In the News

Tax deadline looms for Defender publisher

Monday, December 21, 1998
by Jeff Borden

Crain's Chicago Business

With an estimated $400,000 tax payment looming for Chicago Defender publisher Sengstacke Enterprises, Inc., a January 13 hearing to decide the company's direction will be critical.

The company's future has been in limbo since March, when adult beneficiaries of a trust created by late Chairman and Publisher John H. Sengstacke ousted Northern Trust Co. As trustee because they disagreed with the bank's decision to sell the firm.

In addition to publishing the Defender, the city's only African-American daily newspaper, Sengstacke publishes papers in Detroit, Pittsburgh and Memphis, Tenn.

The beneficiaries' inability to find a successor trustee over the past nine months threatens to derail a 10-year installment plan to pay off state and federal estate taxes totaling more than $3.5 million.

The first payment is due Feb. 28, but while the trust controls 70% of Sengstacke Enterprises, it has virtually no cash assets. Thus, a sale or recapitalization of the company is needed to meet tax obligations, but that can't go forward without a trustee.

These are fears that a missed payment would lead the Internal Revenue Service to demand the entire sum.

South Chicago Bank -- a community bank with assets of about $310 million -- is weighing whether to become the trustee, but hasn't made a decision (Crain's, Dec. 14).

Northern's attorney, David A. Baker, a partner at Chicago's McDermott Will & Emery, filed an emergency motion in Cook County Circuit Court Dec. 10 asking that a successor trustee be named, noting that the trust has "now reached a critical point" and that missing the February payment could mean "potential ruinous results to the Sengstacke trust."

Estate and trust attorneys say the delay in naming a successor trustee is highly unusual, but an attorney for the adult beneficiaries says the search for a trustee sympathetic to them has been complicated.

"(The beneficiaries) had an objective, which is to preserve the legacy (of Sengstacke Enterprises) and do so in a way to produce fair value," explains Elias N. Matsakis, a partner at Chicago law firm McBride Baker & Coles.

Though a Chicago-based group of black investors wants to buy the company for $12.5 million in cash, the Sengstacke beneficiaries favor a $10-million recapitalization plan proposes by Detroit businessman Don Barden (Crain's, Dec. 7). Mr. Barden would get a 51% stake, while Myiti Sengstacke and three brothers, adult grandchildren of Mr. Sengstacke, together would get the remainder.

"We're confident the transaction we're presenting is a transaction that meets our clients' objectives and is financeable and doable," Mr. Matsakis says. "Mr. Barden has been extremely supportive in working with the family."

The attorney downplays any urgency to the Jan. 13 hearing. If a trustee is named and subsequently approves the Barden plan, Mr. Matsakis says, a deal could be consummated by mid-February.

But South Chicago Bank President James A. Fitch Jr. -- who emphasizes that the bank hasn't accepted the trustee post -- says the impending tax liability requires that due diligence be accomplished "very quickly... But the tough thing for us is determining whether (the Barden proposal) is as good or better than any other."

Marc J. Lane, a Chicago attorney specializing in trusts and wealth management, says the successor trustee faces a tough scenario fraught with potential legal liabilities. He expects a successor will demand indemnification from the beneficiaries.

"(The beneficiaries) have to find a trustee who can make all these angels dance on the head of a pin and make this work," Mr. Lane says. "The trustee is bearing entrepreneurial risk."

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