By Andrew Scurria
J.C. Penney Co. is flirting with collapse, eager for lenders to agree to buy its assets out of bankruptcy after talks broke down with potential bidders including landlords Simon Property Group Inc. and Brookfield Property Partners LP.
"We've hit a stalemate" in negotiations with several outside bidders, Penney's bankruptcy lawyer Joshua Sussberg said Monday during a hearing in U.S. Bankruptcy Court in Corpus Christi, Texas. The department-store chain instead will pursue a bankruptcy sale to top lenders, including H/2 Capital Partners LLC, that would turn them into owners in exchange for debt forgiveness, Mr. Sussberg said.
"Our lenders are no longer going to be held hostage in negotiations," he said, adding that Penney intended to negotiate and document the lender deal within the next 10 days. No agreement has been reached.
Putting the retail assets in lenders' hands wasn't the first choice for Penney or the lenders. Their lawyer, Andrew LeBlanc, said the other bidders "have been a disappointment" and that trying to hammer out a takeover so quickly is a "heavy lift."
Negotiations have dragged on past several lender-imposed deadlines. The longer Penney lingers in bankruptcy, the greater the chance of a liquidation that would dismantle the company's retail operations and put most of its 70,000 employees out of work.
Penney officials had been in advanced talks with Simon, the biggest mall owner in the U.S. by number of locations, and Brookfield, another big shopping-center company, about the sale of the chain's retail operations and some real estate. Private-equity firm Sycamore Partners also submitted a bid.
Mr. Sussberg said talks had stalled as "negotiating postures and egos have not necessarily been set aside." The lawyer had previously expressed optimism that a deal to preserve the business was within reach.
Brookfield declined to comment. A representative for Simon didn't immediately respond to a request for comment.
After years of missteps, Penney filed for bankruptcy in May when the coronavirus pandemic shut down nonessential shopping across the country and forced a parade of department stores and other retailers into chapter 11.
The company has since reopened stores but roughly 150 of the 850 locations it had when it entered bankruptcy are closing for good.
Mr. Sussberg said Monday that more stores will be shutting their doors. Stores inside Simon and Brookfield malls had remained open as the landlords negotiated with the company, but some of those will now be slated to close, according to a person familiar with the matter.
Simon and Brookfield emerged as the leading contenders to buy Penney's retail assets in recent weeks, eclipsing other bidders. Simon's interest marked its latest foray into acquiring distressed tenants after it participated in buying Forever 21 Inc. out of chapter 11 in February and purchasing Aéropostale Inc. in 2016.
Simon has agreed to buy Brooks Brothers Group Inc. out of bankruptcy in a joint bid with apparel-licensing firm Authentic Brands Group LLC. The mall owner has also been in discussions with Amazon.com Inc. about the possibility of turning space left by ailing department stores like Penney into Amazon distribution hubs. Penney is one of Simon's top anchor tenants, second only to Macy's Inc.
Penney entered bankruptcy proposing to split its retail operations and its real-estate holdings into separate businesses. The company was seeking bidders to take control of an operating company that would hold Penney's intellectual property and most of its stores.
Lenders were expected to carve out Penney's distribution centers and 160 stores into investment trusts while writing off portions of a $5 billion debt load.
Negotiations stalled over disagreements about whether the landlords or the lenders would have authority to close or sell stores, according to people familiar with the matter. Penney is now seeking a sale to lenders including H/2, Sixth Street Partners and Sculptor Capital Management through a credit bid, allowing the lenders to take control of the assets by forgiving debt.
Write to Andrew Scurria at Andrew.Scurria@wsj.com