Forty additional Sears stores are set to close in February 2019.

ESL Investments Inc. is hoping to set the record straight — and do damage control — regarding its transactions connected to Sears Holdings Corp.

Attorneys for ESL have filed their “preliminary” response to the motion by the Unsecured Creditors Committee on Tuesday seeking expedited discovery in the Sears bankruptcy case.  The court document said that response was filed to “promptly correct the record with respect to the various unfounded allegations raised against ESL” by the Committee’s motion. It called the allegations in the motion “baseless” and “completely divorced from the facts.” Furthermore, the court document stated that “ESL’s actions have always been taken in good faith, on fair terms, alongside third parties, regularly reviewed by independent and experienced advisers, and beneficial to all Sears stakeholders.”

Constituency groups typically seek to expedite certain processes because they think time is critical. In the case of Sears’ bankruptcy, there is a real concern that the company moves toward a liquidation and the nameplates Sears and Kmart end up in the retail graveyard.

The company just said it would close 40 more stores on top of the 142 it said it would shutter on Oct. 15 when it filed its voluntary Chapter 11 petition. And many executives in the retail sector believe that Sears will need to close even more stores. Credit analysts said many of their clients have elected not to ship new goods to the bankrupt retailer, even though it has post-petition financing in place. Over the past two weeks or so, many vendors have filed reclamation claims with the bankruptcy court, seeking a return of goods sold on credit terms. Federal bankruptcy law allows suppliers to demand reclamation when the debtor receives goods within 45 days before the Chapter 11 filing, and was insolvent at the time the goods were received.

ESL is both Sears’ largest creditor and shareholder, and, according to its legal papers, “most significant source of financing in recent years.” The document also affirmed that the hedge fund is “committed to cooperating with any investigation and is already providing information” to the Sears Board’s Restructuring Subcommittee and the Unsecured Creditors Committee. The fact that questions arose over transactions between ESL and Sears, sometimes referred to as intercompany transactions, wasn’t exactly unexpected since Edward S. Lampert is chairman of both ESL and Sears Holdings.

The court document filed by the hedge fund said the financing ESL provided helped Sears to transform its business and had the added benefit of allowing Sears to continue meeting its obligations to creditors, including pensioners. It also said that ESL “never acquired any assets from Sears to the exclusion of other stockholders,” and when it did participate in transactions, did so on a pro rata basis along with other Sears stockholders. The lawyers for ESL noted that participation in publicly announced spin-offs or rights offerings were done on terms “blessed by independent directors.” Moreover, the court document said that financial transactions were documented fully and were approved by directors unaffiliated with the hedge fund and with the counsel of “independent legal and financial advisors.”

And while ESL has claims of over $2.6 billion in debt, the legal document noted that ESL’s investments in Sears did not result in any “windfall” for ESL. It explained that ESL’s equity investment in Sears was worth more than $12 billion in 2007, but fell to more than $5 billion in 2012 and now has a “market value of less than $20 million.”

The legal papers also attacked the Unsecured Creditors Committee’s allegations regarding the July 2015 transaction that involved three joint ventures connected with the then newly formed Seritage Growth Properties. It noted, among other points, that the Seritage partnership units held by ESL were “significantly less liquid than the other shares held by other stockholders,” adding that “ESL was treated differently — but not better — than other stockholders.”

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