As long-running legal feud slogs on, Lampert and Sears Holdings creditors ordered to mediation

Dive Brief:

• A federal bankruptcy judge ordered mediation in ongoing litigation between creditors to Sears Holdings, which has been stuck in bankruptcy limbo for more than three years, and the company’s former head, Eddie Lampert.
• Creditors seeking repayment on years-old claims have alleged that Lampert and his hedge fund ESL Investments transferred billions of dollars in assets to Lampert during his years at the helm of Sears Holdings.
• “The defendants’ motions to dismiss remain pending, and ESL continues to believe that plaintiffs’ claims are contrary to both the law and the facts,” a spokesperson for ESL said in an emailed statement. “We look forward to the mediation, but remain prepared to defend ourselves in court if a reasonable resolution cannot be achieved.”

Dive Insight:

Litigation against Lampert has dragged on through much of Sears Holdings’ bankruptcy, which has continued on well past the sale of Sears’ remaining stores to the Lampert-controlled Transformco in early 2019.

For unsecured creditors, lawsuits against directors and executives of debtor companies are among the few avenues for repayment in bankruptcy cases where claims like shipping invoices go unpaid. 

Sears Holdings filed for bankruptcy in the fall of 2018. Today the company is a husk, with its administrative debts — which include both lawyers’ and consultants’ fees as well as claims by vendors — from its endless bankruptcy still being fought over. 

Creditors warned long ago that Sears Holdings was administratively insolvent, meaning there wasn’t enough value in its assets to cover the claims against it in bankruptcy. The entity’s enormous stack of legal and consulting fees have made it the most expensive bankruptcy case in recent history, if not all time. At this time last year, the company was more than $80 million short on its obligations to administrative creditors. 

Meanwhile, remaining Sears and Kmart stores have been steadily declining in number since Lampert bought them, with the footprints of both banners just a tiny fraction of what they once were. 

As for the litigation against Lampert, the original complaint targeted the deep and complicated financial relationship between the former chief and the company he ran. Lampert, at the time Sears Holdings filed for bankruptcy, was the company’s leader, largest investor, largest lender, a landlord through the real estate spinoff from Sears (Seritage Growth Properties) that Lampert bought a large chunk of, and a vendor through his stake in Lands’ End, another Sears spinoff Lampert profited from. 

Plaintiffs in the past have accused Lampert of “thefts of assets,” “rank self-dealing” and “numerous other breaches of fiduciary duty,” all allegations that Lampert has denied. 

The mediation, first reported on by the Wall Street Journal’s bankruptcy specialty publication, will be private, with both parties forbidden by the judge from disclosing any details or proposals that come out of the process.

The judge in the case set a deadline of May 23 for the mediation to conclude.