Sears’ $175 Million Bankruptcy Deal with Ex-CEO Lampert Approved

The bankrupt estate of Sears Holding Corp. won court approval to settle complex litigation against former CEO Eddie Lampert and other investors for $175 million, helping bring the retail chain’s four-year-old Chapter 11 case to a close.

Resolution of the litigation, which focused on $2 billion worth of pre-bankruptcy transactions engineered by Lampert and his hedge fund ESL Investments Inc., dispels lingering uncertainty about the estate’s ability to pay creditors pursuant to a Chapter 11 plan approved nearly three years ago.

Judge Robert Drain of the US Bankruptcy Court for the Southern District of New York said he would approve the deal during a virtual court hearing Wednesday, marking what should be the retiring jurist‘s final appearance in the case.

The settlement, which was negotiated over the course of several months with the help of three mediators, allows the estate to avoid what would likely be two more years of litigating “complex, and therefore expensive” legal claims, Drain said.

Although the amount of claims asserted “were substantially higher than the settlement amount,” those figures are discounted “by probability of success,” he said. He noted that the deal allows the company to pay all administrative and priority claims required under the plan.

However, an order approving the deal won’t be signed for at least 30 days to give all parties sufficient time to review terms that were added just before the hearing regarding a settlement with lender Cyrus Capital Partners LP, Drain said. Cyrus has been pursuing an appeal over the priority of its claims against the estate.

The Sears bankruptcy estate and creditors’ suits targeted several transactions taken under Lampert’s leadership, which allegedly siphoned value away from the company. The plaintiffs’ claims focused on a 2014 spin-off of Lands’ End Inc. to Sears shareholders; a 2015 issuance of subscription rights to purchase shares of Seritage Growth Properties Inc.; the subsequent sale of real properties to Seritage; and financing agreements provided to Sears before its 2018 bankruptcy.

The settlement puts an end to remaining disputes related to the sale of Sears to Transform Holdco LLC, an ESL entity. It also allows Sears to make payments under a $97.5 million deal it reached with the Pension Benefit Guaranty Corp. in 2019.

The settlement amount comprises payments of $125.6 million from Sears insurers, $41.9 million from Lampert and company insiders, and $7.5 million from public shareholder defendants.

Attorney Ira Dizengoff of Akin Gump Strauss Hauer & Feld LLP, representing an official committee of unsecured creditors, called the deal a “monumental outcome” after “years of work.”

The iconic department store chain filed for bankruptcy in October 2018 after years of financial difficulties and billions of dollars in losses.

The case is In re Sears Holdings Corp., Bankr. S.D.N.Y., No. 18-23538, hearing 8/31/22.