Come See the Debtor Side of Sears – Legal Issues for Creditors


By: Matthew Weiss

On Monday October 15, Sears Holdings filed for Chapter 11 bankruptcy in the Southern District of New York, claiming approximately $7 billion in assets and $11 billion in liabilities. The bankruptcy of what was at one time the nation’s largest retail company is anticipated to result in the closing of 142 of Sears’ remaining stores before the end of the year.  It is believed that Sears currently has more than 100,000 creditors.
It remains to be seen whether Sears will be able to successfully reorganize, or whether it will suffer the same fate as other recent retailers in bankruptcy such as Toys-R-Us and be forced to liquidate its assets. As Sears’ substantial debts are sorted out, creditors and vendors of the retailer should keep the following in mind to preserve their interests:

Reclamation Demands: Vendors may issue reclamation demands on Sears pursuant to section 546(c) of the Bankruptcy Code, which authorizes a seller of goods to reclaim those goods if the debtor received them while insolvent, within 45 days before the commencement of a bankruptcy case. Because Sears has been legally insolvent for a long time, all vendors who have provided goods to Sears within 45 days of the bankruptcy filing (since September 1, 2018) have the ability to demand the reclamation of those goods by filing a written notice with the bankruptcy court.

Clawback Claims: Creditors are actively investigating whether claims exist against Sears’ former CEO, Eddie Lampert, for engaging in improper transactions involving the debtor. Lampert has had interests on both sides of transactions involving Sears in recent years and remains the Chairman even though he has resigned as CEO. For example, he is also the chairman of Sears’ real estate spinoff entity, Seritage Growth Properties, which acquired the real estate on which 230 Sears and Kmart stores are located (valued at $2.7 billion) and now collects rent from those stores. Additionally, Lampert individually and through his hedge fund, ESL Investments, Inc., has loaned Sears $2.66 billion through a variety of financing transactions.  These transactions have allowed Lampert to control the terms of the financing arrangements and benefit from interest payments by Sears. Thus, creditors will attempt to argue that Lampert deliberately stripped Sears of its assets through fraudulent transfers. The Official Committee of Creditors will likely argue that these assets should be clawed back into the bankruptcy estate pursuant to section 548 of the Bankruptcy Code.  Under relevant Delaware law, creditors have four years to assert fraudulent transfer claims and they must prove both that Sears was insolvent at the time the transactions occurred and that it did not receive reasonably equivalent value for the transfers. Other claims could be asserted against Lampert, including fraud and shareholder derivative suits for breach of fiduciary duty, although those will be harder to prove. Lampert and other directors have already settled four lawsuits involving the creation of Seritage Growth Properties for approximately $40 million.

Low Priority Creditors: After Sears’ secured creditors and prior creditors are paid, the remaining creditors, including unsecured vendors, service providers, shareholders, and pensioners, will have to fight over whatever assets remain.  Sears’ largest unsecured creditor is the Pension Benefit Guaranty Corp., a federally chartered corporation that insures pensions. PBGC claims that Sears underfunded its pension obligations by $1.5 billion.

Sears has also said that it will continue paying employees’ wages and benefits, honoring member programs, and paying vendors and suppliers in the ordinary course of business for all goods and services provided on or after the date of the bankruptcy filing. Sears specifically has said that customer loyalty programs, warranties, protection agreements, and guarantees would continue for the time being. Nonetheless, because Sears has only received $300 million in debtor-in-possession financing, there is a looming threat that the debtor will be forced to liquidate, which could shut down the entire business as a going concern. Therefore, vendors and customers should be wary about continuing to do business with Sears and Kmart until they appear to be on more solid financial footing.
For more information, please contact Matthew Weiss at