Sears creditors condemn plan to save store, citing ‘misconduct’
Sears creditors are still trying to stop chairman Eddie Lampert from buying the beleaguered retailer.
The creditors filed an objection in bankruptcy court late Thursday to the former Sears CEO’s $5.2 billion bid for the company. They blamed Lampert for the problems that led to Sears’ downfall.
The creditors, who are owed at least a combined $3.4 billion, acknowledged that Sears was hurt by the rise of big box rivals and online shopping. But they claimed the company’s undoing “was precipitated by years of misconduct by Lampert, ESL, and others against Sears and its creditors.”
Lampert, through his hedge fund ESL, won an auction for 425 stores and other Sears assets earlier this week. US Bankruptcy Court Judge Robert Drain will hold a hearing February 4 to consider that bid and any objections to it.
“Sears’s downfall is nothing short of tragic,” the creditors wrote in the filing. They said the company, at Lampert’s direction, “engaged in serial asset stripping, taking Sears’ best assets out of the enterprise to shield them from the claims of other creditors … in anticipation of these inevitable bankruptcy proceedings.”
The committee of creditors — which represents vendors, landlords and others owed money by Sears — was already on record saying that the company should be shut down rather than kept alive. But the filing is its most direct assault on Lampert and the way Sears was run after he merged it with Kmart in 2005 and took control.
“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,” they wrote.
A series of loans that ESL made to Sears over the years made Lampert its largest creditor, as well as its chairman, primary shareholder, and — until the day of its bankruptcy filing — its CEO. But unlike money owed to the members of the creditors committee, almost all the loans made by ESL to Sears were backed by hard assets, such as real estate.
In response to the filing, Lampert’s hedge fund said that “all transactions were done in good faith, on fair terms, beneficial to all Sears stakeholders” to help the company become profitable once again.
The fund said it has cooperated fully with the creditors’ review of the transactions between it and Sears. ESL also said it is “confident that the processes we followed are unimpeachable.”
“We reject any assertion to the contrary and will vigorously contest any effort to assert claims against ESL, its principals or affiliates concerning these transactions,” the hedge fund said.
Lampert has repeatedly said his bid is in the best interest of the employees, the creditors and other stakeholders, and the communities served by Sears.
But the creditors derided the bid as “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.”
If Judge Drain agrees with the creditors and blocks Lampert’s bid, Sears and Kmart would shut down and their assets would be liquidated. The auction included no other bidder who wanted to keep the company open.
So far, though, Drain has has been open to proposals that would help Sears stay alive. During a hearing Friday, Drain said “it would be a very good thing” if there were a way to save the jobs of the roughly 45,000 remaining Sears employees by keeping the company in business. Drain added, however, that he would still consider the creditors’ claims.
Even if Lampert and ESL are successful, there’s no guarantee that Sears would stay healthy. It’s common for a retailer that emerges from bankruptcy to file for bankruptcy again.
The children’s clothing retailer Gymboree, for example, just filed for bankruptcy for the second time Wednesday and said it would shut down its flagship brand. RadioShack and American Apparel met similar fates.