Skip to main content

Sears Holdings v. Lampert’s New Sears: Round Two on Insolvency

Old Sears versus New Sears and Edward S. Lampert are fighting another battle in bankruptcy court and, of course, they’re fighting over money again.

Sears Holdings Corp. is the old Sears company that’s still a debtor in bankruptcy court proceedings. New Sears is the reorganized operation acquired in February for $5.2 billion by Lampert’s ESL Investments, whose official name is Transform Holdco LLC, an affiliate of ESL. And now the two still can’t seem to stay away from the court system.

The fact that they are fighting again shouldn’t be a surprise. Creditors in the Sears Holdings Corp. bankruptcy case didn’t want Lampert to get the nod to buy Sears. They were pushing for a liquidation, saying that Sears’ assets were worth more now than later on in the event the retailer–operating the Sears and Kmart nameplates–were to go under a second time. And the unsecured creditors’ committee argued that the focus should be on securing assets so creditors can be paid on their claims. But that would have meant denying the retailer a second chance at life and more importantly the loss of 45,000 jobs, a fact that wasn’t lost on U.S. Federal Bankruptcy Judge Robert Drain in White Plains.

One other key claim then–and the reason sale negotiations took so long as creditor constituency groups haggled over pricing working to get the highest valuation for the debtor’s estate–was the fear of being administratively insolvent. Administrative insolvency means the debtor–Old Sears–can’t even pay its administrative claims comprising largely of fees for professionals working the case, forget about even money left over to pay a portion of unsecured creditor claims.

And it is administrative insolvency that’s at the heart of the latest legal drama. Unfortunately for both sides, neither one can really afford another legal battle.

Related Stories

Last Friday, New Sears filed a motion in Manhattan bankruptcy court in White Plains seeking mediation to resolve alleged breaches of the asset purchase agreement that governed Lampert’s acquisition of the operations of the bankrupt retailer. Allegations include delayed payment of millions of dollars of accounts payable, which in turn “artificially inflated” the amount New Sears agreed to pay, as well as New Sears receiving only $41 million in prepaid inventory, even though the purchase agreement contemplated $147 million in prepaid inventory, resulting in an inventory shortfall. The court document said the alleged breaches impair its “going-forward strategy.”

“Transform Holdco LLC is willing to work with the debtors to resolve any disputes expeditiously and believes that a mediator can facilitate that process, help the debtors avoid unnecessary expense and allow us to keep our full focus on turning around the new Sears,” a spokesman for New Sears said.

The initial motion noted that while it has raised concerns with Old Sears, the debtor has “taken an increasingly adversarial position with respect to the concerns raised by [New Sears] and have rejected the suggestion of mediation.”

Old Sears followed on Monday with a motion seeking enforcement of the asset purchase agreement and a request to compel New Sears to immediately hand over $57.5 million of “estate funds” it said New Sears is holding onto “unlawfully.” The court document said the latter amount was from Old Sears’ bank accounts that New Sears got control over because supposedly New Sears didn’t have time to set up new accounts before the closing date.

Old Sears also said New Sears is “well aware of the extent to which the debtors have limited resources to engage in protracted litigation.”

Old Sears would rather Judge Drain adjudicate the dispute. And there could be a good reason why.

Mediation typically tries to get the parties to agree to some resolution. While the process costs less, it’s nonbinding unless the parties decide to voluntarily agree to accept the resolution that’s then memorialized in an agreement. And if they can’t get to that agreement, the whole process becomes a waste of time and they end up back in court.

A court hearing before Judge Drain has been slated for March 21.