Sears creditors look to investigate insiders ahead of sale process

By Caroline Salls

Pittsburgh, Nov. 7 – Sears Holdings Corp.’s official committee of unsecured creditors is seeking court approval to investigate some insider transactions and “other potentially problematic transactions involving the debtors,” according to a motion filed Tuesday with the U.S. Bankruptcy Court for the Southern District of New York.

The committee said the investigation would require it to serve documents requests/subpoenas on the Sears debtors, ESL Investments, Inc., Seritage Growth Properties, Fairholm Capital Management LLC and other entities involved in or with knowledge of the transactions in question.

The creditor group is also looking to take discovery from Sears chairman and former chief executive officer and current ESL chairman and CEO Edward Lampert.

“Based on its limited investigation in the short time since its formation, the committee is convinced that there exist potential estate claims and causes of action arising from the debtors’ various attempts to finance the company’s operations, often involving related-party transactions with controlling shareholders ESL and Lampert,” the motion said.

“The circumstances surrounding the various transactions raise the possibility that ESL and other insiders may have exercised undue influence to siphon value away from the company on favorable terms.”

In addition, the committee said some of these parties may have used their status to “obtain an ever-increasing percentage of the debtors’ senior debt,” allowing them to benefit more from Sears’ restructuring.

Specifically, the committee said ESL obtained $2.6 billion, or 46%, of the Sears debtors’ funded pre-bankruptcy debt, including about 73% of its second-lien debt.

According to the motion, Sears intends to designate a stalking horse bidder by Dec. 15 for a sale of some of its assets, and the company has already discussed that bid with ESL.

“Thus, to properly evaluate any stalking horse bid by ESL, and investigate the insider transactions within the timeline provided by the debtors, the committee’s professionals need access to historical information from the debtors and other third parties without delay,” the motion said.

The committee is requesting a Nov. 15 hearing.

Sears is a retailer based in Hoffman Estates, Ill. The company filed bankruptcy on Oct. 15 under Chapter 11 case number 18-23538.

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