Sears Holdings Corporation – Files Major Rewrite of Plan and Disclosure Statement

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May 28, 2019 – The Debtors filed a Second Amended Plan and a related Disclosure Statement [Docket Nos. 4041 and 4042] and further filed redlines of each document showing changes from versions filed on May 16, 2019 [Docket No. 4043]. You will need the redlines.

The documents are heavily revised to reflect (i) major structural class changes (eg. a shift from nine classes to 41 classes spread over 5 separate Debtors) and (ii) a continuing barrage of objections and adversarial actions launched by ESL Investments, Inc. ("ESL"), the Debtors' Creditors Committee (the "Committee") and Cyrus Capital Partners. One telling new exhibit appended to the revised Disclosure Statement, reflecting concerns raised by several groups, including ESL and the Committee, is an "Administrative Solvency Tracker." This tracker attempts to illustrate that the Debtors are administratively solvent (just), but that has not stopped the Debtors from beefing up two risk factors which make it pretty clear that administrative insolvency is a very real issue and that solvency depends on some pretty optimistic assumptions as to the resolution of disputes in the Debtors' favor (including a myriad of unresolved fights with ESL). 

One of the most heavily revised areas in the documents relates to the Debtors' "Plan Settlement" (covered below), a have-your-cake-and-eat-it-too balancing act which asks the Court (and creditors) to accept that the Debtors should be consolidated for purposes of assessing claims and distributing assets…but not actually be required to prove that they meet a traditional "substantive" consolidation test; the Debtors' basic argument being that the Sears mess is way too complicated to disentangle (ie to allow for the separate treatment of Debtors and their respective creditors), so the wiser approach is just not to bother. Should the Court balk at this underwhelming argument, the Debtors also offer up a lesser of two evils alternative in the form of a threatened "toggle" back to separate Chapter 11s for each Debtor which the Debtors make clear would be a time-consuming process that chews rapidly through the shrinking distributable proceeds pie. The Plan Settlement is something of a metaphor for the revised Plan and Disclosure Statement which collectively beg the Court and creditors to just give up, move on with their lives and leave Sears to limp into another chapter of its own life (presumably Chapter 22).

The Disclosure Statement provides: "The Debtors’ operational and financial affairs are inextricably tied and any disentanglement efforts are likely to be time-consuming, expensive, and ultimately may not produce a clear benefit to the Debtors’ Chapter 11 Cases.

Through the Plan Settlement, the Debtors seek to provide stakeholders with certainty, as well as prompt and maximum distributions, without potentially cost-prohibitive and time-consuming litigation regarding the complex issues of substantive consolidation.

The Debtors believe the Estates are 'hopelessly entangled' that…pursuing a 'de-consolidated' plan would have been at odds with the consolidated and interconnected nature of the Debtors’ enterprise and would require a time-consuming forensic accounting analysis that would take tens of millions of dollars and significant time to complete, creating a risk of potentially significant intercompany litigation.

In deciding to pursue the Plan Settlement, the Debtors and their advisors undertook an extensive analysis of the Debtors’ prepetition books and records, in particular their intercompany transactions, to evaluate whether intercompany liabilities between the Debtor entities could be accurately determined or if substantive consolidation would be appropriate….Among other things, the Debtors’ advisors found that: historical intercompany data was incomplete and at times inaccurate, creating a possibility of inaccurate results by orders of magnitude; antiquated accounting systems (reflecting millions of lines of data) complicated the analysis of historical intercompany transaction data; and significant adjustments would have to be considered in light of spin-offs and dozens of other transactions over the years."

The Plan Settlement

Only two weeks ago, the Debtors Plan had a short list of nine classes; it now it has 41 classes spread across 5 Debtors: (i) KMart Corp, (ii) KMart Stores of Illinois LLC, (iii) KMart of Washington LLC, (iv) Sears Holdings Corp and (v) All Other Debtors. Notwithstanding that the Debtors strongly prefer to be viewed on a consolidated basis, unless the Settlement Agreement is approved…the default position is exactly just the opposite; each Debtor is separate and classes at each Debtor will be entitled to vote on individual Plans of liquidation. The Disclosure Statement notes (in new language): "The Plan constitutes a separate chapter 11 plan of liquidation for each Debtor; if the Plan Settlement is approved, subject to Section 9.2(b) of the Plan. Votes to accept or reject the Plan shall be solicited at each Debtor [hence the 41 classes]. If the Plan Settlement as provided in Section 9.2 of the Plan is approved, all classes of Claims against all of the Debtors shall be treated in accordance with the Plan Settlement. Claims against each Debtor…are classified for all purposes (unless otherwise specified), including voting and Distribution pursuant to the Plan."

Therefore, IF the Plan Settlement is approved, there will be little actual difference between the old and new class structures; the Plan Settlement largely effectuating a distribution of proceeds as if the Debtors were "substantively consolidated," ie as if the Debtors still had the simplified 9-class structure that existed in the Plan filed on May 16, 2109. IF the Settlement Agreement is not approved, however, the Debtors' Plan toggles back to separate Plans of liquidation.

The Disclosure Statement provides the following detail: "The Plan contemplates a Wind Down of the remaining assets of the Debtors’ estates—primarily litigation claims—and a distribution to creditors in accordance with the absolute priority rule and certain settlements, as described herein. Specifically, the Plan incorporates and provides for the approval of the proposed settlement of inter-estate and inter-creditor issues, including whether the assets and liabilities of the Debtors should be substantively consolidated, including a proposed settlement with the Pension Benefit Guaranty Corporation, as modified (the ‘PBGC’ and, such settlement, the ‘PBGC Settlement’)(collectively, the ‘Plan Settlement’).

At its core, the Plan Settlement is a proposed settlement of inter-estate and inter-creditor issues, including the characterization of pre- and post-petition intercompany balances, allocation of costs and expenses of administration among the Debtors, whether the liabilities and assets of Debtors should be substantively consolidated for Distribution purposes, and issues specifically related to disputes between the Debtors and PBGC embodied in the Plan. Pursuant to the Plan Settlement, the chapter 11 plans of the six main Debtors have been essentially grouped together, such that a chapter 11 plan cannot be confirmed at one Debtor without the confirmation of chapter 11 plans for all six Debtors. In the event the Bankruptcy Court does not approve the Plan Settlement, the Debtors have the flexibility to toggle into a de-consolidated plan (the ‘Toggle Plan’).

After applying the appropriate Plan Settlement Premium to each Affected Creditors’ recoveries, holders of Allowed PBGC Claims, General Unsecured Claims, Guarantee Claims, and ESL Unsecured Claims share in Total Assets (as applicable) as follows, in accordance with the Plan:

(a) As a proposed compromise and settlement of inter-estate and inter-creditor issues, including those relating to whether the liabilities and assets of the Debtors should be substantively consolidated for distribution purposes under the Plan (the “Plan Settlement”), the following treatment shall apply if the Plan Settlement is accepted and approved:

(i) all Assets of the Debtors shall be consolidated and treated as Liquidating Trust Assets irrespective of which Debtor owns such Asset;

(ii) all guarantee Claims (other than Guarantee Claims against Kmart Stores of Illinois LLC and Kmart of Washington LLC) will not be entitled to distributions from the Liquidating Trust;

(iii) all Claims against any Debtors on account of joint obligations of two or more Debtors shall be treated as a single Claim entitled to a single recovery against the Liquidating Trust Assets;

(iv) each holder of an Other Secured Claim shall only receive from the Debtor against which the Other Secured Claim is Allowed; 

(v) pre- and post-petition Intercompany Claims shall be disregarded and not participate in recoveries from the Liquidating Trust;

(vi) each holder of an Administrative Expense Claim, Priority Tax Claim, ESL 507(b) Priority Claim, Other 507(b) Priority Claim, or Priority Non-Tax Claim, shall receive its distributions from the consolidated Liquidating Trust Assets, irrespective of the Debtor against which such Claim was filed or is Allowed; and

(vii) after satisfaction in full (or reserving for Disputed Claims) in accordance with the Plan, holders of Allowed PBGC Claims, General Unsecured Claims, Guarantee Claims, and ESL Unsecured Claims shall share in Total Assets (as applicable) as follows (subject to Section 9.2(a)(viii) of the Plan with regard to the Allowed PBGC Claim): 

(1) 7.60% of Net Proceeds of General Assets for holders of Allowed General Unsecured Claims, the Allowed PBGC Unsecured Claim, and Allowed ESL Unsecured Claims against Kmart Corp.; 

(2) 1.19% of Net Proceeds of General Assets for holders of Allowed Kmart IL Guarantee Claims, the Allowed PBGC Unsecured Claim against Kmart Stores of Illinois LLC and Allowed ESL Unsecured Claims against Kmart Stores of Illinois LLC; 

(3) 0.16% of Net Proceeds of General Assets for holders of Allowed Kmart WA Guarantee Claims, the Allowed PBGC Unsecured Claim against Kmart of Washington LLC, and Allowed ESL Unsecured Claims against Kmart of Washington LLC;

(4) 91.05% of Net Proceeds of General Assets for holders of Allowed Claims against any of the Debtors, including holders of (x) Allowed General Unsecured Claims, the Allowed PBGC Unsecured Claim, and Allowed ESL Unsecured Claims against Kmart Corp., (y) Allowed Kmart IL Guarantee Claims, the Allowed PBGC Unsecured Claim against Kmart Stores of Illinois LLC, and Allowed ESL Unsecured Claims against Kmart Stores of Illinois LLC, and (z) Allowed Kmart WA Guarantee Claims, the Allowed PBGC Unsecured Claim against Kmart of Washington LLC, and Allowed ESL Unsecured Claims against Kmart of Washington LLC;

(5) 7.60% of Net Proceeds of Specified Causes of Action and the Credit Bid Release Consideration for holders of Allowed General Unsecured Claims and the Allowed PBGC Unsecured Claim against Kmart Corp.;

(6) 1.19% of Net Proceeds of Specified Causes of Action and the Credit Bid Release Consideration for holders of Allowed Kmart IL Guarantee Claims and the Allowed PBGC Unsecured Claim against Kmart Stores of Illinois LLC; 

(7) 0.16% of Net Proceeds of Specified Causes of Action and the Credit Bid Release Consideration for holders of Allowed Kmart WA Guarantee Claims and the Allowed PBGC Unsecured Claim against Kmart of Washington LLC; and 

(8) 91.05% of Net Proceeds of Specified Causes of Action and the Credit Bid Release Consideration for holders of Allowed Claims against any of the Debtors, including holders of (x) Allowed General Unsecured Claims and the Allowed PBGC Unsecured Claim against Kmart Corp., (y) Allowed Kmart IL Guarantee Claims and the Allowed PBGC Unsecured Claim against Kmart Stores of Illinois LLC, and (z) Allowed Kmart WA Guarantee Claims and the Allowed PBGC Unsecured Claim against Kmart of Washington LLC.

(viii) PBGC will not participate in any distributions of Excess PBGC Amounts, which shall be distributed to the applicable holders otherwise entitled to share in such recoveries in accordance with Sections 4.4, 4.5, 5.5, 5.6, 6.5, 6.6 of the Plan. 

(ix) Distributions shall otherwise be made in accordance with the Plan.

(b) Pursuant to the Plan Settlement, a chapter 11 plan for any of the following Debtors shall not be confirmed unless a chapter 11 plan is confirmed at all of the following Debtors:(i) SHC, (ii) Sears, Roebuck and Co., (iii) Kmart Corp., (iv) Kmart Stores of Illinois LLC, (v) Kmart of Washington LLC, or (vi) Sears Insurance Services, L.L.C. 

(c) PBGC Settlement shall be approved upon entry of the Confirmation. 

(d) In the event the Bankruptcy Court does not approve the Plan Settlement, the Plan shall revert to a joint plan of liquidation of the Debtors for administrative purposes only, and constitute a separate chapter 11 plan of liquidation for each Debtor (the 'Toggle Plan')."

The following documents were attached to the Disclosure Statement:

  • Exhibit A: Plan
  • Exhibit B: Corporate Organizational Chart
  • Exhibit C: Administrative Solvency Tracker
  • Exhibit D: Post-petition Intercompany Claims Summary Chart
  • Exhibit E-1: Liquidation Analysis (Plan Settlement) (to be filed separately)
  • Exhibit E-2: Liquidation Analysis (Toggle Plan – De-Consolidated) (to be filed separately)

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