🔥What’s Going on with Sears? Part II.🔥
Plus: Minority Shareholders sue Washington Prime and SVPGlobal
In Part I titled “What’s Going on with Sears?,” we discussed how Sears Holding Corporation remains mired in chapter 11 bankruptcy. The Sears debtors haven’t emerged from bankruptcy because they owe tens of millions of dollars to administrative and priority claimants. This is perplexing, really, because at confirmation, the debtors and the official committee of unsecured creditors (UCC) represented that they could get to emergence in a reasonable amount of time — after certain potentially valuable causes of action play out against former Sears owner Eddie Lampert, certain company directors and officers, and company partners (collectively, the “Original Action Defendants” or “Eddie Lampert & Co.”) and company shareholders (the “Public Shareholder Defendants” and, all together, the “Defendants”) for all manner of alleged insider and other transactions conducted pre-petition.
Which begs the question: objectively, does a couple of years, $25mm in professional fees expended, and the prospect of taking on $35mm in super-priority financing to fund pursuit of the next stage of significant litigation sound particularly “reasonable” to you? 🤔
Everything is a cost/benefit analysis, y’all, and the UCC would answer that question in the affirmative given what they said are colorable claims and potential recoveries in the billions. As we previously covered in Part I, the UCC filed a motion in April for authority to enter into an agreement with a litigation financer for $35mm of fresh funding to tackle the next stage of litigation. Several interested parties — from indenture trustee and collateral agent, Wilmington Trust, to a number of admin claimants — were like:
From there, several objections from said aggrieved parties hit the docket with all manner of complaint: among other things, the UCC has no standing to take on new funding; the UCC screwed up when it didn’t lock in attorneys on a contingency basis; the terms of the financing arrangement are opaque; it’s premature to take on such a liability when there are various motions to dismiss pending; and the statements at confirmation about time/expense were bunkum for which there ought to be consequences (that don’t come out of the theoretical unsecured creditor recoveries). Ultimately, the hearing on the UCC’s motion got punted for months without any real clarity where things were headed. We had the popcorn on standby for an epic throwdown.
But in a recent turn of events, it appears a different form of relief will prevail, and Sears might finally reach the light at the end of the tunnel. On August 10, Sears and certain company creditors announced an agreement that would resolve the drawn-out, complex litigation.
Let’s talk settlement. The price? $175mm. The timeline? 16 calendar days after what’s been dubbed the “Final Approval Date,” the date on which the agreement is no longer subject to appeal or petition for review as a matter of law. The punch? An overwhelming majority –– $125,625,000 — of the settlement amount is to be paid by certain of Sears’ insurers, leaving $41,875,000 to be paid by Eddie Lambert & Co.1 and $7.5mm to be paid pro rata by the Public Shareholder Defendants.
Crucial to the settlement for the Defendants is — and this won’t come as any shock to anybody who’s paid any bit of attention to bankruptcy over the years — all kinds of releases. The settlement’s releases resolve all alleged and potential liability of the Original Action Defendants and Public Shareholder Defendants “based on, relating to, in connection with, or arising out of any and all claims and causes of action asserted, that could have been asserted in the Actions, that relate to or arise out of any transactions at issue in the Actions, and that concern Debtors or the Bankruptcy Case.” Permit us to cut through the legal verbiage: basically the Defendants will get releases from anything and everything.
What does this mean as a practical matter? The three-year-old mountain of litigation stemming from the sale of Sears to Transform Holdco, an ESL Investments Inc. (Lampert’s hedge fund) entity, and other transactions Lampert undertook during his tenure as CEO of Sears would be settled and claimants with claims relating to the Sears bankruptcy case would be thwarted from adjudicating them on their merits and would be required to turn to the $175mm settlement fund for recovery. In other words, the folks at Eddie Lampert & Co. will get to kick back their feet and wipe their hands clean from the fiasco that has been Sears’ bankruptcy.
Which brings us back to that cost/benefit analysis: wasn’t the whole attempt to secure litigation funding predicated upon a potential multi-billion dollar recovery? Color us confused.
On point, Mark Cohen, director of retail studies at Columbia University’s business school as well as the former chief executive of Sears Canada, explained, and we’re sure he’s not alone in this sentiment, that the settlement is “a pittance of what I believe Lampert and his associates should be asked to pay.”
So, we suppose we’re left to wonder what, exactly, swayed the UCC to settle on these terms…? It appears, the plaintiffs conceded that continuing litigation against roughly 200 named defendants would be “extraordinarily complex,” and accepted the reality that “the circumstances of the Chapter 11 Cases necessitate material compromise, not intransigence, and the benefits of the Settlement Agreement—the prompt resolution not just of the Consolidated Adversary Proceeding, but other ancillary, costly and potentially value-destructive disputes—will give certainty to creditors and provide a viable path for the Debtors to emerge from bankruptcy.” It’s all a bit … well, anticlimactic. And, frankly, curious. We suspect that the UCC’s professionals came to (or were forced into) the stark realization that they’d reached the end of their rope; that the fee frenzy was over; that the cash cow was f*cking dead.
So, fine, bad news for us: there’s not more juicy litigation on the horizon. But admin and priority claimants will FINALLY get paid, so good news for them. And Sears’ bankruptcy will FINALLY come to an end — giving us all an opportunity to put this stain of a bankruptcy in the rearview mirror. Hopefully there aren’t any lingering effects. Oh, sh*t, there’s Bed Bath & Beyond Inc. BBBY 0.00%↑:
An under-appreciated aspect of the last wave of retail bankruptcies: there’s a lot of PTSD out there.
The fact that Sears is only now settling to the point where admin claimants will get paid surely didn’t help (see also Toys R Us).
“Fool me once, shame on you. Fool me twice…”
A hearing to, among other things, approve the settlement agreement is scheduled for later today before Judge Drain (who must be counting the days before he can actually retire … and by “retire,” we mean become a Partner at a big name law firm and rake in some big bucks doing mediations like a lot of other judges LOL).2
⚡️Announcement: Much-Needed Break Time⚡️
We’ll be taking a short break to refresh during these last remaining days of summer.
As always, we want to thank you for your readership/support and we wish you the very best over the holiday weekend. We’ll see you on the other side.
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💥How Are the Malls Doing? Part II.💥
Back in June in “💥How Are the Malls Doing?💥,” we wrote
We still scratch our heads and marvel at the fact that SVP Global was able to snatch the keys to the Washington Prime Group bus without ever even having to address valuation at confirmation.
So, what’s the latest and greatest with good ol’ WPG anyway?