Sears is back in court.
Just two months after Edward Lampert, former chief executive officer of Sears, bought the remains of Sears Holdings Corp. out of bankruptcy for $5.2 billion, creditors are continuing their beef with the company.
On Thursday, the restructuring subcommittee, which represents unsecured creditors of Sears, along with other shareholders and investors, filed a complaint against Lampert, his hedge fund ESL Investments; Treasury Secretary Steven Mnuchin, a former director of Sears and ESL executive; Kunal Kamlani, the president of ESL and Seritage Growth Properties, the real estate group that housed some of Sears’ most profitable stores, among others, demanding their money back.
The suit alleges Lampert and his crew knew the retailer was doomed and engaged in a “years-long strategy of stripping out Sears’ most valuable assets,” as stated in the filing, “to the great detriment of the company and its creditors.”
Altogether they claim Lampert had more than $2 billion worth of assets transferred to himself before Sears’ Oct. 15 bankruptcy.
“These transfers were unmistakably intended to hinder, delay and defraud creditors and/or occurred when the company was insolvent and had insufficient capital to continue its operations and to repay its billions of dollars in debt,” the court documents state. “Had defendants not taken these improper and illegal actions, Sears would have had billions of dollars more to pay its third-party creditors today and would not have endured the amount of disruption, expense and job losses resulting from its recent bankruptcy filing.”
In addition, the committee claims Lampert and his crew produced fake financial documents that painted a very different view of the company, one where “the company would experience an immediate and dramatic turnaround from deep and mounting losses to sudden profitability.”
The creditors are asking for a trial by jury.
But ESL “vigorously disputes” the accusations, according to a statement released from the hedge fund, even going as far as calling them “baseless allegations and fanciful claims.”
A representative for ESL pointed out that Sears’ market value was between $2.5 billion and $5 billion at the time of the bankruptcy sale. “Which demonstrates the company’s solvency and supports the solvency opinions the company received from a notable expert in conjunction with such transactions. In addition, the company received proceeds in excess of $3 billion from these transactions, all of which were applied to reduce debt and fund operations, and all of the referenced transactions treated every shareholder equally from an economic standpoint.
“All transactions were done in good faith, on fair terms, beneficial to all Sears stakeholders and approved by the Sears board of directors, made up of a majority of independent directors, as well as the company’s related party transactions committee, which was itself comprised of independent directors and advised by separate independent financial and legal advisors,” the ESL representative continued. “As we have previously said, the debtors’ allegations are misleading or just flat wrong.”
Sears, once America’s largest retailer, filed for bankruptcy in the fall. At the time, the insolvent retailer was burning through about $125 million in cash a month and the total store count had fallen to fewer than 700 combined Sears and Kmart stores. That’s a noticeable difference from the roughly 3,700 stores Sears had during its peak in 2006. The store fleet was down to just 425 during the February bankruptcy hearing. Sears revenues had also dwindled to just $16.7 billion in 2018, down from $53 billion in 2006.
During the highly contested bankruptcy hearing, creditors asked a New York bankruptcy judge to reject Lampert’s bid, which would have meant an immediate liquidation of Sears. Still, creditors argued this was the surest way to get their money back. But Lampert and his crew argued that dissolving Sears would put tens of thousands of people out of work.
After Lampert’s bid was approved, he formed Transform Holdco, the “new Sears,” by way of ESL.
Earlier this month Transform Holdco placed a bid to acquire the remaining shares of Sears Hometown & Outlet Stores, the company that spun off of Sears in 2012.
Lampert, who was ceo and chairman of Sears at the time of the 2012 spin-off, owns 58 percent of Sears Hometown and Outlet Stores, through ESL and its affiliates. ESL is also the majority owner of Transform Holdco.
The proposal, if approved, would mean Lampert would own 100 percent of Sears Hometown and Outlet Stores. But a week after the proposal was made public, a new development arose: it was revealed that Sears Hometown and Outlet Stores may also be facing liquidation. Shares of the spin-off are down nearly 90 percent in the last five years.
But Lampert filed a regulatory document expressing “his opposition to any dissolution of the Hometown segment,” and asked the U.S. Security and Exchange Commission to remove two key members of the Sears Hometown and Outlet Stores board — William Phelan and David Robbins — and replaced them with fresh faces.