also targets PricewaterhouseCoopers, Kmart’s accounting firm from 1993 until January 2003, for accounting negligence.
MarketFoods Bankruptcy
In its initial bankruptcy filing, MarketFoods checked the boxes on the form indicating both debts and assets are less than $50,000.
Donckers, as president of MarketFoods, listed five creditors: Arkansas Valley State Bank of Broken Arrow, Okla., Community Bank of Rogers, IFC Credit Corp. of Morton Grove, Ill., KingsPointe Village LLC of Tulsa and Western Finance & Lease of Devils Lake, N.D.
Schedules listing creditors were due in the bankruptcy court on Feb. 8, but the court granted MarketFoods an extension until Feb. 28.
KingsPointe Village mall in Tulsa has been trying to evict The Market at KingsPointe Village, which is owned by MarketFoods.
Mall owners claim the upscale grocery store is several months behind on rent, but Mike Harrison, assistant general manager, said the store is trying to rectify the situation with the mall.
The 22,000-SF Tulsa store, which opened last March, was the company’s second. MarketFoods also planned to open The Market at Jordan Creek in West Des Moines, Iowa, but that store is apparently on hold.
According to the bankruptcy filing, MarketFoods’ owners include Donckers, Montoya and Carlos Rodriguez. Rogers developer Collins Haynes is a passive shareholder in the company.
RSI’s Web
According to RSI’s Web site, the company is an “executive management consulting corporation specializing in retail growth strategies, store design and development, merchandising, operations, and marketing.”
RSI’s clients include Wal-Mart, Fleming Cos., Blockbuster Video, Randall’s Food Markets, Hudson Foods of Rogers (which was acquired by Tyson Foods Inc.), Food Brands America, Hussmann Corp. and Kmart.
“These services have included providing acquisition strategy, operational assessment and marketing direction,” the Web site states.
The Web site says RSI developed The Market at Pinnacle Point “with Rich [Donckers] holding part ownership.”
Before Wal-Mart, Donckers worked for seven years with H.E.B. Food & Drugs in south Texas, where he was responsible for the San Antonio Super Stores. He spent the previous 15 years with Jewel Food Stores in Chicago.
A Feb. 8 Internet search revealed a bio of Montoya on RSI’s Web site. The bio omitted any mention of Montoya being demoted and fired by Kmart. It also didn’t mention that the Kmart Trust sued Montoya to try to recover money they believe he owes.
The Web site did say Montoya worked for Wal-Mart for 10 years “in various management positions” and is a recipient of Sam Walton “Excellence in Leadership” award.
The Web site stated that Montoya opened Wal-Mart’s first international Supercenter in Mexico City.
“David was also responsible for store planning and design in Mexico leading the development of new prototype Supercenters,” the Web site stated.
Montoya spent the previous nine years working for H.E.B. in San Antonio.
Rodriguez, Donckers’ partner in RSI, is another former Wal-Mart, Kmart and H.E.B. employee. He served for 13 years at Wal-Mart, where his duties began as food co-director and ended as international store planning division manager.
Rodriguez was divisional vice president of store development for Kmart, although the Web site doesn’t say when.
Rodriguez worked for H.E.B. from 1970 to 1989.
Rick Donckers, Richard Donckers’ son, serves as director of category management at RSI. He, too, is a former Wal-Mart employee.
Timeline
Early 1990s — David Montoya, Richard Donckers and Mark Schwartz work for Wal-Mart Stores Inc. at the company’s Bentonville headquarters. Donckers helps Wal-Mart set up operations to sell groceries through its Supercenters.
1998 — Donckers founds Retail Strategies Inc. of Rogers, a consulting firm to retailers, and MarketFoods Ltd, through which he plans to open a chain of upscale grocery stores.
June 2000 — MarketFoods opens its first store, The Market at Pinnacle Point in Rogers.
September 2000 — Schwartz becomes president of Kmart Corp.
Early 2001 — Kmart hires David Montoya, now vice president of RSI, as a consultant, apparently violating a non-compete agreement with Big V Supermarkets.
September 2001 — Kmart appoints Montoya as executive vice president of store operations.
January 2002 — Kmart fires Schwartz.
January 2002 — Kmart files for Chapter 11 bankruptcy protection.
February 2002 — Kmart Chairman James Adamson receives an anonymous letter saying he should look into Kmart’s dealings with RSI.
February 2002 — Montoya is demoted to senior vice president of special divisions.
March 2002 — Kmart fires Montoya.
June 2002 — Richard Donckers hires Montoya as vice president of operations for Rogers-based MarketFoods, a sister company to RSI.
January 2003 — The Kmart Creditors Trust files a lawsuit against Montoya and four other former Kmart executives to try to recover money allegedly squandered before the company’s bankruptcy. The suit also questions Montoya’s connection with RSI.
March 2004 — MarketFoods opens a store in Tulsa. Shortly afterwards, it opened a store in Glenview, Ill., a suburb of Chicago.
January 2005 — MarketFoods files for Chapter 11 bankruptcy protection.
January 2005 — MarketFoods closes its store in Glenview, Ill.
February-March 2006 — Montoya is scheduled for arbitration hearings involving the Kmart suit in a Michigan courtroom.