NEW YORK — The Kmart Creditor Trust’s attempt to recover some of its losses through a lawsuit may get some help from a recent case involving a store that wound up on the retail industry’s scrap heap.

This story first appeared in the November 21, 2003 issue of WWD. Subscribe Today.

Recent precedent from the $80 million settlement that unsecured creditors of defunct Montgomery Ward obtained from GE Capital Corp. — albeit on grounds different from those in Kmart’s case — could provide a powerful incentive to Kmart creditors to keep pushing for what they believe is rightfully theirs. In the GE/Ward lawsuit, creditors sought at least $500 million in damages, alleging that GE “intentionally misled creditors.” It also sought another $500 million as a restitution claim. The multimillion-dollar settlement, of course, increases the recovery for creditors.

In the case of Kmart Corp., a lawsuit was filed against six former executives on Tuesday by the trust in a state court in Pontiac, Mich. Among the six defendants named were former chairman and chief executive Charles Conaway and former president Mark Schwartz. The trust is seeking recovery of assets for creditors of the old Kmart holding company, which once owned the assets of the retailer.

The old holding company is still mired in bankruptcy proceedings, but the assets it once held are now part of the new firm that emerged from Chapter 11 in May, known as Kmart Holding Corp. The new firm is not a party to the lawsuit and can’t be affected by its outcome.

The 116-page suit alleges that the six former executives cost the bankrupt firm over $1 billion in personal and business expenses through poor management. How so? The creditors charged in the document that the executives’ free-spending ways were part of a pattern of corporate waste: Kmart was billed $106,191 for improvements to a personal residence, including $34,948 for a guard house and $3,590 for a safe room; $100,000 for nannies, and even $230,000 for a trip to Las Vegas for 60 employees.

The trust already has sued six former executives to recover loans given to them by the firm shortly before it went bankrupt. Those claims are in separate legal proceedings before a federal bankruptcy court judge in Chicago.

The latest lawsuit could affect ongoing legal proceedings. As reported, the Detroit offices of the Federal Bureau of Investigation and the U.S. Attorney are conducting active investigations into what led to Kmart’s January 2002 Chapter 11 filing.

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