The unsecured creditors committee in the Sears Holdings Corp. bankruptcy isn’t happy with the auction result that named Edward S. Lampert and ESL Investment’s affiliate as the winning bidder—and they’re not going away quietly.
On Thursday, the committee filed a request with the bankruptcy court in White Plains to allow it to file under confidentiality rules a lawsuit against Lampert and ESL. Lampert is the chairman of both Sears and ESL. The committee indicated in court papers that Sears’ downfall was “precipitated by years of misconduct by Lampert, ESL, and others against Sears and its creditors.” It also made clear that it believes Sears board members, handpicked by Lampert and ESL and therefore beholden to them, capitulated to their efforts to control the remaining assets of Sears and deprived unsecured creditors of any chance of recovery. In mega bankruptcies such as Sears, unsecured creditors providing services or goods solely on the debtor’s promise to pay are at the bottom of the food chain and typically see little recovery.
The committee alleged in court papers that after taking control of Sears in 2005, ESL acted under Lampert’s direction to serially asset strip the retailer, “taking Sears’ best assets out of the enterprise to shield them from the claims of other creditors and maximize ESL’s investments in anticipation of these inevitable bankruptcy proceedings.” The court document went on to note the closure of more than 3,500 stores, loss of 250,000 jobs and “untold billions in value.”
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The committee also alleged that Sears was managed as a private portfolio company that existed solely to provide the greatest returns on their investment, and that Lampert was “hopelessly conflicted as he presided over Sears’ descent into insolvency and a persistent state of liquidity crisis.” Those crises enabled Lampert and ESL to burden Sears with more debt held by ESL. The committee previously made known its position on credit-bidding, and in the latest court document said that Lampert and ESL should not be allowed to assert their superior claims over the “creditors they damaged” by using its credit bid to trump other offers.
Past transactions that the committee have been reviewing include the creation of the real estate investment trust Seritage Growth Properties through the transfer of certain Sears’ real estate and the spinoff of Lands’ End
A Sears spokesman declined comment.
A spokesman for ESL said the hedge fund “has been a constant source of financing for Sears Holdings over the past several years, including the extension of $2.4 billion in various secured financings to the company…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…”
The ESL spokesman emphasized that the hedge fund has cooperated fully with the committee’s review, adding, “We reject any assertion to the contrary and will vigorously contest any effort to assert claims against ESL…”
Sears confirmed Lampert’s $5.2 billion bid as the winning offer on Thursday, although there continues to be questions over whether Sears really has a viable business model.