UPDATE: November 7, 2018: A spokesperson for ESL Investments said in a statement emailed to Retail Dive that the fund has "consistently supported Sears Holdings in its efforts to transform and return to profitability during a period of rapid change and disruption in the retail industry." The spokesperson added: "We have every confidence that all transactions involving ESL and Eddie Lampert are valid and enforceable, based on fair and reasonable terms, which were approved by independent directors who were advised by independent financial and legal advisors and featured other appropriate corporate governance procedures. Any legal claims that attempt to challenge these transactions will have no merit and we will defend ourselves vigorously against any asserted claims."
- Past deals that Sears Holdings has made with its chairman and former CEO, Eddie Lampert, are under scrutiny in the retailer's Chapter 11 case, with a group of creditors alleging several transactions in recent years were self-serving, fraudulent and represented a breach of fiduciary duty.
- A committee of unsecured creditors Tuesday asked for court permission to examine those transactions between Sears and Lampert, as well as his hedge fund, ESL Investments, and related parties, according to court papers. Those deals include various loans that ESL has made to Sears in the past year and a half; the spinoff of more than 200 properties into Seritage Growth Properties (which Lampert chairs and partly owns); the spinoff of Lands' End and Sears Hometown; and the sale of Sears' stake in Sears Canada, which liquidated last year.
- The creditors also said they plan to file an objection to Sears' plans to sell its remaining profitable stores in bankruptcy. In a court document, the creditor group described the plan as apparently organized to allow ESL to buy "material assets of [Sears] at deflated prices (potentially by an inappropriate credit bid)." A Sears spokesperson did not immediately reply to Retail Dive's request for comment.
Just as few in the retail world are surprised to see Sears in bankruptcy court, few will likely be surprised to learn that Lampert's complicated financial relationship with Sears could be the subject of litigation in Chapter 11.
It's worth noting that discovery and litigation over fraudulent transfers, and other financial and management claims, is one the primary points of leverage that unsecured creditors have in bankruptcy, as they lack claims on assets to secure their debt. (As just one recent instance, Nine West creditors are pursuing such litigation over the fashion retailer's leveraged buyout by private equity firm Sycamore Partners.)
In the case of Sears, attorneys and analysts have anticipated that the company's various asset sales to, and loans from, Lampert and ESL Investments could make for litigation fodder in a potential bankruptcy.
The creditor group looking into the deals now said the transactions "raise the possibility that ESL and other insiders may have exercised undue influence to siphon value away from [Sears] on favorable terms." They said further that "through an escalating series of transactions" ESL has bought up $2.6 billion, or 46%, of Sears' debt. That, they argue, puts ESL and others in a position to influence and benefit from the "trajectory" of Sears' Chapter 11 case and the events leading up to it.
Looking at the deals specifically, the creditors say the spinoff of 200 real estate assets into Seritage was done "on unfavorable and burdensome terms." Among those terms were provisions in leases that Sears took on from Seritage that included "unusual and burdensome obligations," such as clauses allowing Seritage to "literally evict Sears and re-let the space to tenants capable of paying higher rents," the creditor group said.
In the cases of Sears Hometown and Lands' End (two companies that ESL has large stakes in), the creditors allege both were profitable businesses spun off at below-market value and made isolated from Sears Holdings, so that it could not benefit from their cash flow and assets. The creditors also point to numerous loans taken out by Sears in the months following the company's disclosure of doubts that it could continue as a going concern into the future because of its operating performance.
All of this adds up to more potential complications for Sears as it tries to shed assets and reorganize in bankruptcy. Sears said on filing for bankruptcy that ESL and Lampert could be buyers of the company's remaining stores. Litigation against Lampert could affect how such a process plays out.