Sears store Streets of Southglenn, Sears store in Streets of Southglenn. Signs mark the closing of a Sears store in the Streets of Southglenn mall in Littleton, Colo. Sears confirmed Thursday, Jan. 17, that chairman and largest shareholder Eddie Lampert's hedge fund has won tentative approval for a $5.2 billion plan to buy 425 stores and the rest of its assetsSears Survival - 31 Dec 2018

The fate of Sears remains in limbo as Eddie Lampert and his hedge fund ESL Investments wait to see if their bid to reclaim Sears is approved by a bankruptcy judge. The answer will be determined on Feb. 1.

On the line are tens of thousands of jobs and roughly 425 Sears and Kmart stores around the nation. But avoiding liquidation might not spare Lampert from being liable to creditors for previous deals under his leadership.  

In fact, when Sears Holdings Corp. accepted Lampert’s $5.2 billion bid to save the company from bankruptcy earlier this month, one important provision was missing: a clause that lets Lampert off the hook for pre-bankruptcy deals he tried to execute while in charge of Sears, according to multiple sources. That means whether or not Sears lives or dies, Lampert and ESL can still be sued.     

The deals, while profitable for investors, made Lampert a very rich man. Some critics argue that Lampert and his team designed the deals for his own benefit and now that Sears has failed he should be held liable to the creditors who fronted the money.

Sears filed for Chapter 11 bankruptcy protection on Oct. 15, with massive debt payments that the 126-year-old retailer couldn’t meet.

With so many layers of secured and unsecured debt during bankruptcy “creditors pretty much have to look to litigation as their only source of recovery,’ said Stephen Lubben, a bankruptcy lawyer and professor of law at Seton Hall University. He pointed out that creditors can challenge past transactions under both federal bankruptcy law and corporate state law.

While it is reasonable to assume Lampert and ESL have their own lawyers protecting them from future litigation, Lubben said allegations from creditors who claim wrongdoings, “don’t have to be airtight, just plausible enough to possibly get some leverage — and money — out of any source that might be available.”

During Lampert’s 15-year tenure at Sears he wore various hats, including chief executive officer and chairman, as well as Sears’ largest shareholder and debt holder. One of the criticisms was that was too much power for one person in a company the size of Sears — once America’s largest retailer. But Lampert was a seasoned investor and businessman. Two of his most notable deals were a 2014 spin-off of Lands’ End and a transaction with real estate firm Seritage Growth Properties.

The Lands’ End deal netted Sears $500 million and was pitched as a way to increase shareholder profits. The deal matched Sears stockholders shares — including those of Lampert — in Lands’ End shares. ESL also owns a majority stake in Lands’ End.

Meanwhile, Seritage Growth Properties bought 235 Sears and Kmart-branded stores in 2015 for $2.7 billion. For as long as Sears survives, the real estate group will continue to collect rent money off the spaces.

A Sears department store in Saugus, Massachusetts, USA 09 January 2019. Sears chairman and former CEO Eddie Lampert is being given an additional chance to save the Sears Holdings Corp., that also owns Kmart stores, from liquidation by putting up 120 million US dollars (104.1 million euros) on 09 January 2019.Sears department store in Saugus Massachusetts, USA - 09 Jan 2019

A Sears department store in Saugus, Mass.  CJ GUNTHER/EPA-EFE/REX/Shutterstock

Prior to Sears’ bankruptcy there were about 700 Sears and Kmart stores open nationwide. Since then more than 200 store closures have been announced. That means Seritage is tasked with finding new tenants for closing stores. The extensive project would be made even larger if all of Seritage’s Sears stores were to go dark at once from a liquidation. Keeping Sears alive — even for a short time — also gives Seritage more time to find new tenants, often ones that pay higher rent, while still collecting hundreds of millions of dollars in rent.  

Sears shareholders benefited from the deal, too, as they were allowed to purchase Seritage shares as a result of the endeavor. The most notable among them was Lampert, who, in addition to being a shareholder and real estate developer, is on the chairing committee of Seritage.  

Even the acquisition of Kmart in 2005, an attempt to revive two legacy retailers while pulling Kmart out of bankruptcy, did little to bring Sears back to its once iconic status. In the last 10 years, Sears Holdings Corporation’s revenues have fallen from more than $50 billion to $16.7 billion. That’s a 67 percent decline.  

Like most negotiations, Lampert and ESL had to adjust their offer several times — from $4.6 billion to $5 billion to $5.2 billion — before they won at auction. It’s no surprise then that the legal release from previous deals, which was part of the original bid, was eliminated during negotiations.  

Even so, if the bid is accepted by a bankruptcy court, Lampert and ESL would be getting what remains of Sears at a bargain.

Meanwhile, creditors are trying to prevent that from happening. The day after Lampert won the bid at auction, the Creditors’ Committee, comprised of unsecured creditors, filed a motion asking the courts to reject the offer, calling the bid to save Sears “nothing but the final fulfillment of a years-long scheme to deprive Sears and its creditors of assets and its employees of jobs while lining Lampert’s and ESL’s own pockets,” according to court documents.

“Nothing can undo Sears’ excruciating, slow-motion destruction at the hands of Lampert and ESL,” the court documents read. “Throughout these proceedings, Lampert and ESL have painted themselves as saviors, stating that their bid will save the few jobs they have not already eliminated — but for how long? They have failed to set forth a business plan that offers any viable go-forward path. Sears simply cannot survive as a going concern.”

ESL has helped finance billions of dollars worth of transactions for Sears over the past few years. Representatives from the firm responded to the motion with a statement saying ESL and Lampert have always acted in “good faith” on behalf of shareholders.  

Lawyers for creditors would not respond to a request for comment.