Sears Holdings Corporation; Sears, Roebuck And Co.; Sears Development Co.; Kmart Corporation and several debtors last week took former Chairman and CEO Eddie Lampert and other former board members to court, demanding a jury trial on claims that it has been pillaging the company for years, according to court documents filed with the United States Bankruptcy Court Southern District Of New York.
The company alleges that the defendants "transferred billions of dollars of the Company's assets to its shareholders for grossly inadequate consideration or no consideration at all," according to the documents. "These transfers were unmistakably intended to hinder, delay, and defraud creditors and/or occurred when the Company was insolvent and had insufficient capital to continue its operations and to repay its billions of dollars in debt," according to the filing.
In a statement emailed to Retail Dive, ESL Investments, Inc. said it "vigorously disputes the claims in the debtors’ complaint against ESL, Mr. Lampert and Mr. Kamlani, which repeats baseless allegations and fanciful claims. As we have previously said, the debtors’ allegations are misleading or just flat wrong." That statement goes on to say: "We are confident that the processes we followed for each of these transactions are unimpeachable. We reject the debtors’ allegations and will vigorously contest their complaint concerning these transactions."
Under Lampert, Sears slowly but steadily deteriorated, shuttering hundreds of stores and selling off that real estate, along with the sale of the retailer's most prized brands, including Craftsman.
"Sears, once one of the country's dominant retailers, was falling further and further behind its competitors in a rapidly declining retail market," according to the lawsuit. "Between fiscal years 2011 and 2014, Sears had a cumulative net loss of $7.1 billion. By at least FY 2014, and continuing through its bankruptcy filing in 2018, the Company was insolvent and had insufficient capital to remain in business, and Lampert and the other insider Defendants knew it."
Those defendants include, in addition to Lampert and several others, United States Secretary of the Treasury Steven Mnuchin, an ESL investor and former vice chairman, and are referred to in the lawsuit as "the Culpable Shareholders."
But in its statement to Retail Dive, ESL said that "The complaint completely ignores that the company's market value ranged between $2.5 billion and $5.0 billion during the period when these transactions took place, which demonstrates the company's solvency and supports the solvency opinions the company received from a notable expert in conjunction with such transactions," adding that as Sears "received proceeds in excess of $3.0 billion from these transactions, all of ... were applied to reduce debt and fund operations, and all of the referenced transactions treated every shareholder equally from an economic standpoint."
The legal maneuver follows a previous lawsuit filed by "the old Sears" — the remnant of the company that sold its stores and other assets in bankruptcy in February — against Transform Holdco (an entity of Eddie Lampert's hedge fund) or "new Sears," for $57.5 million it says it is owed from the sale. But this one goes much further, suggesting that Sears troubles wouldn't have been so dire and remedies would have been more effective but for the actions taken by Lampert and his cohort.
"Had Defendants not taken these improper and illegal actions, Sears would have had billions of dollars more to pay its third-party creditors today and would not have endured the amount of disruption, expense, and job losses resulting from its recent bankruptcy filing," according to the lawsuit. "This Complaint is brought to make Sears whole for these thefts of its assets and for the breaches of fiduciary duty arising from certain related-party loans."
But ESL describes itself as "a constant source of financing for Sears Holdings over many years including through the extension of $2.4 billion in various secured financings to the company," according to its statement.
Those "and other transactions involving Sears’ assets were undertaken to facilitate the company’s continued operations and implement its transformation plan," according to ESL's statement. "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, which was itself comprised of independent directors and advised by separate independent financial and legal advisors."
Lampert's new Sears entity may want to have its cake and it eat, too, at least when it comes to Craftsman. One of the first big product announcements after Lampert and his hedge fund took back control of Sears was its rollout of the Craftsman Ultimate Collection. But new brand owner Stanley Black and Decker sued Sears for the alleged breach of a trademark license agreement over the way the retailer trumpeted that it is "the real home" of the iconic tool brand.
The latest lawsuit doesn't exactly come out of the blue. Several analysts have made observations along the same lines for years.
"While I don't have specific knowledge of this lawsuit, it's been fairly well understood in the industry that Sears has been transferring valuable asset to investment and holding vehicles for many years," retail analyst Nick Egelanian, president of retail development consultants SiteWorks, told Retail Dive in an email. "From Craftsman to Kenmore — and of course real estate — assets have been monetized over the years."
And that's without any real investment in the retailer, Egelanian also said, adding that the extraction of value from even the new, shadow of a company looks to be continuing. "Sears has announced transaction after transaction after transaction over the years since Lampert mines the company with KMart, but we have rarely if ever seen any significant investment in the stores themselves," he said. "Just death by a thousand cuts. We appear to be in the final phases of a long and painful liquidation — by financial maneuvers."
Last week ESL Partners replaced two directors on the board of Sears Hometown and Outlet Stores and changed its bylaws in an effort to stymie the board's plans to liquidate the retailer. The hardware and appliance retail company, whose stores are run mostly by independent dealers and franchisees, was spun off from Sears Holding Corp. in 2012.