* Files for bankruptcy protection in New York
* To sell assets through court-supervised auction
* Names liquidator Gordon Brothers as bidder (Adds Zale details, background on industry, company)
NEW YORK, Aug 6 (Reuters) - The U.S. jewelry industry, one of the worst hit in the recession, suffered two more blows on Thursday as Finlay Enterprises Inc FNLY.OB, which runs the Bailey Banks & Biddle jewelry chain, filed for bankruptcy, and Zale Corp ZLC.N said it had closed 118 underperforming stores.
Finlay, which also runs the Carlyle and L.Congress jewelry retail chains and jewelry departments at The Bon Ton stores, sought bankruptcy protection in a Manhattan court late on Wednesday, saying it plans to liquidate its assets if it receives no better offers at an Aug. 31 bankruptcy auction.
Zale said on Thursday that the company had closed the 118 stores during its fiscal fourth quarter, bringing its total store closures to 191 for 2009.
Zale had sold the 177-year-old Bailey Banks & Biddle chain to Finlay in 2007 for $200 million.
Finlay had historically sold most of its jewelry through licensed retail locations in U.S. department stores such ase Macy's Inc (M.N), Dillard's (DDS.N), and Lord & Taylor, and had only recently expanded into the stand-alone store format -- buying Carlyle & Co jewelry stores in 2005 and later acquiring L. Congress.
In court documents, Finlay said decisions by the retailers to phase out or not renew Finlay's contracts and the bankruptcy of department store chain Gottschalks, limited the company's financial flexibility and pushed it to begin plans to drop its department store business.
Finlay also cited the economy, the delisting of its stock from Nasdaq and difficulties with vendors, as reasons for its bankruptcy filing.
INDUSTRY IN TROUBLE
Finlay is the latest in a string of jewelry stores that have been affected as consumers spend less.
Whitehall Jewelers WHJHQ.PK and Friedman's Inc were among the first jewelers to file for bankruptcy last year, each holding fire sales to liquidate their merchandise. That put additional pressure on the remaining jewelers like Finlay, which were struggling with weak sales.
Not even high-end jewelers have been spared in the downturn. Doris Panos Designs Ltd and Henry Dunay Designs, both said to have a Hollywood following, sought bakruptcy protection recently.
Finlay said that said that it would seek approval for a court-overseen auction process in which Gordon Brothers Retail Partners is the "stalking horse" bidder. The stalking horse typically sets a floor price for the auction.
Under the stalking horse agreement, Finlay expects to receive $116 million, which could be used to repay creditors, it said in court documents.
As of July 4, New York-based Finlay said it had assets of $332 million and liabilities of $385 million.
Zale said it took a $50 million pre-tax charge related to the store closures and contingent obligations it had related to leases on Bailey Banks & Biddles stores.
Finlay was founded in 1887 as a mail-order jeweler. It sells jewelry at about 77 department store locations and operates about 106 stand-alone jewelry stores.
It has scaled back its operations from the 674 locations it had at the end of January. Macy's accounted for 52 percent of its total sales before it lost its licensing agreement with the chain.
Gordon Brothers has already been working for the company on the sales of inventory in 549 department store locations and 58 of its stand-alone locations. Through July 4, those sales generated $200 million and $37.5 million respectively.
The company has proposed court hearing date of Sept. 2 to approve the sale, according to court documents.
The case is In re: Finlay Enterprises Inc, U.S. Bankruptcy Court, Southern District of New York (Manhattan), No.09-14873. (Reporting by Caroline Humer And Emily Chasan in New York, Aarthi Sivaraman in Seattle and Santosh Nadgir in Bangalore; Editing by Valerie Lee, Maureen Bavdek, Leslie Gevirtz)