Sears CEO under pressure from Sears Canada creditors as retirees seek pension funds

Key Points
  • Sears Canada creditors are calling out Sears Holdings' CEO, Eddie Lampert, for receiving dividend payments as the now-bankrupt company struggled.
  • They claim Lampert and his hedge fund, ESL Investments, were "major beneficiaries" of roughly $3 billion in dividend payments.
  • Now, thousands of Sears Canada's former employees are preparing for a reduction in their pensions.
Edward S. Lampert speaks at a news conference in New York in this November 17, 2004 file photo. 

Sears Canada creditors are calling out Eddie Lampert, the erstwhile controlling shareholder of the bankrupt retailer and current chief executive of Sears Holdings, for receiving dividend payments as the Canadian business crumbled in 2017.

Late last week, a group of pensioners served court papers in Ontario's Superior Court of Justice, requesting the appointment of a trustee in Sears Canada's bankruptcy proceeding who would look for more funds for those creditors.

Lampert and his hedge fund, ESL Investments, were "major beneficiaries" of roughly $3 billion in dividend payments since 2005, the papers said.

Meanwhile, since Sears Canada began shuttering its stores, about 16,000 former employees are now preparing for a reduction in their pensions later this year, Toronto-based CBC News has reported. When the company applied for protection from creditors last June, the deficit in the defined benefit pension plan was nearly $270 million.

Lampert has since defended his position, writing in a blog post Sunday that "the [dividend] payments had no impact whatsoever on the Sears Canada pension plans" and "these dividend payments did not deprive the company of the cash needed to fund operations."

"I too very much regret the failure of Sears Canada," Lampert added. "Like all other stakeholders, ESL has suffered significant losses from the bankruptcy of this storied company."

His post, title "Just The Facts — Sears Canada," explained that dividends paid to Sears Canada shareholders in 2012 and 2013 were largely from asset sales, when the company had "virtually no funded debt." Even after the dividend payments, the company continued to invest in its operations at the same level, Lampert said.

Lampert also called out Hudson's Bay's struggles and Target pulling out of Canada, saying the retail environment has been "rapidly changing" and not only effecting Sears Canada.

A spokesman for Chicago-based Sears Holdings told CNBC: "We believe any attempt to reclaim those dividends would be unfounded. ... Sears Holdings received dividends that were duly authorized by Sears Canada's Board of Directors during a time when Sears Canada was clearly solvent, with minimal debt and $514M in cash on its balance sheet after giving effect to the final dividend payment in 2013."

Since liquidation sales on the chain's assets have begun, Sears Canada creditors are still waiting to see how much money will be leftover to pay them back.

Retirees were told by an Ontario regulator late last year that they could recover (on their pension claims) as much as 81 cents on the dollar, unless other funds became available.

The same fears have been surfacing for Sears Holdings creditors who are concerned the U.S. company is on the brink of bankruptcy and won't have enough to cover pension claims after Lampert (a top shareholder) is paid. Lampert and ESL have been loaning the department store chain money to stay afloat.

Hedge fund manager Bruce Berkowitz, a longtime pal of Lampert's and another top shareholder, also recently attacked Sears Holdings after departing its board of directors in 2017.

In an annual letter to shareholders of Fairholme Funds, Berkowitz said: "Although markets reached new highs in 2017, there was not much to celebrate as the securities of Sears Holdings Corporation ("Sears") and Sears Canada wrecked the Funds' performance. Sears realized billions of dollars from asset sales, as we predicted, but I did not foresee the operating losses that have significantly reduced values."

Most recently, Sears Holdings announced its plans to close roughly 100 additional Sears and Kmart stores early this year, as it finalizes a deal to release another 140 stores from a ring-fence agreement with the guardian of its pension fund, the Pension Benefit Guaranty Corp.

In addition to selling its real estate for cash, management has said the company is looking for ways to monetize its other assets, including Sears Home Services and the Kenmore and DieHard brands. Shares of Sears Holdings were trading close to $2 apiece Monday morning, falling more than 6 percent and touching an all-time intraday low.