Casualties of Sears' downfall will get their day in court Monday

Key Points
  • Sears Holdings unsecured creditors will head to bankruptcy court in White Plains, New York on Monday, Feb. 4 to protest Eddie Lampert's $5.2 billion bid to save the company, which owns both Sears department stores and Kmart.
  • The offer is the only one that would keep Sears alive, but its unsecured creditors allege misdealing by Lampert under his tenure as chairman and CEO.
  • Judge Robert Drain will hear the objections and rebuttals, and make an ultimate ruling regarding the company's future.
Edward Lampert speaks during a news conference to announce the merger of Kmart and Sears in New York, Nov. 17, 2004.
Gregory Bull | AP

For more than a decade, billionaire Eddie Lampert was arguably able to run Sears like his kingdom.

The hedge fund titan who combined Sears and Kmart in 2005 led Sears Holdings as its chairman, CEO and largest investor. The company had public shareholders and a board of directors, but Lampert had unique discretion guiding its fate. That fate was tortured. Under his stewardship, Sears closed over 3,500 stores, slashed roughly 250,000 jobs and saw its share price fall from $193 a share in 2007 to less than a dollar.

Now, bystanders in that destruction are finally having their day in court. Sears unsecured creditors — people owed money by Sears who are unprotected by collateral — will head to U.S. Bankruptcy Court for the Southern District of New York in White Plains on Monday to protest Lampert and air their grievances. Unsecured creditors are objecting to Lampert's $5.2 billion deal to buy Sears out of bankruptcy through his hedge fund ESL Investments, the only deal that would stave off liquidation. In a litany of filings that piled up over the past two weeks, they have accused Lampert of everything from "stealing assets" to "years of misconduct" that reads like a "Shakespearean tragedy."

Lampert, who helped prop up Sears for years through investments from ESL, is Sears' largest creditor, and its most protected with collateral.

The fate of the 126-year-old chain will be decided upon by Judge Robert Drain in what is expected to be a two-day hearing on Monday, Feb. 4 and Wednesday, Feb. 6. Drain has already shown a propensity for pushing Lampert and Sears to draft a deal that would save jobs, having twice granted the parties more time in order to craft a resolution when it seemed like they had reached a breaking point.

Sears' unsecured creditors include the Pension Benefit Guaranty Corp., the federal government oversight organization that guarantees Sears' pension, which is more than $1 billion underfunded. The group is arguing that Lampert's deal to buy Sears will undo an agreement the PBGC struck with Lampert in 2015. To help fill the pension's losses, Lampert granted the group a lien and royalty fees from some of its most valuable assets: the Kenmore, Craftsman and Diehard brands.

The PBGC is arguing that as part of Lampert's deal to buy Sears, Lampert will get back full access to Kenmore and Diehard, leaving it and its 90,000 pensioners empty-handed.

The group also includes mall-owner Simon Property Group, whose CEO David Simon told investors the company is putting Sears in its "rear-view mirror." The mall owner has said the ability to replace shuttered Sears stores in its malls with higher paying tenants has helped its business. It could, arguably, be in Simon's best interest for the company to go out of business entirely.

A focus for the unsecured creditor committee, which filed a roughly 100-page objection against Lampert, will be deals Lampert did under his tenure. The group argues his unique control gave Lampert "undue influence to siphon value" on favorable terms. The deals include Sears' spinoff of Lands' End in 2014 and transactions with Seritage Growth Properties, a real estate investment trust Lampert created through some Sears' properties a year later.

Lampert, for his part, will defend himself through his legal team, as he did with ESL's court filing on Friday. The filing accused Sears' unsecured creditors of efforts to "poison the well" against ESL, with "page after page of its pleadings with smears and false narratives that are completely irrelevant" to his proposed acquisition of Sears. Lampert has argued that all transactions done under his watch were approved the company's independent board.

ESL stressed that the offer will save 45,000 jobs and was approved by an independent restructuring committee made up of the independent members on its board, including restructuring experts like William L. Transier and Alan Carr, a former attorney at Skadden, Arps, Slate, Meagher & Flom.

At issue on Monday will also likely be the motivations behind Lampert's efforts to save Sears. Its unsecured creditors have cast doubt in the altruism of Lampert's efforts. They say his proposed deal is "nothing but the final fulfillment of a years long scheme to rob Sears and its creditors of assets and employees of jobs while lining Lampert's and ESL's own pockets." They also doubt Sears' post-bankruptcy viability and its ability to avoid a second trip to bankruptcy court — a fate several other retailers have recently endured.

There is reason for concern.

Under Lampert's guidance the company hasn't turned a profit since 2010. The department store industry continues its decline: department stores accounted for 14.5 percent of all North American retail purchases in 1985 but only 4.3 percent last year, according to Neil Saunders, managing director of GlobalData Retail. Sears' peers, like department stores Bon-Ton and Mervyn's, have gone out of business while rivals like discount retailers Walmart and Target have poured money Sears and Kmart do not have into their businesses to be among the ones left standing. Those investments include partnerships with other retailers, acquisitions and investments in delivery and online technology.

While this past holiday season was a strong one for the industry as a whole, Sears in December, the most crucial month for a retailer, posted of a loss of $193 million.

People familiar with Lampert's thinking say he continues to believe in the value of Sears' assets, like its home services business, as a collective whole, whereby it cant take advantage of its store footprint. Its DieHard and Kenmore labels still represent value and quality to a number of shoppers that grew up with those brands.

Lampert maintains his faith in the power of his ability to convert shoppers from its loyalty program, Shop Your Way, into in-store purchases, a belief that people say drove much of his optimism in the years leading up to Sears' bankruptcy, despite its continued financial losses. ESL projects Sears will achieve positive earnings growth of $25 million in 2019.

It has said its go-forward business plan will include a continuation of a strategy the store had begun to test in the years leading up to its bankruptcy. Among the things it has tested are smaller stores focused on selling its most popular products like appliances and mattresses.

Lampert also argued in court documents this week he is putting money where his mouth is. ESL is committing more than $300 million in cash to fund the offer, including buying out other senior debt holders, and at least $193 million in credit.

"ESL therefore has much to lose if [its] go forward business plan is not successful," the documents stated.

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