Old Sears settles disputes with New Sears for more than USD 18 Million

Deal requires Transform Holdco to hand over USD 12 million in cash to Sears

By guest author Soma Biswas from Wall Street Journal

Sears Holdings Corp., the estate of the iconic department store left behind in bankruptcy, has agreed to settle litigation over new owner Edward Lampert’s USD 5 billion purchase of the retailer’s best stores for more than USD 18 million.

Sears sold its best assets including 425 of its most profitable stores back to Mr. Lampert’s hedge fund, ESL Investments Inc., last year, and an ESL-backed company, Transform Holdco LLC, became the new owner. Fights between the “old” and “new” Sears over the payment terms of the transaction started almost immediately.

The Sears department store at the Inland Center in San Bernardino, Calif., pictured above in November 2019, is among dozens of stores the retailer is closing. Caption courtesy by Wall Street Journal

“Disputes between Transform and the debtors regarding the meaning of certain provisions of the asset purchase agreement arose before the ink even dried on the contract,” according to papers filed in U.S. Bankruptcy Court in White Plains, N.Y., on Friday describing the settlement.

Transform Holdco claimed the old Sears intentionally delayed payments to vendors and shortchanged it on promised inventory, breaching the purchase agreement between the two companies. The old Sears, for its part, claimed it was owed at least USD 57.5 million by Transform.

Under the settlement, Transform Holdco will pay Sears only USD 12 million in cash, court documents filed on Friday show. That money may ultimately go to paying off the old Sears’s vendors, former employees owed severance and tax authorities.

Old Sears can use the money as its bankruptcy case left a trail of unpaid business partners who were paid pennies on the dollar for their claims.

The deal doesn’t affect another lawsuit Sears’s unsecured creditors are pursuing against ESL and Mr. Lampert.

That lawsuit—potentially worth USD 2 billion—claims Mr. Lampert and ESL fraudulently siphoned billions of dollars worth of assets out of Sears before it filed for bankruptcy. The lawsuit could take two to four years to come to fruition.

Since buying 425 Sears and Kmart stores out of bankruptcy, Transform Holdco has struggled to return them to profitability and has closed or is closing more than half of them. Both Sears and Kmart have been gutted by falling sales, as people shop online or at rivals such as Walmart Inc.

Sears filed for bankruptcy in October 2018 after years of decline in the face of competition from big box retailers such as Walmart and more recently from online retailers such as Amazon. com Inc.