FINANCE

Sears sues Eddie Lampert; claims he stripped chain of $2 billion in assets

BY Marianne Wilson

Sears Holdings Corp. on Thursday filed a blockbuster federal lawsuit that essentially claims former CEO Eddie Lampert drove the company into bankruptcy, by siphoning off the company’s assets and preventing it from being able to pay off debts.

The suit accuses Lampert, his ESL Investments hedge fund and others associated with Sears and ESL — including Treasury Secretary Steven Mnuchin, a former investor and executive at ESL — of stripping the chain of billions of dollars worth of assets even as the retailer racked up huge losses. The suit was filed in the U.S. Bankruptcy Court for the Southern District of New York by the bankruptcy restructuring team that is winding down what remains of the company after Lampert — through Transform Holdco, an affiliate of ESL — purchased of most of Sears assets, including stores and its Kenmore and DieHard brands, for $5.2 billion in February

The lawsuit lays outs its charge in its introduction.

“As Sears was sliding into bankruptcy, Eddie Lampert—its long-time controlling shareholder, chairman, and chief executive officer—in concert with and assisted by other defendants, transferred billions of dollars of the company’s assets to its shareholders for grossly inadequate consideration or no consideration at all,” the lawsuit stated. “By far the largest share of the value siphoned from the company went to Lampert himself, ESL, the hedge fund he controls, and other insider defendants. As Lampert and the other defendants stripped Sears of billions of dollars of assets and encumbered its remaining property with new liens, Sears was suffering billions of dollars of losses annually, and had not generated positive cash flow from operations for years—much less cash flow sufficient to pay principal and interest on its billions of dollars of debt.”

The 109-page complaint alleges that Lampert caused more than $2 billion of assets to be transferred to himself and Sears’ other shareholders and beyond the reach of Sears’ creditors in the years leading up to the retailer’s bankruptcy. It asks that the transactions be ruled fraudulent transfers and says creditors should be compensated.

“Had defendants not taken these illegal and improper 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,” the lawsuit alleges.

The complaint points to five allegedly improper asset transfers, beginning in 2011 with Orchard Supply Hardware, Sears Hometown and Outlet Stores, and Sears Canada. Other transactions involved Lands’ End and Seritage, the real estate investment trust created in 2015.
The suit includes details of five transactions that it alleges unfairly benefited Lampert and the defendants, beginning in 2011 with Orchard Supply Hardware Stores Corp. The others are Sears Hometown and Outlet Stores Inc., Sears Canada Inc., Lands’ End Inc., and Seritage, the real estate investment trust created in 2015.

Among the allegations: Lampert rejected a $1.6 billion offer for Lands’ End from Leonard Green & Partners and the Tommy Hilfiger investment group in favor of a spin-off that would keep his stake in the brand untouched. Lampert called the offer a “non-starter” and rejected it in order to protect his hedge fund’s equity stake in Lands’ End. Lampert and ESL later reaped at least $490 million from a spinoff of Lands’ End that did not benefit Sears, and dealt a blow to its future revenues.

In other allegations, the filing claims that ESL stripped Sears of the real estate under 266 of the chain’s most profitable stores, undervaluing the land by at least $649 million.

“Moreover, the culpable insiders arranged for Sears to lease the properties back under blatantly unfair terms,” according to the filing. “The appraisals were fundamentally flawed and, among other things, intentionally used under-market future lease rates as the sole basis for their valuations.”

The suit alleges that Lampert and the other insider defendants knew the company had no plan to return to profitability. It accuses Sears employees — at Lampert’s direction — of repeatedly producing “financial plans reflecting fanciful, bad-faith predictions that the company would experience an immediate and dramatic turn-around from deep and mounting losses to sudden profitability.”

ESL sent the following statement to Chain Store Age with regards to the lawsuit:

“ESL Investments, Inc. 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.

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. In addition, the company received proceeds in excess of $3.0 billion from these transactions, all of which were applied to reduce debt and fund operations, and all of the referenced transactions treated every shareholder equally from an economic standpoint.

ESL was 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. These financings and other transactions involving Sears’ assets were undertaken to facilitate the company’s continued operations and implement its transformation plan. 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.

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.”

 

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