The unsecured creditors committee in the Sears Holdings Corp. bankruptcy filed a motion on Tuesday asking the court if it can take expedited “discovery” against ESL Investments, Edward Lampert and others in connection with certain pre-petition transactions.
Lampert is chairman of both Sears and ESL and for over a decade has been the central figure at Sears, which filed for Chapter 11 protection on Oct. 15. Following the filing, Sears formed a subcommittee of the board’s restructuring committee to evaluate prepetition transactions and possible legal actions against both ESL and Lampert. The motion filed in the bankruptcy case stated that lawyers for the unsecured creditors committee have already reached out to attorneys representing the Sears subcommittee and the lawyers representing ESL to coordinate the discovery process.
The discover process can include requests for documents and the depositions of individuals.
The motion said the unsecured creditors committee is convinced there are potential claims arising from the attempts to finance the company’s operations, often involving related-party transactions with controlling shareholders ESL and Lampert. The motion also said the transactions they are reviewing also involved Fairholme Capital Management, another investor that had a significant stake in Sears, and other third parties.
Court documents said the circumstances surrounding the transactions raise the possibility that ESL and other insiders “may have exercised undue influence to siphon value away from the company on favorable terms.” The unsecured creditors committee alleged the parties might have used their inside status to obtain senior debt that positions them to be able to exert “undue influence” over the trajectory of the Chapter 11 cases. It said that ESL has managed to obtain $2.6 billion, or 46 percent of Sears’ funded pre-petition debt, including 73 percent of the second lien debt.
A major concern is the July 2015 rights offering and sale-leaseback transactions that led to the creation of Seritage Growth Properties, a real estate investment trust controlled by ESL. Another possible problematic transaction is the April 2014 spin-off of Lands’ End.
A spokesman for ESL said, “ESL Investments has consistently supported Sears Holdings in its efforts to transform and return to profitability during a period of rapid change and disruption in the retail industry. This support has consisted of a variety of transactions including rights offerings that provided all Sears shareholders the opportunity to invest in businesses separated from Sears Holdings, as well as loans to the company that often involved the participation of third parties.
“We have every confidence that all transactions involving ESL and Eddie Lampert are valid and enforceable, based on fair and reasonable terms, which were approved by independent directors who were advised by independent financial and legal advisors and featured other appropriate corporate governance procedures. Any legal claims that attempt to challenge these transactions will have no merit and we will defend ourselves vigorously against any asserted claims,” the ESL spokesman said.
A hearing on the request is scheduled for Nov. 15.