J.C. Penney’s Johnson Cleanup Includes Unpaid Contractors

J.C. Penney Contractor Lawsuits Add Challenges to CEO’s Cleanup
Building brand-focused shops in about 680 J.C. Penney stores was at the heart of Ron Johnson’s strategy when he joined the department store chain in November 2011. Photographer: Victor J.Blue/Bloomberg

Myron Ullman has another item on his to-do list as he tries to revive J.C. Penney Co.: dealing with litigation alleging the department-store chain didn’t pay for store upgrades ordered by predecessor Ron Johnson.

EMJ Corp., a general contractor based in Chattanooga, Tennessee, has filed liens totaling $2.3 million and lawsuits against the retailer in three states, saying it refused to pay for work completed in September. R&R Packaging Inc. of Gravette, Arkansas, has a pending action claiming it’s owed $4 million for installing wireless Internet networks in J.C. Penney stores across the country last year.

The lawsuits and liens may add to the challenges facing Ullman as he seeks to return J.C. Penney to profitability after the chain lost $985 million last year. The opening of some of its renovated home departments will be delayed and a media event to unveil them will be pushed back three weeks to June 6, the company said today.

Since Ullman replaced Johnson as chief executive officer on April 8 he has shaken up the real estate and construction division. At least four senior executives, including three who worked with Johnson when he was running Apple Inc.’s retail operations, have left.

Building brand-focused shops in about 680 J.C. Penney stores was at the heart of Johnson’s strategy when he joined the department store chain in November 2011. Johnson also agreed to sell Martha Stewart-branded home goods, which prompted Macy’s Inc. to sue both Martha Stewart Living Omnimedia Inc. and J.C. Penney, alleging sales of Stewart-branded products violates an exclusivity deal between Martha Stewart and Macy’s.

Caused Delays

The R&R complaint, filed Sept. 21 in federal court in Fayetteville, Arkansas, describes a company struggling to meet deadlines on the store remodels. R&R representatives often showed up at scheduled times to perform work at a store, and J.C. Penney wasn’t ready, which in turn caused delays and pushed up costs, according to the complaint.

“This was evidence of their inability to execute an aggressive plan that was pushed down under this Ron Johnson re-branding,” John Scott, a lawyer for R&R, said in an interview. “They have no defense for not paying for legitimate charges.”

Daphne Avila, a spokeswoman for Plano, Texas-based J.C. Penney, declined to comment on the litigation in an e-mail.

Penney Counterclaim

J.C. Penney filed a counterclaim on April 4 in the lawsuit, alleging that R&R breached the contract by failing to finish work on time. R&R informed the retailer before the deadline that it was unable to complete the work, forcing J.C. Penney to pay other contractors. J.C. Penney is asking R&R to reimburse it $736,642 for that work and $1.3 million for materials.

John Scott, a lawyer for R&R, didn’t immediately respond to e-mail and phone messages seeking comment on the J.C. Penney counterclaim.

In a complaint filed by EMJ on April 4 in Chancery Court of Shelby County, Tennessee, a picture emerges of the costs associated with implementing Johnson’s plan. Renovating sections dedicated to the Izod and Liz Claiborne brands cost an average of about $92,000 at two stores in Tennessee, according to the complaint.

$63 Million

That means work for those two brands at 680 stores could cost about $63 million. Johnson’s original vision was to cut the brands sold in J.C. Penney to 100 from 400 and give each its own distinct, renovated space.

“We are parties to several actions pending against J.C. Penney for non-payment,” Jay Jolley, CEO of closely held EMJ, said in an e-mailed statement. “Those amounts we are alleging due include payments we owe to subcontractors and suppliers for the jobs. We’re continuing to work with J.C. Penney in hopes that this can be amicably resolved.”

After the retailer’s balance sheet deteriorated during Johnson’s 17-month tenure, Ullman drew $850 million from the company’s credit facility, J.C. Penney said in a Feb. 15 statement. He’s also seeking to raise an additional $1 billion with the help of financial advisers, people familiar with the situation said earlier this month.

Several of Johnson’s hires have left the company since he stepped down, including Chief Operating Officer Michael Kramer. The upheaval spread to the construction department this week. Ben Fay, executive vice president of real estate, store design and development, has departed after joining J.C. Penney a year ago from a similar role at Apple. Michael Koch, vice president of construction, Robert Laughrea and Todd York, directors in the same unit, are also gone.

Michael Graves

To help right the ship, Ullman brought back Tom Clerkin, a former senior vice president of property development, to advise on the renovations. J.C. Penney still needs to finish the home sections Johnson designed for 500 stores. Scheduled to start opening in the next month, they’ll have areas dedicated to such brands as Michael Graves and account for about 15 percent of selling square footage.

J.C. Penney rose 12 percent to $17 at the close in New York after billionaire George Soros disclosed a stake in the company that made him its fourth-largest shareholder and CNBC reported the department-store chain had a $1.75 billion loan commitment from Goldman Sachs Group Inc. The shares had declined 23 percent this year through yesterday compared with an 11 percent gain for the Standard & Poor’s 500 Index.

The cases are R&R Packaging Inc. v. J.C. Penney Co. 12-cv-05215, U.S. District Court, Western District of Arkansas (Fayetteville); EMJ Corp. v. J.C. Penney Properties Inc., Chancery Court of Shelby County, Tennessee; EMJ Corp. v. J.C. Properties Inc., 13-18868, District Court of Harris County, Texas; EMJ Corp. v J.C. Penney Properties Inc., 13-00101, Circuit Court of DeSoto County, Mississippi.

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