Sears Holdings Corporation – Accuses Lampert, ESL, Fairholme, Seritage and Directors (Including Treasury Secretary Mnuchin) of Fraud, Theft and Breaches of Fiduciary Duty

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April 17, 2019 – The Debtors, acting at the direction of the Restructuring Sub-Committee (“Subcommittee”) of the Restructuring Committee of the Board of Directors (“Board”) of Sears, filed an adversary complaint against Edward Lampert, the ESL Defendants, Fairholme, and certain of the Borad's directors, (the “DefendantsFN1”) alleging fraud, theft and breaches of fiduciary duty and seeking to make "Sears whole" in respect of related losses [Docket No. 3278].

The complaint alleges, “As Sears was sliding into bankruptcy, Eddie Lampert—its long-time controlling shareholder, Chairman, and Chief Executive Officer—in concert with and assisted by other Defendants, transferred billions of dollars of the Company’s assets to its shareholders for grossly inadequate consideration or no consideration at all. By far the largest share of the value siphoned from the Company went to Lampert himself, ESL, the hedge fund he controls, and other insider Defendants. These transfers were unmistakably intended to hinder, delay, and defraud creditors and/or occurred when the Company was insolvent and had insufficient capital to continue its operations and to repay its billions of dollars in debt. Had Defendants not taken these improper and illegal 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. This Complaint is brought to make Sears whole for these thefts of its assets and for the breaches of fiduciary duty arising from certain related-party loans.

As Lampert and the other Defendants stripped Sears of billions of dollars of assets and encumbered its remaining property with new liens, Sears was suffering billions of dollars of losses annually, and had not generated positive cash flow from operations for years—much less cash flow sufficient to pay principal and interest on its billions of dollars of debt. Sears, once one of the country’s dominant retailers, was falling further and further behind its competitors in a rapidly declining retail market. Between fiscal years 2011 and 2014, Sears had a cumulative net loss of $7.1 billion. By at least FY 2014, and continuing through its bankruptcy filing in 2018, the Company was insolvent and had insufficient capital to remain in business, and Lampert and the other insider Defendants knew it.

Altogether, Lampert caused more than $2 billion of assets to be transferred to himself and Sears’ other shareholders and beyond the reach of Sears’ creditors. These assets included (i) 80.1% of the common stock and 100.0% of the preferred stock of Orchard, together worth at least $133 million, (ii) rights to purchase 100% of SHO, a profitable subsidiary, worth at least $231 million, (iii) 44.5% of Sears Canada, worth at least $621 million, (iv) 100% of Lands’ End, a profitable subsidiary worth more than $1 billion, and (v) rights to purchase Seritage, a new REIT to which Sears sold 100% and 50% ownership, respectively, in 235 and 31 of its premier properties (for at least $649 million below their fair value), worth at least $399 million. These transactions were actual and/or constructive fraudulent transfers, and constituted illegal dividends under Delaware law.”

FN1: The defendants are listed as: "Edward Scott 'Eddie' Lampert; (ii) ESL Investments, Inc. ('ESL'); (iii) RBS Partners, L.P., CRK Partners, LLC, SPE Master I., L.P., ESL Partners L.P., SPE I Partners, L.P., RBS Investment Management, LLC, ESL Institutional Partners, L.P., and ESL Investors, L.L.C. (together, the 'ESL Shareholders'); (iv) JPP LLC and JPP II LLC (together, the 'ESL Lenders,' and together with ESL and the ESL Shareholders, the ESL Defendants); (v) Fairholme Capital Management, L.L.C. ('Fairholme'); (vi) Cesar L. Alvarez, Bruce Berkowitz, Alesia Haas, Kunal Kamlani, Steven Mnuchin, and Thomas J. Tisch (together with Lampert, the 'Directors'); (vii) Seritage Growth Properties, Inc. ('Seritage'), (viii) Seritage Growth Properties, L.P. (the 'Seritage Operating Partnership'), Seritage KMT Mezzanine Finance LLC ('KMT Mezz'), Seritage SRC Mezzanine Finance LLC ('SRC Mezz'), Seritage KMT Finance LLC, Seritage SRC Finance LLC, Seritage GS Holdings LLC, Seritage SPS Holdings LLC, and Seritage MS Holdings LLC (together with Seritage, the 'Seritage Defendants'; and, together with Lampert, the ESL Defendants, Fairholme, and the Directors, the 'Defendants')."

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