CHICAGO — Sears Holdings Corp. has filed a lawsuit against its former chairman and CEO, Edward Lampert, and his hedge fund, claiming they wrongly siphoned $2 billion in assets from the company as it headed for bankruptcy.
“Had defendants not taken these illegal and improper actions, Sears would have had billions of dollars more to pay its third-party creditors today and would not have endured the amount of disruption, expense, and job losses resulting from its recent bankruptcy filing,” lawyers for company wrote in a court filing.
The lawsuit was filed by the team winding down what remains of Sears’ business after Lampert purchased the majority of its remaining assets in a bankruptcy auction and earlier this year and formed a new company out of those assets. The complaint, filed Wednesday in the U.S. Bankruptcy Court in the Southern District of New York, seeks to recover the property that was allegedly fraudulently transferred.
The lawsuit also names former Sears directors and ESL executives and directors including U.S. Treasury Secretary Steven Mnuchin, a former investor and executive at ESL, and Kunal Kamlani, president of ESL and a former Sears director, as defendants, as well as Sears shareholder Fairholme Capital Management and its founder Bruce Berkowitz.
Representatives for Lampert and ESL could not immediately be reached for comment. Fairholme said it is in the process of reviewing the filings.
The lawsuit claims Lampert directed employees to produce “fanciful, bad-faith” financial projections while designing transactions that allegedly unfairly benefited Lampert, ESL and other defendants. Those transactions involved Orchard Supply Hardware Stores, Sears Hometown and Outlet Stores, Sears Canada, Lands’ End and Sears’ real estate investment trust spinoff, Seritage Growth Properties.
ESL has said all its deals with Sears had the approval of the company’s board. But the committee tasked with overseeing transactions involving potential conflicts of interests failed to protect Sears and its creditors, attorneys said in the lawsuit.
Lawyers for Sears claimed the 2015 spinoff of 266 of Sears’ best-performing stores into Seritage Growth Properties was designed to benefit Seritage at Sears’ expense. The real estate was undervalued by at least $649 million, according to the lawsuit, and terms allowing Sears to lease back space were unfair to the retailer, according to the complaint.
The terms ensured “that Sears would continue to pay Seritage rent, even for unprofitable stores, and that Seritage could invest those funds in redevelopments that ousted Sears from its most profitable stores,” attorneys said in the complaint.
Lampert is both an investor in Seritage and its chairman.
Lampert’s and ESL’s initial attempts to buy the retailer out of bankruptcy sought to guarantee they would not be held liable for controversial transactions the hedge fund made with Sears. Following opposition from a committee of unsecured creditors, ESL’s successful $5.2 billion bid dropped that requirement.
Sears also filed a proposed restructuring plan with the bankruptcy court Wednesday that would wind down the retailer’s remaining assets following its $5.2 billion sale to Lampert and ESL.
Those assets would include proceeds from any lawsuits related to the transactions highlighted in the complaint or other intentional misconduct by ESL, according to the plan filed with the bankruptcy court. A hearing on the wind-down plan has been scheduled for May 16.