Lampert, Sears Lenders Lose Appeal for Priority Bankruptcy Claim

Sears Holdings’ bankruptcy estate sufficiently repaid former CEO Eddie Lampert’s hedge fund and other lenders based on properly calculated collateral valuation, the Second Circuit ruled.

ESL Investments Inc., run by Lampert, and other second-lien lenders had recovered more than the value of collateral securing their claims, the US Court of Appeals for the Second Circuit affirmed Friday.

The US Bankruptcy Court for the Southern District of New York, which oversaw Sears’ Chapter 11 case, “committed no legal or factual error” in 2019 when it denied the lenders’ right to assert priority claims against Sears, the appeals court said. Other lenders include Cyrus Capital Partners LP and Wilmington Trust NA, a subsidiary of M&T Bank Corp.

Judge Robert Drain of the Southern District of New York used reasonable methods to tabulate the value of collateral securing the lenders’ claims against Sears, the appeals court said.

Drain also correctly determined that the lenders had already received more than the calculated collateral value when ESL bought Sears’ assets out of bankruptcy for $5.2 billion and forgave $433.5 million in loan debt, the Second Circuit said.

Sears’ debt obligations to the lenders’ when it filed for Chapter 11 in October 2018 were secured principally by the department store chain’s inventory and rights to payment still owed for goods and services. Following the February 2019 bankruptcy sale to ESL, the parties litigated over how to determine what that inventory was worth when Sears first entered bankruptcy.

Drain determined that valuing the inventory at prices below retail value—but above forced fire sale prices—would be fair because Sears’ path to reorganization was uncertain when it filed Chapter 11.

Drain determined that the collateral was worth $2.15 billion, using a “net orderly liquidation value” and factoring in other reasonable costs.

After subtracting Sears’s debt to most senior secured lenders, the hypothetical collateral value left for the second lien lenders would have been $187 million, Drain concluded.

The second lien lenders had already been paid back $433.5 million from the sale, and they aren’t entitled to a priority claim on account of that collateral, he ruled.

On appeal, the lenders argued that Drain improperly low-balled the collateral value. But the ruling was upheld by a federal district court, which prompted the lenders’ appeal to the Second Circuit.

Attorneys for the parties didn’t immediately respond to requests for comment.

The case is ESL Investments Inc. et al. v. Sears Holdings Corp., 2d Cir., No. 20-3343, opinion 10/14/22.