Creditors in the Sears Holding Corp. bankruptcy could finally be getting paid after a four-year wait.
Sears and its creditors have reached a $175 million settlement with former CEO and majority owner Edward S. Lampert over allegations he stripped the company of valuable assets and acted in his own self interest. The allegations centered on actions under Lampert’s reign in the years leading up to the company’s October 2018 Chapter 11 bankruptcy. The agreement still needs the approval of a bankruptcy court in White Plains, N.Y.
Approval and payment would finally clear the way for Sears to officially exit Chapter 11 bankruptcy and move forward. The old Sears Holdings no longer has any operations, but a bankruptcy plan still is needed in order to pay unsecured creditors.
Lampert and his hedge fund ESL Investments made headlines when he bailed out Kmart Corp. from bankruptcy in 2003. Two years later, he engineered Kmart Holdings’s merger with Sears, Roebuck & Co. in an $11 billion deal that was supposed to create a formidable competitor to Walmart.
But Lampert was dogged by criticism that he never really understood the retail business. As he struggled with declining sales at the post-merger Sears Holdings Corp., the company got rid of assets including brands such as Lands’ End. He also sold off two of Sears’s crown jewels, the Craftsman tool brand and Diehard automotive battery brands, leaving Kenmore, the appliance maker, in its portfolio. He also sold off 266 properties to a real estate investment trust called Seritage Properties Group that Sears shareholders and ELS created in 2015. Seritage leased back many of the store leases, getting rent from Sears but burdening Sears with the monthly operating overhead.
Following the Chapter 11 filing, Lampert’s plan to acquire Sears Holdings out of bankruptcy garnered strong creditor opposition. Many were pushing for a liquidation instead. But the $5.2 billion going-concern offer from Transform Holdco, LLC (Transformco), an affiliate of ELS, and Lampert as Transform’s CEO, ultimately won bankruptcy court approval a month later.
The Transformco exit plan kept 400 stores open. But even with a new operating balance sheet and smaller footprint, Lampert hasn’t been able to turn things around at “new” Sears. The new Sears under Transformco has been operating on life support. Just three U.S. Kmart stores were still open as of April, a far cry from its nearly 2,500 stores heading into 2001. As for Sears, there are only about 20 full-line U.S. stores still serving shoppers. Both nameplates have a handful of stores in Puerto Rico.
According to Manhattan bankruptcy court documents, creditors in the Sears bankruptcy would receive $175 million as payment of their claims. Lampert and other defendants named in the April 2019 lawsuit filed by creditors, which include past directors and officers, will pay $41.9 million. Insurers who provided directors and officers liability insurance are obligated to pay $125.6 million. The $7.5 million balance will be paid from so-called public shareholding funds, such as those entities who held Seritage Growth Properties subscription rights.