In a scathing court filing, a group of unsecured creditors contested the proposed sale of bankrupt Sears Holdings to its chairman Eddie Lampert, claiming the retail giant’s downfall “was precipitated by years of misconduct by Lampert,” his namesake hedge fund ESL Investments and others. The documents in a White Plains, New York, court proceeding over the Chapter 11 petition by Sears Holdings were filed late last week after the parent of Sears and Kmart stores agreed to be sold for $5.2 billion to ESL.
ESL won the auction for 425 stores and other assets after a grueling three days of around-the-clock talks that prompted ESL to up its bid at least three times. ESL, of which Lampert is also chairman, was the only bidder willing to keep what’s left of the 126-year-old retailer in business; others wanted only pieces of the company or the right to liquidate it. Sears Holdings and its independent board approved the sale in the wee hours of the morning Jan. 16.
But the creditors, a group of lenders, landlords and vendors that is owed at least a cumulative $3.4 billion, claim that keeping Sears Holdings in business is a lost cause and that Lampert has misrepresented his real plan. “Throughout these proceedings, Lampert and ESL have painted themselves as saviors, stating that their bid will save the few jobs they have not already eliminated — but for how long?” the creditors asked in the filing. “They have failed to set forth a business plan that offers any viable go-forward path. “Sears simply cannot survive as a going concern,” they wrote.
While acknowledging that the Sears Holdings collapse was “caused in part by the Internet age and other factors beyond Sears’ control,” the creditors also noted that they believed Lampert and ESL have been plotting how they could gain if the failing retailer were to file for bankruptcy.
ESL and Lampert have made billions of dollars in loans, primarily backed by real estate and other hard assets, to Sears Holdings since Lampert used his ownership of Kmart stores to purchase Sears Roebuck & Co. in 2005. That put Lampert in the unusual position of being the largest shareholder, chairman and chief executive of Sears Holdings while also being its largest secured creditor.
ESL and Lampert have repeatedly denied any wrongdoing.
“Sears’s downfall is nothing short of tragic,” according to the filing. “After taking control of Sears in 2005, ESL — acting at all times at founder and namesake Lampert’s direction — engaged in serial asset stripping, taking Sears’s best assets out of the enterprise to shield them from the claims of other creditors and maximize ESL’s investments (in Sears and other entities) in anticipation of these inevitable bankruptcy proceedings.”
The filing noted that under Lampert’s and ESL’s reign since 2005, Sears has shuttered more than 3,500 stores, cut some 250,000 jobs, and “lost untold billions in value.” In effect, Lampert and ESL managed Sears as if it were a private portfolio company that existed solely to provide the greatest returns on their investment, recklessly disregarding the damage to Sears, its employees, and its creditors,” the creditors claimed in the filing.
“ESL’s current bid to ‘save the company’ is nothing but the final fulfillment of a years-long scheme to deprive Sears and its creditors of assets and its employees of jobs while lining Lampert’s and ESL’s own pockets,” the filing said. In previous filings and again in the latest one, the creditors allege there were financial gymnastics and “wrongful actions” involved in the 2014 spinoff of Lands’ End and of 235 properties in 2015 into Seritage, a real estate investment trust whose name is the amalgam of “Sears” and “heritage,” as in the legacy properties. Lampert is the largest shareholder of both Lands’ End and Seritage.
The creditors also said in the filing that Sears Holdings and its independent board, “led by board members who were handpicked by and are beholden to Lampert and ESL—have capitulated to Lampert’s and ESL’s efforts to control the remaining assets of Sears and deprive unsecured creditors, already damaged by Lampert’s and ESL’s multi-year and multi-faceted scheme, of any chance of a recovery.”
They also complained that a big chunk of the bid, some $1.3 billion, is to be paid as a “credit” bid, one in which ESL forgives some of the secured debt that is owed to it through loans it made to Sears Holdings over the years.
“Nothing can undo Sears’s excruciating, slow-motion destruction at the hands of Lampert and ESL,” the filing said. “But without any such recourse, Lampert and ESL will have created the perfect blueprint for future bad actors: stack a company’s board of directors with allies and devotees; with their blessing, raid the company’s cash and assets; in the process, dismantle operations and put hundreds of thousands of employees out of a job; and, finally, manipulate chapter 11 proceedings to obtain the company’s remaining assets for a bargain while falsely claiming to 'save' a fraction of the jobs already sacrificed.”
ESL has long held that its transactions were done in good faith and on fair terms that benefited all Sears Holdings shareholders. The spokesperson also noted that the transactions were approved by a board whose majority was made up of independent directors. The transactions also included approval by the company’s related party transactions committee, “which was itself comprised of independent directors and advised by separate independent financial and legal advisors,” according to the spokesperson.
Sears Holdings did not respond to a request for comment. The company is likely to respond through court filings later this week. A hearing about the auction results is scheduled for Feb. 4.
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