Sears: Allegations and Settlement

On June 1, 2015, according to Chicago Tribune, a lawsuit was filed against the CEO of Sears and others of stripping “…the struggling retailer of one of its last remaining valuable assets, leaving it a debt-laden, money-losing renter in its own stores.”

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The Plaintiff(s)

  • Ryan Flanagan [Flanagan v. Lampert et al., C.A. No. 11180-VCL (filed June 19, 2015)]
  • Jacob Rossof [Rossof v. Lampert et al., C.A. No. 11178-VCL (filed June 19, 2015)]
  • John Solak [Solak v. Lampert et al., C.A. No. 11081-VCL (filed May 29, 2015)]
  • Shiva Stein [Stein v. Lampert et al., C.A. No. 11173-VCL (filed June 18, 2015)]

The Defendant(s)

  • Edward S. Lampert
  • Steven T. Mnuchin
  • Thomas J. Tisch
  • Ann N. Reese
  • William C. Kunkler, III
  • Paul G. Depodesta
  • Cesar L. Alvarez
  • Kunal S. Kamlani
  • ESL Investments, Inc.
  • Seritage Growth Properties
  • Sears Holdings
  • Fairholme Capital Management L.L.C.
  • Fairholme Funds

The Allegations

  • Claims for breach of fiduciary duty against Lampert and ESL in their capacity as Sears’ controlling stockholder
  • Claim for breach of fiduciary duty against the individual defendants
  • Claim for breach of fiduciary duty against Lampert
  • Claim for aiding and abetting against Seritage

On February 9, 2017, Reuters announced that a settlement was reached in the above consolidated claims by the plaintiffs.

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The Settlement

  • $40 million in cash (the “Settlement Amount”) shall be paid by the Defendants and/or their insurers into an interest-bearing escrow account to be established by Plaintiffs’ Co-Lead Counsel (the “Escrow Account”).
  • If the Settlement is approved by the Court and the Effective Date occurs, the Settlement Amount, less Plaintiffs’ Counsel’s attorneys’ fees and litigation expenses as awarded by the Court, Plaintiffs’ incentive awards, and the costs of providing this Notice, will be paid from the Escrow Account to Sears.

The Plaintiffs Assert:

  • In light of the substantial monetary recovery included in the Settlement, and on the basis of information available to them, including publicly available information and discovery obtained from certain Defendants, Plaintiffs and Plaintiffs’ Co-Lead Counsel have determined that the proposed Settlement is fair, reasonable, adequate, and in the best interests of Sears and Sears’s stockholders. The Settlement provides substantial immediate benefits to Sears and its stockholders without the risk that continued litigation could result in obtaining similar or lesser relief for Sears and its stockholders after continued extensive and expensive litigation, including trial and the appeals that were likely to follow.

The Defendants Assert:

  • Defendants, who believe they have substantial defenses to the claims alleged against them in the Action, have denied and continue to deny the allegations of wrongdoing, liability, and violation of any laws and the existence of any damages asserted in or arising from the Action, but have nevertheless concluded that further litigation in connection with the Action would be time consuming and expensive, and after weighing the costs, disruption, and distraction of continued litigation, have determined that the Action should be fully and finally settled in the manner and upon the terms and conditions set forth in the Stipulation.

NLO Commentary

In the filing of Flanagan v. Lampert et al. (C.A. No. 11180-VCL), it is claimed that:

"As disclosed on June 10, 2015 by Seritage’s final prospectus (the “Prospectus”), Sears agreed to a sale-leaseback transaction (the “Sale-Leaseback”) involving 235 real estate properties for which Sears would receive roughly $2.7 billion (both the Rights Offering and Sale-Leaseback will be collectively referred to as the “Spin-off”) (page 5-6)."

The following allegation is asserted:

"The terms of the Spin-off are nothing short of unfair and discriminatory to Sears but rewarding to Lampert. Sears’ stockholders won’t see a dime of the $2.7 billion due to Sears’ indebtedness to Lampert (page 6)."

If the view is that $2.7 billion is a loss to Sears and Sears shareholders and a direct benefit to Lampert then the $40 million settlement is equal to a 1.48% litigation expense.  This excludes that “…Sears will be responsible to pay Seritage roughly $140 million a year to rent properties it once owned (page 6)” and the considerable loss of shareholder value from June 1, 2015 until Sears’ bankruptcy filing.

More on Sears from NLO:

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