19-08250-rdd

Doc 1

Filed 04/17/19

Entered 04/18/19 00:28:55
Pg 1 of 110

Main Document

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
)
)
)
SEARS HOLDINGS CORPORATION,
)
et al.,
)
Debtors.
)
)
)
SEARS HOLDINGS CORPORATION; SEARS,
)
ROEBUCK AND CO.; SEARS DEVELOPMENT CO.; )
KMART CORPORATION; and KMART OF
)
WASHINGTON, LLC,
)
)
Plaintiffs,
)
)
v.
)
)
EDWARD SCOTT “EDDIE” LAMPERT; ESL
)
INVESTMENTS, INC.; RBS PARTNERS LP; CRK
)
PARTNERS LLC; SPE MASTER I L.P.; ESL
)
PARTNERS L.P.; SPE I PARTNERS L.P.; RBS
)
INVESTMENT MANAGEMENT LLC; ESL
)
INSTITUTIONAL PARTNERS L.P.; ESL INVESTORS, )
L.L.C.; JPP LLC; JPP II LLC; FAIRHOLME CAPITAL )
MANAGEMENT, L.L.C.; CESAR L. ALVAREZ;
)
BRUCE BERKOWITZ; ALESIA HAAS; KUNAL
)
KAMLANI; STEVEN MNUCHIN; THOMAS J. TISCH; )
SERITAGE GROWTH PROPERTIES, INC.; SERITAGE )
GROWTH PROPERTIES, L.P.; SERITAGE KMT
)
MEZZANINE FINANCE LLC; SERITAGE SRC
)
MEZZANINE FINANCE LLC; SERITAGE KMT
)
FINANCE LLC; SERITAGE SRC FINANCE LLC;
)
SERITAGE GS HOLDINGS LLC; SERITAGE SPS
)
HOLDINGS LLC; and SERITAGE MS HOLDINGS LLC, )
)
Defendants.
)
)
In re:

COMPLAINT

Chapter 11
Case No. 18-23538 (RDD)
Jointly Administered

Adversary Proceeding
Case No. 19-____ (RDD)

JURY TRIAL DEMANDED

 19-08250-rdd

Doc 1

Filed 04/17/19

Entered 04/18/19 00:28:55
Pg 2 of 110

Main Document

Sears Holdings Corporation (“Sears” or the “Company”); Sears, Roebuck & Co.
(“Sears Roebuck”); and Sears Development Co., Kmart Corporation, and Kmart of Washington,
LLC (together, with Sears Roebuck, the “Real Estate Transferors”; and together with Sears and
Sears Roebuck, “Plaintiffs”), acting at the direction of the Restructuring Sub-Committee
(“Subcommittee”) of the Restructuring Committee of the Board of Directors (“Board”) of Sears,
file this Complaint against (i) Edward Scott “Eddie” Lampert; (ii) ESL Investments, Inc.
(“ESL”); (iii) RBS Partners, L.P., CRK Partners, LLC, SPE Master I., L.P., ESL Partners L.P.,
SPE I Partners, L.P., RBS Investment Management, LLC, ESL Institutional Partners, L.P., and
ESL Investors, L.L.C. (together, the “ESL Shareholders”); (iv) JPP LLC and JPP II LLC
(together, the “ESL Lenders,” and together with ESL and the ESL Shareholders, the “ESL
Defendants”); (v) Fairholme Capital Management, L.L.C. (“Fairholme”); (vi) Cesar L. Alvarez,
Bruce Berkowitz, Alesia Haas, Kunal Kamlani, Steven Mnuchin, and Thomas J. Tisch (together
with Lampert, the “Directors”); (vii) Seritage Growth Properties, Inc. (“Seritage”), (viii) Seritage
Growth Properties, L.P. (the “Seritage Operating Partnership”), Seritage KMT Mezzanine
Finance LLC (“KMT Mezz”), Seritage SRC Mezzanine Finance LLC (“SRC Mezz”), Seritage
KMT Finance LLC, Seritage SRC Finance LLC, Seritage GS Holdings LLC, Seritage SPS
Holdings LLC, and Seritage MS Holdings LLC (together with Seritage, the “Seritage
Defendants”; and, together with Lampert, the ESL Defendants, Fairholme, and the Directors, the
“Defendants”).
Introduction
1.

As Sears was sliding into bankruptcy, Eddie Lampert—its long-time controlling

shareholder, Chairman, and Chief Executive Officer—in concert with and assisted by other
Defendants, transferred billions of dollars of the Company’s assets to its shareholders for grossly
inadequate consideration or no consideration at all. By far the largest share of the value
1

 19-08250-rdd

Doc 1

Filed 04/17/19

Entered 04/18/19 00:28:55
Pg 3 of 110

Main Document

siphoned from the Company went to Lampert himself, ESL, the hedge fund he controls, and
other insider Defendants. These transfers were unmistakably intended to hinder, delay, and
defraud creditors and/or occurred when the Company was insolvent and had insufficient capital
to continue its operations and to repay its billions of dollars in debt.
2.

Had Defendants not taken these improper and illegal actions, Sears would have

had billions of dollars more to pay its third-party creditors today and would not have endured the
amount of disruption, expense, and job losses resulting from its recent bankruptcy filing. This
Complaint is brought to make Sears whole for these thefts of its assets and for the breaches of
fiduciary duty arising from certain related-party loans.
3.

As Lampert and the other Defendants stripped Sears of billions of dollars of assets

and encumbered its remaining property with new liens, Sears was suffering billions of dollars of
losses annually, and had not generated positive cash flow from operations for years—much less
cash flow sufficient to pay principal and interest on its billions of dollars of debt. Sears, once
one of the country’s dominant retailers, was falling further and further behind its competitors in a
rapidly declining retail market. Between fiscal years 2011 and 2014, Sears had a cumulative net
loss of $7.1 billion. By at least FY 2014, and continuing through its bankruptcy filing in 2018,
the Company was insolvent and had insufficient capital to remain in business, and Lampert and
the other insider Defendants knew it.
4.

Lampert and the other insider Defendants also knew the Company had no plan to

return to profitability. In an effort to create a false record to cover up their asset stripping, at
Lampert’s personal direction, Sears employees repeatedly produced financial plans reflecting
fanciful, bad-faith predictions that the Company would experience an immediate and dramatic
turn-around from deep and mounting losses to sudden profitability. Rather than attempt to

2

 19-08250-rdd

Doc 1

Filed 04/17/19

Entered 04/18/19 00:28:55
Pg 4 of 110

Main Document

project Sears’ financial results in good faith, Sears’ annual plans were based on top-down orders
from Lampert, the controlling shareholder who benefited massively from asset stripping.
Without any legitimate reason and despite Sears’ immense and consistent losses, these plans
simply assumed that profits would appear. Often, hundreds of millions of dollars of Earnings
Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) were attributed to what
internal Sears documents called “go-gets”—unidentified initiatives that, the plans assumed,
somehow would be discovered, implemented, and profitable. Sears continued to produce these
false projections year after year, even as baseless projections of huge profits were consistently
followed by the reality of huge losses.
5.

While these violations occurred, Lampert and ESL were Sears’ largest

shareholders, holding between 47.8% and 62% of Sears’ issued and outstanding stock. Another
large shareholder, Fairholme, held between 15.1% and 25% of Sears’ stock and had affiliated
directors on Sears’ Board. Thomas Tisch, another Sears director, held between 3.5% and 3.7%
of Sears’ stock. Together, these culpable insider shareholders—Lampert, the ESL Shareholders,
Fairholme, and Tisch (the “Culpable Shareholders”)—received at least 80.1% of the value of the
2011 spinoff of Orchard Supply Hardware Stores Corp. (“Orchard”), 80.8% of the value of the
2012 Sears Hometown and Outlet Stores, Inc. (“SHO”) rights distribution, 81.2% of the value of
the 2012 partial spinoff of Sears Canada Inc. (“Sears Canada”), 74.7% of the value of the 2014
spinoff of Lands’ End, Inc. (“Lands’ End”), and 76.3% of the value of the 2015 Seritage rights
distribution. The Culpable Shareholders were aided and abetted by four directors affiliated with
the Culpable Shareholders who approved some or all of these transactions: Cesar L. Alvarez, a
director of Fairholme’s parent company; Bruce Berkowitz, Fairholme’s founder and president;

3

 19-08250-rdd

Doc 1

Filed 04/17/19

Entered 04/18/19 00:28:55
Pg 5 of 110

Main Document

Kunal Kamlani, the president of ESL; and Steven Mnuchin, an investor in ESL and former vice
chairman of ESL (together with the Culpable Shareholders, the “Culpable Insiders”).
6.

These five asset transfers were part of a single, years-long strategy of stripping

out Sears’ most valuable assets for the benefit of Lampert, the ESL Defendants, and Sears’ other
shareholders, to the great detriment of the Company and its creditors. In 2012, Lampert formed
and chaired a management committee euphemistically called the “non-core asset committee”
(the “Non-Core Committee”) to consider dispositions of major assets. Beginning in 2011 and
2012, with transactions involving Orchard, SHO, and Sears Canada and continuing with 2014
and 2015 transactions involving Lands’ End and Seritage, Sears—under Lampert’s control and at
his direction—repeatedly spun off major assets to its shareholders, for no consideration or
grossly inadequate consideration. As the Company’s controlling shareholders, Lampert and the
ESL Shareholders were the primary beneficiaries of these transfers.
7.

Altogether, Lampert caused more than $2 billion of assets to be transferred to

himself and Sears’ other shareholders and beyond the reach of Sears’ creditors. These assets
included (i) 80.1% of the common stock and 100.0% of the preferred stock of Orchard, together
worth at least $133 million, (ii) rights to purchase 100% of SHO, a profitable subsidiary, worth
at least $231 million, (iii) 44.5% of Sears Canada, worth at least $621 million, (iv) 100% of
Lands’ End, a profitable subsidiary worth more than $1 billion, and (v) rights to purchase
Seritage, a new REIT to which Sears sold 100% and 50% ownership, respectively, in 235 and 31
of its premier properties (for at least $649 million below their fair value), worth at least $399
million. These transactions were actual and/or constructive fraudulent transfers, and constituted
illegal dividends under Delaware law.

4

 19-08250-rdd

8.

Doc 1

Filed 04/17/19

Entered 04/18/19 00:28:55
Pg 6 of 110

Main Document

First, between December 2011 and November 2012, Sears spun off its entire

stake in Orchard, rights to purchase all of SHO (a wholly owned subsidiary), and a significant
stake in Sears Canada to its shareholders for no consideration. At the time the Culpable
Shareholders owned between 80.1% and 81.2% of Sears’ stock, the Board was dominated by
Lampert, two other ESL investors (Tisch and Mnuchin), and a CEO (Louis D’Ambrosio)
beholden to the three of them, and ESL was facing crippling demands for redemptions from its
own investors. When the transfers were made, Sears’ cash flow from operations, operating
income, pre-tax income, and net income had already dropped first to de minimis levels
(FY 2010) and then to negative levels (FY 2011), from which the Culpable Insiders knew Sears
was unlikely ever to recover. The Culpable Insiders and D’Ambrosio orchestrated these
transactions—which were part of a single years-long scheme—with the actual intent to hinder,
delay, and defraud Sears and its existing and future creditors.
9.

Second, in April 2014, after Sears’ condition had deteriorated even further, after

Lampert had taken over as CEO and D’Ambrosio was replaced on the Board by Cesar Alvarez (a
director of Fairholme’s parent company), Sears spun off Lands’ End. Prior to the spinoff, Lands’
End was a wholly owned subsidiary that operated one of Sears’ few remaining profitable
businesses. The Wall Street Journal described it as one of Sears’ “crown jewels.” In transferring
Lands’ End to Sears’ shareholders, the Culpable Insiders refused to consider an unsolicited thirdparty indication of interest that valued Lands’ End at $1.6 billion (inclusive of net debt), failed
even to consider a sale to an unaffiliated third party or to undertake a meaningful marketing
process, and refused to increase Lands’ End’s borrowing to support a larger “pre-spin” dividend
from Lands’ End to Sears (as recommended by the lead banker). As a consequence of the

5

 19-08250-rdd

Doc 1

Filed 04/17/19

Entered 04/18/19 00:28:55
Pg 7 of 110

Main Document

transaction, Sears’ shareholders received Lands’ End shares worth more than $1 billion for no
consideration. Over $750 million of that amount went to the Culpable Shareholders.
10.

The Lands’ End spinoff was patently designed to benefit Lampert and other Sears

shareholders at the expense of the enterprise and its creditors. In the words of Sears’ then-CFO
in a contemporaneous email, “[Lampert] was trying to optimize cash for [Sears] while
maximizing his (esl) equity stake . . . because he knows that [Lands’ End] is worth a great deal
outside of [Sears].” The Wall Street Journal presciently warned that “Lampert is carving out
some of the best pieces of [Sears] for its shareholders, moves that could leave bondholders at risk
if its remaining businesses continue to deteriorate.” In approving the spinoff, the Board willfully
ignored the interests of Sears’ creditors.
11.

Third, in July 2015, Sears closed the Seritage transaction, which included a rights

offering permitting shareholders to invest in Seritage, a newly created real estate investment trust
(“REIT”), and a sale-and-lease-back agreement allowing Seritage to take ownership of 266 of
Sears’ premier retail stores.
12.

The Seritage rights offering gave Sears shareholders (again, predominantly

Lampert, the ESL Shareholders, and the other Culpable Shareholders) the ability to purchase
Seritage’s common stock for no consideration to Sears. As reflected in the minutes of meetings
of the Sears Board, the subscription rights were intended to transfer value to Sears’ shareholders
and therefore divert that value from creditors. The Company achieved that goal: the trading
price of the rights confirms that at least $399 million of value was transferred from Sears to its
shareholders through the distribution of the rights for no consideration. Even worse, the
transferred value exceeded that amount because Lampert, the ESL Shareholders, and
Fairholme—each of whom could not exercise all of his or its rights due to laws governing

6

 19-08250-rdd

Doc 1

Filed 04/17/19

Entered 04/18/19 00:28:55
Pg 8 of 110

Main Document

ownership concentration of REITs—simultaneously traded their excess rights plus cash to
Seritage in exchange for interests in other, more valuable classes of Seritage stock and interests
in the Seritage Operating Partnership (which held title to the real estate).
13.

In the second step of the Seritage transaction, a sale-and-lease-back agreement

between Sears and Seritage, Sears transferred to Seritage its real estate interests in 266 of its
most profitable stores.
14.

The purchase price paid to Sears undervalued the transferred real estate by at least

$649 million. The amount of the purchase price was not negotiated. Instead, at the direction of
Lampert and the Sears Board, the purchase price for most of the stores was purportedly
established by appraisals conducted for Sears by Cushman & Wakefield (“C&W”). But (as the
Culpable Insiders knew or should have known) the C&W appraisals grossly undervalued the
stores, because the appraisals were fundamentally flawed and, among other things, intentionally
used under-market future lease rates as the sole basis for their valuations.
15.

Moreover, the Culpable Insiders arranged for Sears to lease the properties back

under blatantly unfair terms that, among other things: (i) permitted Seritage, at any time and at its
sole discretion, to “recapture” up to half of the square footage of each store, regardless of Sears’
plans for the store; (ii) permitted Seritage, again, at any time and at its sole discretion, to retake
the entirety of 21 specified stores upon the payment of a fee to Sears; and (iii) required Sears to
pay a hefty fee to Seritage if—as Lampert and the management team already intended—Sears
voluntarily terminated the lease on any of the remaining stores if they did not generate sufficient
cash flow to pay the rent owed to Seritage. Like the purchase price for the Sears stores, the
terms of the leases between Seritage and Sears were not negotiated between the parties, but were
established unilaterally by Lampert and the other members of Sears’ Board, in willful violation

7

 19-08250-rdd

Doc 1

Filed 04/17/19

Entered 04/18/19 00:28:55
Pg 9 of 110

Main Document

of the interests of Sears’ creditors. According to Sears’ own advisors, the value to Seritage of
these admittedly unusual lease terms was between $204 and $409 million.
16.

The Seritage transaction saddled Sears with hundreds of millions of dollars of rent

and termination fees ultimately paid to Seritage and resulted in the ouster of Sears from many of
its most profitable locations. As the Culpable Insiders intended, in the years since the transaction
closed, Seritage thrived and paid handsome dividends to its investors—principally Lampert, the
ESL Shareholders, and the other Culpable Shareholders—while Sears’ financial condition
continued to worsen.
17.

At the time of the Lands’ End and Seritage transactions, Sears was in what

Lampert would later call a “death spiral”—cannibalizing core assets to meet ordinary course
obligations, without any realistic plan to return to profitability. Its operating and financial
performance were declining at a dizzying rate. Its business did not generate anywhere near
sufficient cash flow to pay its debts as they came due (including interest and principal on billions
of dollars in debt, and obligations to fund the pension plans for approximately 100,000 retirees).
At the time of both transactions, Sears and other transferors (Sears Roebuck and the Real Estate
Transferors, respectively) had unreasonably small capital and were unable to pay their debts as
they came due. At the time of the Seritage transaction, Sears and the other Real Estate
Transferors were also insolvent under the balance-sheet test.
18.

To help conceal their fraud, the Culpable Insiders arranged for reviews of these

transactions by committees of directors, first by the Sears audit committee in the case of Orchard
and SHO and then by a newly-created Related-Party Transaction Sub-Committee (the “RPT
Committee”) in the case of Lands’ End and Seritage. These committees, however, failed to
protect the interests of Sears and its creditors or provide any meaningful check on the asset-

8

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 10 of 110

Main Document

stripping scheme. For example, the members of the RPT Committee relied on purported
solvency opinions and appraisals based on false projections. Despite Sears’ dire financial results
and dismal prospects, the RPT Committee focused completely on the interests of Sears
shareholders—willfully ignoring the grievous injury the Lands’ End and Seritage transactions
inflicted on Sears’ creditors. Indeed, in the Seritage transaction, the RPT Committee’s mandate
was limited to a review of Lampert and the ESL Shareholders’ equity ownership in Seritage, and
thus did not cover any of the other critical aspects of the transaction, including the price of the
rights offering, the value of the property itself, the one-sided lease terms, and the Company’s
solvency.
19.

Beginning in 2016 and continuing through October 15, 2018 (the “Petition

Date”), Sears staved off collapse only by selling core assets (including its iconic Craftsman
brand and the related business) and entering into a series of costly emergency secured loans
totaling billions of dollars with Lampert, the ESL Lenders, and Fairholme. Between April 2016
and the Petition Date, Lampert and the ESL Lenders made approximately $3.22 billion in
related-party loans to Sears, and Fairholme loaned the Company another $25 million
(the “Recent Related-Party Loans”). Although Sears was insolvent, these loans had minimal risk
to ESL and Fairholme because they were collateralized by Sears’ remaining real estate, ground
leases, inventory, receivables, and intellectual property assets. Lampert, the ESL Defendants,
and Fairholme breached their fiduciary duties by engaging in this self-dealing and the Directors
breached their fiduciary duties by approving these loans.
20.

As set forth below, Defendants are obligated to repay the billions of dollars of

value looted from Sears, return the real estate, rental payments, and termination fees they

9

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 11 of 110

Main Document

received, and pay damages to compensate Sears fully for the enormous damage they have
caused.
Jurisdiction
21.

This Court has subject-matter jurisdiction over this Adversary Proceeding

pursuant to 28 U.S.C. §§ 157 and 1334. This Adversary Proceeding is a core proceeding
pursuant to 28 U.S.C. § 157(b)(2)(A), (E), and (O).
22.

This Court has personal jurisdiction over each of the Defendants under

Bankruptcy Rule 7004(f).
23.

This Court also has personal jurisdiction over each of the Defendants under N.Y.

C.P.L.R. §§ 301 and 302 because Plaintiffs’ claims arise from acts by Defendants, in person or
through agents, transacting business within New York, committing tortious acts within New
York, and/or committing tortious acts causing injury to persons or property within New York.
At the relevant times, Sears (ticker symbol: SHLD) was traded on the NASDAQ Stock Market
(“NASDAQ”), a securities exchange located in New York. The shares of Orchard (ticker
symbol: OSH), SHO (ticker symbol: SHOS), and Lands’ End (ticker symbol: LE), and the SHO
subscription rights, also traded on NASDAQ, and the shares of Seritage (ticker symbol: SRG)
and the Seritage subscription rights traded on the New York Stock Exchange (“NYSE”), another
securities exchange located in New York. Each of the Orchard, Sears Canada, Lands’ End, and
Seritage transactions involved transfers of property owned, directly or indirectly, by plaintiff
Sears Roebuck, a New York corporation, including (in the case of Lands’ End and Seritage)
substantial interests in real property located in New York. Each of these transactions was also
accomplished through the use of lawyers, financial advisors, and/or other financial institutions
located in New York. Moreover, the Seritage Defendants, as well as defendants Haas and Tisch,
reside in New York.
10

 19-08250-rdd

24.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 12 of 110

Main Document

Venue in this district is proper pursuant to 28 U.S.C. §§ 1409(a) and (c).
The Parties

25.

Plaintiffs are Debtors in these Chapter 11 cases filed on October 15, 2018.

26.

Plaintiff Sears is and was the direct or indirect parent of the other plaintiffs. Sears

is a borrower or guarantor for certain debt outstanding as of the Petition Date. At all relevant
times, Sears was incorporated in Delaware.
27.

Plaintiff Sears Roebuck is and was a direct subsidiary of Sears and was the parent

of Orchard until 2011, a shareholder in Sears Canada, and the parent of Lands’ End until 2014.
Sears Roebuck also held title, directly or indirectly, to much of the real estate transferred in the
Lands’ End and Seritage transactions. Sears Roebuck is a borrower or guarantor for certain debt
outstanding as of the Petition Date.
28.

Plaintiff Sears Development Co. is and was a subsidiary of Sears (through Sears

Roebuck). Sears Development Co. held title to some of the real estate transferred in the Seritage
transaction. Sears Development Co. is a borrower or guarantor for certain debt outstanding as of
the Petition Date.
29.

Plaintiff Kmart Corporation is and was an indirect subsidiary of Sears (through

Kmart Holdings Corporation). Kmart Corporation held title to some of the real estate transferred
in the Seritage transaction. Kmart Corporation is also the successor by merger to several other
entities that held title to some of the real estate transferred in the Seritage transaction.1 Kmart
Corporation is a borrower or guarantor for certain debt outstanding as of the Petition Date.

1

Those entities are: Troy CMBS Property, LLC; Troy Coolidge No. 3, LLC; Troy Coolidge No. 8, LLC; Troy
Coolidge No. 9, LLC; Troy Coolidge No. 19, LLC; Troy Coolidge No. 20, LLC; Troy Coolidge No. 25, LLC;
Troy Coolidge No. 26, LLC; Troy Coolidge No. 28, LLC; Troy Coolidge No. 33, LLC; Troy Coolidge No. 34,
LLC; Troy Coolidge No. 36, LLC; Troy Coolidge No. 37, LLC; Troy Coolidge No. 41, LLC; Troy Coolidge
No. 43, LLC; Troy Coolidge No. 45, LLC; Troy Coolidge No. 51, LLC; Troy Coolidge No. 54, LLC; and Troy
Coolidge No. 58, LLC.

11

 19-08250-rdd

30.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 13 of 110

Main Document

Plaintiff Kmart of Washington, LLC is and was an indirect subsidiary of Sears

(through Kmart Holdings Corporation and Kmart Corporation). Kmart of Washington, LLC held
title to some of the real estate transferred in the Seritage transaction. Kmart of Washington, LLC
is a borrower or guarantor for certain debt outstanding as of the Petition Date.
31.

Defendant Lampert was Chairman of the Board of Sears from the time of the

2005 Kmart/Sears merger until his resignation on February 12, 2019. He was also the CEO of
Sears from February 2013 until the day before the Petition Date. In addition, Lampert is the sole
founder, owner, Chairman, and CEO of ESL (as well as a limited partner in certain of the ESL
Shareholders), and a chairman of the board of trustees of Seritage. Lampert and ESL initially
owned 43.5% of the Seritage Operating Partnership directly and 1.8% of the Operating
Partnership through their ownership of Seritage Class A shares, which (directly or through
subsidiaries) holds title to the Seritage real estate assets. On information and belief, Lampert
resides in Florida.
32.

Defendant ESL is an investment manager incorporated in Delaware, with its

principal place of business in Florida. ESL is controlled by Lampert, who is its sole owner. On
information and belief, ESL’s principal investments during the relevant period were in Sears and
companies spun off from Sears.
33.

Defendants RBS Partners, L.P., CRK Partners, LLC, SPE Master I, L.P., ESL

Partners, L.P., SPE I Partners, LP, RBS Investment Management, L.L.C., ESL Institutional
Partners, L.P., and ESL Investors, L.L.C. (together, the “ESL Shareholders”) are investment
funds controlled by Lampert and ESL that were shareholders of Sears at relevant times. ESL
was the general partner of RBS Partners, L.P. and ESL Investors, L.L.C., the manager of RBS
Investment Management, L.L.C., and the sole member of CRK Partners, LLC. RBS Partners,

12

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 14 of 110

Main Document

L.P. was the general partner of SPE Master I, L.P., ESL Partners, L.P., and SPE I Partners, LP
and the manager of ESL Investors, L.L.C. RBS Investment Management, L.L.C. was the general
partner of ESL Institutional Partners, L.P. All of the ESL Shareholders are incorporated in
Delaware.
34.

Together, Lampert and ESL held approximately 61.2% of Sears’ stock at the time

of the Orchard spinoff, approximately 62% of Sears’ stock at the time of the SHO rights offering,
approximately 61.8% of Sears’ stock at the time of the Sears Canada partial spinoff,
approximately 48.4% of Sears’ stock at the time of the Lands’ End spinoff, and approximately
47.8% of Sears’ stock at the time of the Seritage rights offering. Throughout the relevant time
period, Lampert and ESL’s disclosures on Schedule 4 and Schedule 13D, as well as Sears’
definitive proxy statements, attributed the entirety of Lampert and ESL’s holdings to both
Lampert and ESL.
35.

The ESL Lenders are investment funds controlled by Lampert and ESL that made

related-party loans to Sears. The ESL Lenders and ESL Shareholders were jointly controlled by
Lampert and ESL. Lampert was and is the sole member and sole owner of JPP LLC, and ESL
Partners L.P. was and is the sole member and sole owner of JPP II LLC. RBS Partners, LP was
and is the manager of JPP II LLC. The ESL Lenders are incorporated in Delaware.
36.

Defendant Fairholme is an investment advisor incorporated in Delaware, with its

principal place of business in Miami, Florida. Fairholme was founded in 1997 by Bruce
Berkowitz. Fairholme held approximately 15.2% of Sears’ stock at the time of the Orchard
spinoff, approximately 15.1% of Sears’ stock at the time of the SHO rights offering,
approximately 15.8% of Sears’ stock at the time of the Sears Canada partial spinoff,

13

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 15 of 110

Main Document

approximately 22.8% of Sears’ stock at the time of the Lands’ End spinoff, and approximately
25% of Sears’ stock at the time of the Seritage rights offering.
37.

Fairholme’s interests were represented on the Sears Board by Cesar L. Alvarez (a

director of Fairholme’s parent company) from December 2013 to May 2017 and by Bruce
Berkowitz (Fairholme’s founder and Chief Investment Officer and President of Fairholme’s
parent company) from February 2016 to October 2017.
38.

Defendant Cesar L. Alvarez was a director of Sears from December 18, 2013 until

May 10, 2017. As a director, Alvarez approved the Lands’ End spinoff and the Seritage
transaction. Alvarez also approved certain of the Recent Related-Party Loans, as defined and
discussed below. Alvarez is also a director of Fairholme’s parent company. On information and
belief, Alvarez resides in Florida.
39.

Defendant Bruce Berkowitz was a director of Sears from February 24, 2016 to

October 31, 2017. As a director, Berkowitz approved certain of the Recent Related-Party Loans.
Berkowitz is also the founder and President of Fairholme’s parent company. On information and
belief, Berkowitz resides in Florida.
40.

Defendant Alesia Haas was a director of Sears from February 24 to December 13,

2016. As a director Haas approved certain of the Recent Related-Party Loans. On information
and belief, Haas resides in New York.
41.

Defendant Kunal Kamlani was a director of Sears from December 3, 2014 to

February 12, 2019. He was a member of the audit committee of the Board from 2014 to 2015
and a member of the RPT Committee from December 2014 to March 2016. As a director of
Sears and a member of the RPT Committee, Kamlani approved the Seritage transaction.
Kamlani also approved the Recent Related-Party Loans, including approving certain of the

14

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 16 of 110

Main Document

Recent Related-Party Loans as a member of the RPT Committee. In March 2016, Lampert hired
Kamlani as the President of ESL. On information and belief, Kamlani resides in Florida.
42.

Defendant Steven Mnuchin was a director of Sears from March 30, 2005 until

December 2, 2016 and a member of the audit committee from 2005 to 2009. As a director,
Mnuchin approved the Orchard spinoff, the SHO rights offering, the Sears Canada partial
spinoff, the Lands’ End spinoff, and the Seritage transaction. Mnuchin also approved certain of
the Recent Related-Party Loans. Mnuchin was an investor in ESL (as a limited partner in certain
of the ESL Shareholders), ESL’s Vice-Chairman from December 2002 to August 2003, and a
member of ESL’s board of directors at all relevant times. Mnuchin is a longstanding personal
friend of Lampert’s, having been his college roommate at Yale University and his colleague at
Goldman, Sachs & Co. in the 1980s. On information and belief, Mnuchin resides in either
California, New York, or Washington D.C.
43.

Defendant Thomas J. Tisch has been a director of Sears since 2005 and a member,

at various times, of the audit, compensation, and nominating and governance committees of the
Board. As a director, Tisch approved the Orchard spinoff, the SHO rights offering, the Sears
Canada partial spinoff, the Lands’ End spinoff, and the Seritage transaction. Tisch also approved
all of the Recent Related-Party Loans. Tisch also is an investor in ESL (as a limited partner in
certain of the ESL Defendants). Separately from ESL, Tisch also owned or controlled
approximately 3.7% of Sears’ stock at the time of the Orchard spinoff, approximately 3.6% of
Sears’ stock at the time of the SHO rights offering and Sears Canada partial spinoff, and
approximately 3.5% of Sears’ stock at the time of the Lands’ End spinoff and the Seritage rights
offering. Tisch owned some shares personally and controlled other shares held by his brothers,
family trusts, and family foundations (including Tisch Foundation, Inc. and The Alice M. &

15

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 17 of 110

Main Document

Thomas J. Tisch Foundation, Inc.). Tisch had sole voting power over certain shares held by
trusts of which he and/or his brothers were trustees and/or beneficiaries. Tisch also had shared
voting power over additional shares, including the shares held by two family foundations. On
information and belief, Tisch resides in New York.
44.

Together, Alvarez, Lampert, Mnuchin, and Tisch are referred to as the “Lands’

End Directors”.
45.

Together, Alvarez, Kamlani, Lampert, Mnuchin, and Tisch are referred to as the

“Seritage Directors”.
46.

Together, Alvarez, Berkowitz, Haas, Kamlani, Lampert, Mnuchin, and Tisch are

referred to as the “Recent Related-Party Loan Directors”.
47.

Defendant Seritage is a publicly traded REIT (NYSE:SRG) incorporated in

Maryland, with its principal place of business in New York.
48.

Defendant Seritage Operating Partnership is Seritage’s operating partnership. The

Seritage Operating Partnership is registered in Delaware and has its principal place of business in
New York. Lampert, the ESL Defendants, and Seritage are the owners of the Seritage Operating
Partnership.
49.

Defendant KMT Mezz was an indirect subsidiary of Sears (through Kmart

Corporation) and, following the Seritage transaction, was and is an indirect subsidiary of
Seritage (through Seritage Operating Partnership). KMT Mezz was the transferee of Seritage
KMT Finance LLC (described below).
50.

Defendant SRC Mezz was an indirect subsidiary of Sears (through Sears

Roebuck) and, following the Seritage transaction, was and is an indirect subsidiary of Seritage
(through Seritage Operating Partnership). SRC Mezz was the transferee of Seritage SRC

16

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 18 of 110

Main Document

Finance LLC, Seritage GS Holdings LLC, Seritage SPS Holdings LLC, and Seritage MS
Holdings LLC (described below).
51.

Defendant Seritage KMT Finance LLC was an indirect subsidiary of Sears

(through Kmart Corporation) and, following the Seritage transaction, was and is an indirect
subsidiary of Seritage (through Seritage Operating Partnership and KMT Mezz). Seritage KMT
Finance LLC is incorporated in Delaware and has its principal place of business in New York.
Seritage KMT Finance LLC was an initial transferee of certain real estate assets transferred in
the Seritage transaction.
52.

Defendant Seritage SRC Finance LLC was an indirect subsidiary of Sears

(through Sears Roebuck) and, following the Seritage transaction, was and is an indirect
subsidiary of Seritage (through Seritage Operating Partnership and SRC Mezz). Seritage SRC
Finance LLC is incorporated in Delaware and has its principal place of business in New York.
Seritage SRC Finance LLC was an initial transferee of certain real estate assets transferred in the
Seritage transaction.
53.

Defendants Seritage GS Holdings LLC, Seritage SPS Holdings LLC, and Seritage

MS Holdings LLC were indirect subsidiaries of Sears (through Sears Roebuck) and, following
the Seritage transaction, were and are indirect subsidiaries of Seritage (through Seritage
Operating Partnership and SRC Mezz). Seritage GS Holdings LLC, Seritage SPS Holdings
LLC, and Seritage MS Holdings LLC are incorporated in Delaware and have their principal
places of business in New York. They were initial transferees of certain joint venture interests in
real estate assets that were transferred in the Seritage transaction.

17

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 19 of 110

Main Document

Factual Background
A.

Plaintiffs’ Businesses
54.

Prior to the Petition Date, Sears was a holding company for two nationwide retail

brands, “Sears” and “Kmart.” Sears Roebuck and Kmart once were the largest and secondlargest retailers in the United States by sales (until the late 1980s).
55.

Sears Roebuck’s department stores averaged 150,000 square feet and often served

as anchor tenants in shopping malls. Sears Roebuck sold a wide variety of products, including
appliances, apparel, consumer electronics, outdoor furniture, and automotive tires, and batteries.
56.

Kmart’s stores averaged 100,000 square feet and were primarily located in strip

malls. Kmart also sold a variety of products, including apparel, consumer electronics, children’s
toys, lawn items, and groceries.
57.

According to Sears’ SEC filings, Sears’ key competitors included, depending on

the products, big-box stores like Target and Walmart, department stores like J.C. Penney, Kohl’s
and Macy’s, home improvement stores like Home Depot and Lowe’s, consumer electronics
stores like Best Buy, and online retailers like Amazon.
B.

Control of Sears by Lampert, the ESL Defendants, and Fairholme
58.

Lampert and ESL acquired control of Kmart after it filed for bankruptcy

protection in January 2002, by purchasing Kmart bonds and bank debt with an aggregate face
value of more than $1 billion at significant discounts. Kmart emerged from bankruptcy in 2003
with Lampert and ESL owning approximately 52.6% of its stock, and with Lampert as chairman
of its board of directors. Lampert quickly packed the Kmart board with other directors loyal to
him and ESL, including Mnuchin, Tisch, and William Crowley (the then-President and COO of
ESL).

18

 19-08250-rdd

59.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 20 of 110

Main Document

As Chairman, Lampert led Kmart into a merger with Sears Roebuck.

Immediately prior to the merger, Lampert and ESL held approximately 53.7% of Kmart’s stock
as well as 15% of Sears Roebuck’s stock. The merger was announced in November 2004 and
closed in March 2005. After the merger, Sears was the parent company of both retailers;
Lampert and ESL held approximately 39% of Sears’ stock; Lampert was Chairman of the Board;
and the Board also included three other ESL-affiliated directors: Crowley, Mnuchin, and Tisch.
Given the fragmented ownership of the remainder of Sears’ publicly traded shares, and the
presence of the ESL-affiliated directors, Lampert and ESL’s collective 39% holdings were
sufficient to control the Company.
60.

After the merger, Lampert and ESL continued to acquire Sears shares and, by

August 2008 and at many times thereafter, Lampert and ESL together held an outright majority
of Sears’ shares.
61.

Lampert used this control over the Company to become Sears’ de facto CEO.

Following the Sears/Kmart merger, in the words of Alan Lacy (the pre-merger CEO of Sears
Roebuck): “Effectively, Eddie was CEO. I didn’t want to pretend to be the CEO. I stayed
another nine months to help in the transition. I stopped being CEO in ‘05, and left in ‘06.”
Lampert replaced Lacy with Aylwin Lewis (whom he had previously hired as Kmart’s CEO).
Though Lewis was CEO in title, in practice Lampert had that role. The heads of several
important departments reported to Lampert directly. In early 2008, Lampert orchestrated the
ouster of Lewis as CEO and the appointment of W. Bruce Johnson as “interim” CEO. Lampert
also assumed the role of conducting the search for a permanent CEO. Johnson remained as
interim CEO until early 2011, becoming, at the time, the longest then-serving temporary head of
a publicly traded U.S. company.

19

 19-08250-rdd

62.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 21 of 110

Main Document

Lampert replaced Johnson with Louis D’Ambrosio, a “permanent” CEO, who had

previously served as a consultant to Sears. Given Lampert and ESL’s share ownership, and
representation on the board by Lampert, Mnuchin, and Tisch, Lampert and ESL had the practical
ability to fire D’Ambrosio (as they had fired Lewis) and to set his multi-million-dollar
compensation. Accordingly, D’Ambrosio acquiesced to Lampert and ESL’s plans, including the
spinoff of Orchard, the SHO rights offering, and the partial spinoff of Sears Canada. These three
ESL-affiliated directors (Lampert, Mnuchin, and Tisch), together with D’Ambrosio, constituted
an outright majority of the seven-member board that approved the Orchard, SHO, and Sears
Canada transactions in 2011 and 2012.
63.

In early 2013, Lampert orchestrated the ouster of D’Ambrosio and installed

himself as CEO of Sears.
64.

Later that year, Fairholme also gained board representation. By the second

quarter of 2008, Fairholme owned more than 10% of Sears’ stock; by the end of 2013, more than
20%; and at the time of the Lands’ End and Seritage transactions, 23–25%. Fairholme’s
principal, Bruce Berkowitz, was in frequent contact with Lampert, who supported the addition of
Alvarez and then Berkowitz to Sears’ Board.
65.

Fairholme’s investment in Sears was based on the premise that shareholders

would realize returns from Sears’ valuable real estate assets, and not on Sears’ ability to operate
its business profitably. As Berkowitz stated in a December 2008 interview (when Sears was
trading at around $53 per share): “We didn’t buy Sears based on the business. There’s too much
retail in the U.S. . . . We invested because of the company’s real estate holdings. It has some
fabulous locations . . . . The real estate alone is conservatively—and I mean conservatively—
worth $90 per share.” Similarly, Berkowitz told Fortune magazine in November 2012 that

20

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 22 of 110

Main Document

Sears’ stock (which then traded near $60 per share) “would be over $160 a share if the land on
the books was fully valued” because “today’s standalone store can be tomorrow’s multi-use
hotel/residential-retail center.” Berkowitz said that he expected “gigantic cash flows from the
closing of locations, [and] the pulling-out of the cash from inventory, work in process, and
distribution centers.”
66.

Lampert, ESL, and Fairholme’s combined ownership of approximately 75% of

Sears’ stock, and the close coordination among them, gave them operational control of Sears.
67.

A majority (four of the seven) of the directors of Sears who approved the Lands’

End spinoff—Alvarez, Lampert, Mnuchin, and Tisch—had substantial investments in the ESL
Shareholders (Lampert, Mnuchin, and Tisch) or an affiliation with Fairholme (Alvarez).
Lampert and Tisch also owned substantial Sears stock individually.
68.

A fifth director who approved the Seritage transaction (Kamlani), although not yet

affiliated with ESL at the time of the transaction, became the President of ESL less than nine
months later, in March 2016. As Kamlani admitted, during his tenure as a director prior to
joining ESL, it was “no secret that I was getting anxious and wanted to get back to work,” which
was “not lost on Eddie.” During this period, the position of President of ESL (filled by George
L. Mikan III until December 2014) remained vacant. His desire to fill this position gave
Kamlani, who at the time sat on the RPT Committee, a strong personal incentive to acquiesce to
Lampert’s wishes and approve the Seritage transaction.
69.

From March 2016 (when Kamlani became President of ESL) until October 2017

(when Berkowitz resigned from the Board), the ESL and Fairholme affiliated directors
comprised an outright majority of the Board.

21

 19-08250-rdd

C.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 23 of 110

Main Document

The Rapid Deterioration of Sears
70.

After peaking in 2006, by every relevant measure, Sears began a rapid, inexorable

decline. Beginning in 2006, Sears’ revenue declined every year; its operating income and net
income fell to de minimis levels in FYs 2009–2010, and went negative thereafter; and its debt
burden grew well beyond its capacity to pay.
71.

At the same time, in a vicious cycle, Sears was forced to close stores and reduce

capital expenditures, undercutting its ability to generate revenue. Sears was facing increased
competition—both from more successful brick-and-mortar stores and online market places—and
losing market share. And Sears’ Shop Your Way (“SYW”) loyalty program—which Lampert
claimed as his key initiative and proselytized as the savior of Sears’ future and an essential
source of potential future profitability—consistently failed to deliver results.
72.

As a result, key third parties raised serious concerns about Sears’ solvency.

Sears’ suppliers demanded shorter trade terms, resulting in an effective loss of hundreds of
millions of dollars of trade credit. And the Pension Benefit Guaranty Corporation (“PBGC”)
raised concerns about Sears’ ability to honor its billions of dollars of liabilities to its unfunded,
defined-benefit pension plans and threatened to terminate the plans, ultimately forcing Sears to
“ring fence” collateral to protect the interests of the plans and the PBGC.
1.

Sears’ Deteriorating Financial Performance

73.

Prior to the Lands’ End spinoff and the Seritage transaction, multiple financial

metrics showed clearly that Sears’ performance was in a steep, multi-year free fall. Between
FY 2006 and FY 2014, Sears’ revenue declined steadily from $53 billion to $31.2 billion, or
approximately 41%. Sears had operating losses (i.e., losses before interest and taxes) in each

22

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 24 of 110

Main Document

year beginning in FY 2011 of between $838 million and $1.5 billion. Between FY 2011 and
FY 2014, Sears had incurred cumulative net losses of more than $7.1 billion.2
74.

Revenue. Since FY 2006, when Sears earned approximately $53.02 billion in

revenue, Sears’ revenue has declined each and every year. For FY 2013 and FY 2014, Sears
reported revenue of approximately $36.19 billion and $31.2 billion, respectively. Sears’ revenue
for FY 2014 was more than $20 billion (or 40%) below its FY 2006 peak, and more than $10
billion (or 25%) below its results in FY 2011, only three years earlier.

2

Sears used a retail fiscal year that ran approximately from February 1 to January 31. Following this retail
convention, Sears refers to a fiscal year (“FY”) by the calendar year in which it began. For example, FY 2012
began January 29, 2012 and ended February 2, 2013. Sears filed with the SEC its results for FY 2013 in March
2014 (just prior to the Lands’ End spinoff) and the results for FY 2014 in March 2015 (a couple months prior to
the Seritage transaction).

23

 19-08250-rdd

75.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 25 of 110

Main Document

Cash Flow from Operations. Sears achieved only marginal cash flow from

operations in FY 2010 followed by negative cash flow from operations each year thereafter.
Prior to the Orchard, SHO, and Sears Canada transactions, Sears had cash flow from operations
of just $123 million (FY 2010) and then, prior to the SHO and Sears Canada transactions,
negative $275 million (FY 2011). Continuing up to and during the Lands’ End and Seritage
transactions, Sears had cash flow from operations of negative $303 million (FY 2012), negative
$1.11 billion (FY 2013), and negative $1.39 billion (FY 2014).

24

 19-08250-rdd

76.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 26 of 110

Main Document

Operating Income (Loss). Sears achieved only marginal operating income in

FY 2008, FY 2009, and FY 2010, and since then it has reported negative operating income
(an operating loss) every year beginning in FY 2011. Prior to the Orchard, SHO, and Sears
Canada transactions, Sears posted operating income of just $302 million to $667 million
(FYs 2008–2010) and then, prior to the SHO and Sears Canada transactions, an annual operating
loss of approximately $1.5 billion (FY 2011). Continuing up to and during the Lands’ End and
Seritage transactions, Sears posted annual operating losses of approximately $840 million
(FY 2012), $930 million (FY 2013), and $1.5 billion (FY 2014)—a total operating loss of $4.78
billion in only four years. In the years reported immediately prior to the Seritage transaction,
FY 2013 and FY 2014, Sears’ operating losses deepened by 11% and 62% year-over-year,
respectively.
Operating Income / (Loss)
$3
$2.53 B

$3
$2.12 B
$2

$1.59 B
$2
$1
$1

$0.67 B
$0.30 B

$0.44 B

$0
($1)

($0.43) B

($1)
($2)

($0.84) B

($1.50) B

($2)

($0.93) B

($1.00) B
($1.51) B
($1.98) B

($3)
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

25

 19-08250-rdd

77.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 27 of 110

Main Document

Pre-tax Income (Loss). Sears earned modest pre-tax income in FY 2008,

FY 2009, and FY 2010, and since then it has reported negative pre-tax income (a pre-tax loss)
each and every year beginning in FY 2011. Prior to the Orchard, SHO, and Sears Canada
transactions, Sears posted only marginal GAAP pre-tax income of $170 million to $390 million
(FYs 2008–2010) and then, prior to the SHO and Sears Canada transactions, a GAAP pre-tax
loss of approximately $1.8 billion (FY 2011). Continuing and during the Lands’ End and
Seritage transactions, Sears posted GAAP pre-tax losses of approximately $1 billion (FY 2012),
$972 million (FY 2013), and $1.7 billion (FY 2014).

26

 19-08250-rdd

78.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 28 of 110

Main Document

Net Income. Sears barely achieved positive net income in FY 2008, FY 2009,

and FY 2010, and since then it has reported deep net losses each and every year beginning in
FY 2011. Prior to the Orchard, SHO, and Sears Canada transactions, Sears had only marginal
net income of $50 million to $240 million (FYs 2008–2010) and then, prior to the SHO and
Sears Canada transactions, a net income loss of approximately $3.1 billion (FY 2011).
Continuing and during the Lands’ End and Seritage transactions, Sears continued to have net
income losses of approximately $930 million (FY 2012), $1.4 billion (FY 2013), and $1.7 billion
(FY 2014), or an aggregate loss in four years of $7.1 billion. In the two years reported
immediately prior to the Seritage transaction, Sears’ net income losses deepened by 47% and
23% year-over-year, respectively.

27

 19-08250-rdd

79.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 29 of 110

Main Document

Adjusted EBITDA. Sears’ reported Adjusted EBITDA was de minimis during FY

2011–2012 and then negative starting in FY 2013. Prior to the SHO and Sears Canada
transactions, Sears posted Adjusted EBITDA of just $277 million (FY 2011)—down 80% yearover-year. Continuing up to and during the Lands’ End and Seritage transactions, Sears posted
Adjusted EBITDA of approximately $626 million (FY 2012), negative $337 million (FY 2013),
and then negative $718 million (FY 2014).

Adjusted EBITDA
$3

$3

$2.46 B

$2

$1.74 B
$1.52 B

$2

$1.39 B

$1
$0.63 B
$1

$0.28 B

$0
($0.34) B

($1)

($0.56) B
($0.72) B

($1)

($0.84) B

($0.81) B

FY 2015

FY 2016

($2)
FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

28

FY 2013

FY 2014

FY 2017

 19-08250-rdd

80.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 30 of 110

Main Document

Net Debt. At the same time that Sears’ revenue, operating income, and net

income were declining, Sears’ net debt—its total debt minus its cash and cash equivalents—rose
steadily. Prior to the Orchard, SHO, and Sears Canada transactions, Sears’ net debt grew to
$1.83 billion (FY 2010) and then, prior to the SHO and Sears Canada transactions, net debt grew
$2.7 billion (FY 2011)—up 123% and 50%, respectively. Continuing up to and during the
Lands’ End and Seritage transactions, Sears’ net debt remained at $2.5 billion (FY 2012) before
growing to $3.2 billion (FY 2013) and then $3.5 billion (FY 2014). In FY 2013 and FY 2014,
net debt grew by 28% and 9% year-over-year, respectively.

29

 19-08250-rdd

81.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 31 of 110

Main Document

Net Debt-to-Equity Ratio. Sears’ increase in debt was even more dramatic in

comparison to Sears’ book equity. Sears’ ratio of net debt to equity had been rising
exponentially since FY 2009: from 0.09 (FY 2009) to 0.21 (FY 2010), 0.63 (FY 2011), 0.79
(FY 2012), and then 1.48 (FY 2013). This ratio reflects a material increase in Sears’ effective
debt in the period leading up to the transactions at issue, indicating a high degree of risk that
Sears would be unable to pay its debts. By FY 2014, Sears’ book equity was negative, therefore
rendering the ratio not meaningful.
Net Debt-to-Equity Ratio
1.6
1.48
1.4

1.2

1.0
0.79

0.8
0.63
0.6

0.4

0.2

0.13

0.21

0.19
0.09

0.0
-0.04

-0.02

FY 2005

FY 2006

(0.2)
FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

2.

Sears’ Deteriorating Operating Performance

82.

Sears’ deteriorating condition also was reflected in several troubling operational

trends: store closures; same-store sales declines; reduced investment in stores (capital
expenditures); increased competition and decreased market share; and the failure of the SYW

30

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 32 of 110

Main Document

loyalty/membership program to drive increased sales. In view of these operating trends, it was
abundantly clear that Sears had no viable path to service its debt, let alone return to profitability.
83.

Store closures. Immediately after the Sears/Kmart merger, the combined

Company operated more than 3,433 stores in the United States, including 935 Sears-branded
“broadline” (later referred to as “full-line”) stores, 1,095 Sears-branded specialty stores, 1,388
Kmart-branded stores, and 15 Lands’ End stores. Lampert publicly denied at the time that he
planned to close “tens of dozens” or even “hundreds” of stores, stating that only a few of the
poorest performing stores would be closed.
84.

To the contrary, over the next decade, Sears in fact closed more and more stores.

Even after controlling for the significant number of stores that were spun off in the Orchard,
SHO, Sears Canada, and Lands’ End transactions (by omitting those stores from the prior period
numbers), Sears reduced its store count between 2011 and 2014 by 683 stores, or 28%.

85.

As Sears’ losses began to mount, Lampert began to talk about a supposed strategy

of closing Sears’ worst stores to “right-size” the Company, decrease its operating expenses, and

31

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 33 of 110

Main Document

increase its profitability. But Sears’ problems were the result of a prolonged lack of innovation,
intense competition, failed management strategies, and under-investment at the corporate level,
of which the store-level problems were only a symptom. As Lampert knew at the time, the
strategy of closing money-losing stores—which had been tried unsuccessfully by peers like Toys
“R” Us and Sports Authority—could not return the Company to profitability. Instead, it would
result in a “death spiral.”
86.

Closing stores created the temporary illusion of boosting Sears’ balance sheet

with revenue from the liquidation of inventory and/or the sale of real estate and with reduced
operating expenses, but store closures also eroded Sears’ long-term revenue base. Despite
Lampert’s professed emphasis on online channels, in-store sales remained responsible for 97%
or more of the Company’s revenue at all relevant times.
87.

Sears’ store closures cannot be explained as a good faith strategy of closing

unprofitable stores to “right-size” the Company. Sears was not just closing its unprofitable
stores. In 2012 and 2013, Sears sold at least a dozen profitable stores. As The Wall Street
Journal observed in October 2013, “selling off some of its best stores to raise cash” is “an
unusual strategy that makes it harder for the struggling chain to improve its sales even as it helps
shore up its financial position.”3
88.

In addition to undercutting Sears’ revenue base, store closures undercut the value

of Sears’ affiliated brands (such as Craftsman, DieHard, and Kenmore), whose reputations were
linked to that of Sears and which relied upon Sears’ in-store sales for much of their market share.

3

Suzanne Kapner, “Sears Cashes Out of Prime Stores; Several of Its Most-Profitable Locations Have Been
Sold,” The Wall Street Journal, Oct. 8, 2013.

32

 19-08250-rdd

89.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 34 of 110

Main Document

Reduced Capital Expenditures. Under Lampert’s leadership, Sears’ capital

expenditures drastically declined, reflecting lower investments in maintaining and upgrading its
stores. Specifically, Sears’ capital expenditures declined from $1.1 billion the year before the
Kmart/Sears merger (for both companies) to $432 million by FY 2011 and declined in the
subsequent years: $378 million (FY 2012), $329 million (FY 2013), and $270 million
(FY 2014). Sears’ capital expenditures during this period were far less than those of some of its
key competitors, such as Kohl’s and J.C. Penney.
90.

As many analysts noted, Sears’ failure to invest in its stores made its stores

increasingly unattractive to customers and further reduced the Company’s chances for long-term
profitability. In March 2014, an Albion analyst report stated that “[i]t is common knowledge that
Sears refuses to invest in its store base.” Similarly, Standard & Poor’s (“S&P”) noted in several
of its reports, published throughout 2014 and 2015, that “[a] lack of store upgrades has hurt the
company’s ability to attract and retain talented merchants, to engage store employees, and to win
new customers.”
91.

As Rob Schriesheim (who was hired shortly thereafter to serve as CFO) wrote to

D’Ambrosio and Lampert in June 2011: “it seems there has been less investment in store assets
and labor as compared to competitors and [same-store sales] trends have not been favorable.”
92.

Schriesheim was right. Sears’ same-store sales had declined every year since the

Sears/Kmart merger, demonstrating that Sears’ supposed effort to “right-size” the Company by
removing unprofitable stores was a failure:

33

 19-08250-rdd

93.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 35 of 110

Main Document

Increased competition and loss of market share. According to reports issued by

IBISWorld, Sears’ market share in the department store industry—a declining and intensely
competitive industry—had been shrinking since at least 2008, from 24.0% in March 2008 to
17.4% in May 2013, 16.6% in February 2014, and 15.3% in May 2015. Sears was losing market
share both to larger brick-and-mortar retailers (such as Walmart) and online sellers (such as
Amazon). As an Imperial Capital analyst noted in January 2012, “Sears’ retail operating
platforms have been hurt by underinvestment and poor execution while the competitive climate
has intensified.”
94.

For example, appliances, such as washers, dryers, and refrigerators, have long

been an important product line for Sears. Since World War I and until recently, Sears held a

34

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 36 of 110

Main Document

dominant market share in appliances. Sears owned “Kenmore,” a 100-year-old brand name,
which for decades was the best-selling brand of appliances in the United States. Over the past
few decades, appliances directly contributed approximately one-fifth of Sears’ total revenue,
while also driving sales in other product lines by bringing customers into the stores. As of 2002,
Sears maintained a market share of 40% in appliances. But since the Kmart merger, Sears’
market share for appliances steadily eroded. As of 2013, Sears’ market share in appliances had
declined to 29%, in the face of increased competition from Home Depot, Lowe’s, and others.
Kenmore has been surpassed in sales by Whirlpool—which Sears had terminated as the
manufacturer of Kenmore—and by G.E.
95.

The failure of Shop Your Way. Since the merger, Lampert had promised to

“transform” Sears. That transformation never materialized. As Imperial Capital noted in
January 2012, Sears “still suffers from the lack of a clear definitive ‘go to market’ strategy and
‘point of differentiation,’ based on observations we made during store visits, phone calls made to
the company, discussions with current employees, customers, investors, and industry
participants.”
96.

Lampert claimed that the centerpiece of the promised transformation was SYW, a

no-cost (to customers) membership rewards program created in 2009 that was supposed to
provide Sears with data about its customers that it could leverage to drive results. Specifically,
the information obtained from SYW was supposed to enable Sears to increase margins with
personalized pricing, while also reducing expenditures on traditional marketing. In exchange for
their personal information, SYW members receive coupons, free shipping, and “points” that can
be converted into cash. As explained by director Ann Reese, the goal of SYW was to have SYW
members direct “more share of wallet” to Sears.

35

 19-08250-rdd

97.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 37 of 110

Main Document

While many customers (accounting for 75% of Sears’ sales) signed up for SYW,

Sears never succeeded in its goal of causing members to materially increase their purchases from
Sears.
98.

SYW did not offer Sears a material competitive advantage. Indeed, many of

Sears’ competitors had already launched similar (or superior) programs prior to SYW. Amazon,
for example, launched “Amazon Prime”—a paid membership program that offers members,
among other benefits, two-day free shipping on eligible purchases—in 2005. Best Buy launched
“Reward Zone,” a customer loyalty program, in 2004. Macy’s launched “Star Rewards,” another
customer loyalty program, in 2005. And J.C. Penney also introduced a rewards program in 2008.
99.

In May 2017, Centerview (an advisor retained by the Strategic Planning

Committee of the Board) advised that “SYW must result in significant margin and/or volume
increases to be break even; Company analysis indicates program generates positive ROI, but
absolute contribution levels have yet to achieve scale.” Centerview also noted that “SYW
membership and activity levels have trended downward over the past four years.” Centerview
concluded that, “given its limited penetration and user base, we view SYW as an incremental
‘enabler’ to help improve operating efficiency rather than a transformative ‘game-changer’ that
alters the Company’s near-term operating trajectory.”
100.

As a senior Centerview banker told counsel for the Subcommittee: “There weren’t

enough active members buying enough stuff at high enough prices.” The “strategy, it wasn’t
working.” Contrary to their stated views, Lampert and other insiders clearly knew that SYW
could not halt Sears’ steep decline.
3.

Third Parties Express Concerns About Sears’ Solvency.

101.

In light of the Company’s declining financial and operating performance, Sears’

solvency was increasingly called into doubt by third parties, including rating agencies (which
36

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 38 of 110

Main Document

downgraded Sears’ credit ratings), factors (which reduced their willingness to purchase accounts
receivable from Sears’ suppliers), credit insurers (which demanded increased premiums to write
financial guaranties on Sears), suppliers (which reduced their trade credit to Sears), and the
PBGC (which demanded protection and threatened to terminate the Sears pension plans).
102.

Rating agencies. In the years leading up to the Lands’ End spinoff and Seritage

transaction, all three major rating agencies took notice of Sears’ deteriorating financial and
operating performance and repeatedly downgraded Sears’ credit ratings.
103.

Moody’s Investors Service (“Moody’s”) downgraded Sears’ issuer rating,

corporate family rating, and probability of default rating from Ba2 (which it had held since 2009)
to Ba3 in July 2011. Moody’s further downgraded Sears to B1 in December 2011 and then again
to B3 in January 2012. In January 2014, Moody’s again downgraded Sears to Caa1. In
November 2014, Moody’s revised its rating outlook to negative. Moody’s generally downgraded
Sears’ senior secured debt to a rating one level above Sears’ issuer rating.
104.

S&P downgraded Sears from BB- (which it had held since 2009) to B+ in May

2011. S&P further downgraded Sears to B in November 2011 and CCC+ in January 2012. S&P
revised its rating outlook to negative beginning in August 2012.
105.

Fitch Ratings (“Fitch”) downgraded Sears’ issuer rating to B in June 2011. Fitch

further downgraded Sears to CCC in December 2011. Fitch similarly downgraded Sears’ senior
secured debt rating to BB in June 2011, to B+ in December 2011, to B in September 2012, to Bin September 2013, and then CCC in September 2014.
106.

As Sears’ CFO Rob Schriesheim conceded in a January 2012 email to other Sears

executives following the initial downgrades: “The rating agencies actually do have their facts
correct on our balance sheet and liquidity.” Schriesheim noted that Sears’ year-end debt-to-

37

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 39 of 110

Main Document

EBITDA ratio was at least 8x (even without counting billions of dollars of unfunded pension
obligations, which, Schriesheim admitted, “is debt” too).
107.

Factors and credit insurers. As with other large retailers, Sears generally did not

pay its suppliers for goods on delivery. Rather, it paid them a number of days later, giving Sears
an opportunity to sell the goods before paying for them. Many suppliers rely on “factoring”—a
financial transaction in which the supplier sells its accounts receivable from Sears, at a discount,
to the third-party “factor”—in order to obtain prompt payment and transfer Sears’ credit risk.
Alternatively, suppliers can purchase financial guaranties from credit insurers.
108.

Beginning in late 2011, factors and credit insurers began to raise serious concerns

about Sears’ solvency, substantially increasing the fees or premiums they demanded from Sears’
suppliers, reducing or eliminating their willingness to take credit exposure to Sears, and/or
demanding pre-payment or collateral directly from Sears as a condition of continuing to work
with its suppliers.
109.

For example, in late 2011, CIT Group, Inc. (“CIT”), Sears’ largest factor by

overall exposure and by the number of Sears suppliers as counterparties, began expressing
concerns about Sears’ solvency and requested substantial non-public information about Sears’
financial and operating performance and its projections. In December 2011, CIT’s Chief Credit
Officer (“CCO”) threatened Schriesheim that CIT would cease purchasing new Sears’
receivables entirely (unless Sears immediately paid down $70 million of CIT’s existing
receivables). In January 2012, CIT informed Sears that “we are withdrawing all credit lines
today and declining all existing orders currently on hold.” As Schriesheim explained, “CIT is
cutting us off.”

38

 19-08250-rdd

110.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 40 of 110

Main Document

CIT was not alone. Around the same time, Wells Fargo stopped its revolving

credit line, Euler Hermes (a credit insurer used by important suppliers, such as Samsung) stopped
taking up coverage of receivables from Sears, and ECIC (a credit insurer owned by the
government of Hong Kong and used by important suppliers in Hong Kong as well as mainland
China) greatly reduced its coverage. In summarizing the various factor and credit insurer actions
in January 2012, Schriesheim worried that Sears was facing a “run on the bank,” noting that the
cost of credit insurance to Sears’ suppliers had risen to a level where it was “more expensive
than the margins they derive from our business.”
111.

Factors and credit insurers saw the Lands’ End transaction for what it was. For

example, within hours of its announcement on October 29, 2013, CIT’s CCO emailed
Schriesheim as follows: “[A] spin-off of Land’s End will clearly be viewed by unsecured
creditors as a very negative event and I view this as confirmation that the core domestic business
of Sears will be unable to ever generate positive cash flow from operation hence get it out before
any fraudulent conveyance argument can be lodged in the future melt-down- I don’t know how
we can put any kind of positive spin on this when our Clients ask and they will.”
112.

Following the Lands’ End spinoff, other factors and credit insurers took negative

action against Sears in the second half of 2014 and the first half of 2015. By mid-2015, prior to
the Seritage transaction, at least two credit insurers (Coface and Atradius) had cut their Sears
coverage lines entirely, and—in Sears’ own assessment—“most” U.S. and international credit
insurers were “not responding to vendors’ request[s].”
113.

These concerns from factors and credit insurers indicated not only a belief that

there was a high risk that Sears was insolvent, but also a belief that Sears’ insolvency could
materialize so imminently as to result in a failure to pay trade receivables due within 60 days or

39

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 41 of 110

Main Document

less. Such concerns were closely monitored by Schriesheim and two of his direct reports and
escalated by Schriesheim to Lampert and other members of the Board.
114.

Suppliers. As a result of the increasing costs of factoring and credit insurance, as

well as independent suppliers’ concerns about Sears’ solvency, Sears’ suppliers contracted their
trade credit to Sears. Since FY 2009, Sears’ Days Payables Outstanding (“DPO”)—an aggregate
measure of the average number of days Sears was able to defer vendor payments—had been
significantly below that of Sears’ peer group and generally declining. The decline in Sears’ DPO
from FY 2010 to FY 2014 represented a loss of more than $200 million of trade credit from
suppliers of goods. The decline in DPO was due to demands from suppliers for more favorable
payment terms. Other suppliers ceased taking orders from Sears, forcing Sears to find
replacements or to discontinue certain product lines.
115.

In the words of former Sears executive Lynn Walsh: “The suppliers wanted to

shorten payment terms as our credit and financial standing became less stable. It got to the point
of being absurd. It was like, wink wink, nod nod. Oh yeah, we’re going to grow 2% next year.
Ha ha. Given last year we decreased double digits. I ended up leaving, because I had no
integrity anymore. I was trying to negotiate on the promise that we’ve got a plan to grow the
business, knowing that was never going to happen.”
116.

PBGC. Prior to the Lands’ End and Seritage transactions, the PBGC—a federally

chartered corporation that insures private defined-benefit pension plans—had serious concerns
about Sears’ solvency and ability to pay its unfunded pension obligations.
117.

Based on these concerns, by no later than March 2014, the PBGC sent Sears a set

of detailed information requests for non-public information. Among other things, the PBGC
asked about Sears’ “long-term business plan,” the “spinoffs” and “dispositions” “currently under

40

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 42 of 110

Main Document

consideration” (specifically including Lands’ End), and the value of Sears’ real estate. The
PBGC requested that Sears provide this information by April 2, 2014—which was prior to the
closing date of the Lands’ End spinoff.
118.

By no later than July 30, 2014—well before the Seritage transaction—the PBGC

had communicated to Sears its view that “the risk of loss to PBGC is great and increasing”
(emphasis added). The PBGC explained that its view was based on “a number of factors,
including [Sears’] operating losses, the significant uncertainty around the Company’s business
plan, and accelerating cash-burn rates, which could result in a near-term liquidity issue.” As a
result, the PBGC said, “we believe we must act now.”
119.

Under the Employee Retirement Income Security Act of 1974 (ERISA), the

PBGC is authorized to file litigation to terminate a pension plan if it expects to incur
unreasonable losses with respect to the plan. By no later than August 2014, the PBGC had
threatened Sears with litigation unless Sears agreed to begin negotiating the provision of
additional security to its pension plans. Sears initially asked the PBGC to detail its views in a
letter, but then reversed course and asked the PBGC not to put its position in writing.
120.

If the PBGC had sued, its concerns about Sears’ solvency would have been made

public. Instead, while the PBGC and Sears negotiated, the PBGC’s concerns were kept secret.
In September 2015—after the closing of the Seritage transaction—Sears disclosed that it had
signed a term sheet with the PBGC and in March 2016 the PBGC and Sears announced a
settlement that granted the pension plans rights with respect to certain of Sears’ real estate, with
an appraised value of approximately $890 million, as well as the subsidiary holding the
Company’s primary intellectual property assets (such as Kenmore, Craftsman, and DieHard).

41

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 43 of 110

Main Document

This arrangement—ring-fencing valuable Sears assets for the protection of the plans and the
PBGC—reduced Sears’ available collateral to borrow for general corporate purposes.
D.

Sears’ Unrealistic, Bad-Faith Projections of Future Performance
121.

Despite Sears’ declining financial performance, troubling trends in operating

performance, and third-party concerns about Sears’ solvency, at Lampert’s insistence, Sears
continued to produce financial projections assuming an immediate and dramatic turnaround in its
performance. These projections were not adopted in good faith. After years of missed
projections, by the time of the Lands’ End and Seritage transactions, the Culpable Insiders knew
there was no chance that the projections upon which all analyses of the appropriateness of the
transactions were based could be achieved.
1.

Sears’ Top-Down, “Aspirational” Planning Process

122.

Sears’ fiscal year ends on or around January 31. Prior to the beginning of each

fiscal year, Sears’ management presented a “Plan” to Sears’ Board with projections of future
performance. From the merger through FY 2012 (the year beginning February 1, 2012),
management presented a “Three Year Plan.” Since Lampert became CEO in early 2013 (prior to
FY 2013), management stopped preparing three years of projections in the ordinary course,
limiting projections to an annual basis. During Lampert’s tenure, in or around January of each
year, Sears’ management presented the Board with a “Plan Update” or “Plan Review”
(hereinafter referred to as the “Annual Plan”) for the upcoming fiscal year.
123.

Those Annual Plans set top-down goals for annual financial performance

established directly by Lampert. These top-down goals, or “targets,” consistently bore no
relationship to Sears’ past performance or any realistic prospect of future performance, and were
instead set arbitrarily based upon the amount of revenue and operating profits management
believed would be needed to cover operating costs, interest, and other expenses, and to achieve a
42

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 44 of 110

Main Document

desired level of return on capital for the Company’s shareholders. In other words, the targets
were purely aspirational.
124.

Those top-down goals were then “allocated” to Sears’ various business units, and

each business unit was tasked with developing or identifying “initiatives” that would allow the
business unit to achieve the goal allocated to it by the Annual Plan. The identification of those
initiatives was driven by the need—indeed, the mandate—to achieve the top-down goals, rather
than by the business unit’s realistic projection of what could be achieved in the upcoming year.
125.

The business units consistently fell short of identifying (or successfully

implementing) initiatives that would, even if successful, achieve their allocated goals. As a
result, the Annual Plans were replete with “unidentified initiatives”—characterized by the
Annual Plans themselves as “go-gets”—and associated revenue and related goals that were
attributed to specific business units. In addition, these business unit goals, in aggregate, often
fell far short of the corporate-level Annual Plan target, leaving an unallocated “gap.”
126.

During FY 2012 through FY 2015, significant portions of the Annual Plan targets

were not supported by identified business unit initiatives (again, even assuming that the
initiatives would be successful). In FY 2012, 19% of Sears’ year-over-year Earnings Before
Interest, Taxes, Depreciation, Amortization, and Pension Expense (“EBITDAP”) improvement
goal was based on these gaps or go-gets. In FY 2013, 49% of the year-over-year EBITDAP
improvement goal was attributed to gaps or go-gets. In FY 2014 (prior to the Lands’ End
spinoff), 39% of the year-over-year EBITDAP improvement goal was attributed to go-gets or
other gaps. And in FY 2015 (prior to the Seritage transaction), 49% of the year-over-year
EBITDAP improvement goal was attributed to gaps or go-gets.

43

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 45 of 110

Business Unit Identified
Initiatives

127.

Main Document

Gap / Go Gets

In the FY 2014 Annual Plan, for example, the combined business unit plans were

$200 million below the $1.4 billion corporate target, and those business unit plans themselves
included $480 million of go-gets or unidentified initiatives. Thus, of the $1.4 billion target, $680
million—nearly 50%—was unsupported and unexplained by any identified business initiative.
One slide in the FY 2014 Annual Plan summarized these facts as follows:

44

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 46 of 110

Main Document

2.

The Consistent and Material Discrepancy Between Projections and Reality

128.

As a result of this bad-faith planning process, it is no surprise that, for the period

FY 2012 to the Petition Date, Sears’ actual performance never came close by any significant
metric to meeting the projections set forth in its Annual Plans. Every year, Sears’ Annual Plan
would project that its revenue and gross margins would increase; yet, every year, revenue and
gross margins would continue to decrease. Similarly, every year, Sears’ Annual Plan would
project that EBITDAP would turn from negative to positive, yet every year, Sears’ EBITDAP
not only remained negative, but worsened significantly from the previous year.
129.

The same is true of the multi-year projections provided to Duff & Phelps and used

for the various “solvency analyses” that Duff & Phelps performed for the October 2012 SHO
rights offering and November 2012 Sears Canada partial spinoff, the April 2014 Lands’ End
spinoff, and the July 2015 Seritage transaction, as discussed in greater detail below. Those
multi-year projections predicted that revenue, gross margins, and EBITDAP would grow and
continue to grow, when in reality those metrics continued to decline and/or remain negative.

45

 19-08250-rdd

130.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 47 of 110

Main Document

Revenue. From FY 2012 to FY 2017, Sears’ actual annual revenue has

consistently been $3–4 billion short of the projections in Sears’ Annual Plans. Almost every
year, Sears projected that its revenue for the next year would be higher than its revenue for the
prior year, yet, every year, Sears’ revenue in fact was lower. This is so even when the prior
years include revenue from businesses that were spun off (and thus would no longer contribute to
Sears’ revenue). And Sears’ actual revenue has fallen even further short of Sears’ even more
optimistic multi-year projections that were provided to Duff & Phelps as support for its solvency
opinions.

Budget

131.

Actual

Gross Margin. Sears’ actual gross margins also have consistently fallen $2–3

billion short of Sears’ annual projections. As with revenue, Sears projected every year that its
gross margins for the next year would grow relative to the prior year, yet, every year, Sears’
gross margins continued to shrink. And, as with revenue, the multi-year projections given to
Duff & Phelps were even more aggressive (and missed even more dramatically).

Budget

Actual

46

 19-08250-rdd

132.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 48 of 110

Main Document

EBITDAP and EBITDAP margin. Sears’ EBITDAP and EBITDAP margin

projections also failed to reflect reality. For FY 2013 to FY 2017, Sears projected that it would
retain positive EBITDAP and positive EBITDAP margin. Yet, in each of those years, Sears’
EBITDAP and EBITDAP margin were negative. For example, in FY 2013, Sears projected that
it would have positive $1.4 billion of EBITDAP, when in reality it actually had negative $340
million of EBITDAP. And whereas the annual projections at least acknowledged that EBITDAP
and EBITDAP margin might decline (while remaining positive), the multi-year projections that
Sears provided to Duff & Phelps generally projected a continued increase in EBITDAP and
EBITDAP margin.

Budget

Actual

Company Budget to Actual EBITDAP Margin
7.0%

5.2%

4.0%

5.1%
3.9%

3.7%

2.8%

3.7%
1.6%

1.6%

2.3%
1.0%

0.5%

1.0%
(2.0%)

(1.1%)
(2.2%)
(3.3%)

(5.0%)
FY10

FY11

FY12

FY13

FY14

Budget

FY15

(3.7%)
FY16

(3.4%)
FY17

Actual

3.

The Culpable Insiders’ Knowledge that the Projections Were Unachievable

133.

Sears’ bad-faith Annual Plans failed to account for, among other things, (i) Sears’

declining financial performance, (ii) store closures and spinoffs of profitable businesses,
(iii) declining capital expenditures, (iv) increasing competition and declining market share,

47

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 49 of 110

Main Document

(v) the abject failure of SYW, and (vi) solvency concerns from suppliers and the PBGC. In light
of all these facts, as discussed above, it was grossly unrealistic to project that revenue, gross
margin, and EBITDAP would somehow suddenly improve.
134.

The materiality and consistency of the discrepancies between Sears’ projections

and its actual results cannot be explained by random chance or unforeseen circumstances. By the
time of the Lands’ End and Seritage transactions in 2014 and 2015, Sears had fallen short of its
Annual Plan projections since at least FY 2010. During those years, Sears had missed most of
the targets in its Annual Plans for (among other key performance indicators) revenue, gross
margin, and EBITDAP. And not just by a hair: Sears had missed its revenue targets by between
9.9% and 12.9%; gross margin targets by between 12.4% and 21.7%; and EBITDAP targets by
between 52.6% and 152.2%, all material amounts.
135.

As a result, by the time of the relevant transactions, the Culpable Insiders could

not have reasonably or in good faith expected that Sears would achieve the performance levels
projected. And, knowing that these unrealistic projections were the basis for Duff & Phelps’
solvency opinions, the Culpable Insiders could not have relied upon those opinions in good faith.
136.

In interviews with counsel for the Subcommittee, witness after witness admitted

that the Annual Plans reflected management’s aspirations rather than what was realistically
anticipated. For example, Robert Schriesheim, the CFO until May 2016, admitted the Annual
Plans had a “high degree of execution risk” and “were a pretty aggressive stretch.” According to
Schriesheim, the “philosophy” of the Annual Plans was “aspirational in nature to drive an
outcome.” Kamlani similarly admitted that “it was not lost on the [B]oard that the company was
in a pattern of constantly missing its forecasts.” In the words of the lead Duff & Phelps
representative, Sears’ numbers were “woefully short of forecasted performance,” and Sears “had

48

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 50 of 110

Main Document

a terrible history of performing against projections”—in other words, a “history of not meeting
their projections.” A representative from Centerview also noted that it “had formed a view that
[Sears] was consistently missing its projections.” As Robert Riecker, who succeeded
Schriesheim as CFO, candidly explained, “you are not going to plan to lose money.”
E.

Lampert and ESL Face Increasing Redemption Pressure from ESL’s Investors
137.

In Q1 2005, following the Kmart/Sears merger, ESL had assets under

management (“AUM”) of more than $11 billion. ESL’s AUM peaked at more than $16 billion
in Q2 2007, primarily due to Sears’ stock price increase. During that stock price rise—which
was driven, in large part, by stock buy-backs that cost Sears approximately $5 billion—ESL
pocketed more than $1.9 billion in “performance fees” from its investors (in addition to
“management fees” of 1% or 2% of AUM).4 But those early returns did not last. According to
Institutional Investor, ESL has suffered annualized losses averaging 6% per year beginning in
2005.
138.

As its losses mounted, ESL faced increasing demands for redemptions from its

investors. According to news reports, notable redeeming investors include: billionaire Michael
Dell (the founder of Dell Technologies); billionaire entertainment mogul David Geffen, who
withdrew the last of his funds in 2007; and the heirs of the Ziff Davis Publishing Company, who
withdrew their funds between 2011 and 2013. After a five-year “lockup” expired at the end of
2012, ESL was forced to redeem nearly $3.5 billion in 2013 from investors advised by Goldman
Sachs. As a result, during 2011, 2012, and 2013, ESL made in-kind distributions of Sears’
shares (as well as AutoNation, Inc., Orchard, and SHO shares) to meet investor redemptions.

4

ESL also pocketed an additional $135 million in performance fees in 2013 as a result of Sears’ 20.8% stock
price increase during that year.

49

 19-08250-rdd

139.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 51 of 110

Main Document

Due to the combined effect of redemptions and Sears’ stock price drop, by the

time of the Lands’ End spinoff (2Q 2014), ESL’s AUM had fallen to $2.5 billion; by the time of
the Seritage transaction (3Q 2015), $1.6 billion.5 As a result of this drop, ESL’s revenue from
fees declined substantially.

140.

These increasing demands for redemptions by ESL’s investors put pressure on

Lampert to find ways to deliver returns to shareholders. Because Lampert was unable to
improve Sears’ performance, and because Sears was unable to fund further stock buy-backs,
Lampert’s attention turned to spinoffs and rights offerings.

5

ESL’s AUM follows a conventional fiscal year that is equal to the calendar year (i.e., January 1 to December
31), unlike Sears’ fiscal year (running from February 1 to January 31).

50

 19-08250-rdd

141.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 52 of 110

Main Document

By 2011 and 2012, having failed to return Sears to profitability, the Culpable

Insiders were looking for opportunities to spin off Sears’ assets to shareholders. Beginning in
2012, Lampert convened weekly meetings of Sears’ high-level executives to discuss potential
dispositions of so-called “non-core” assets. That group eventually oversaw each of the major
dispositions of assets that followed, including the transactions at issue.
The Fraudulent Transfers
142.

In the face of Sears’ rapidly deteriorating performance and increasing demands

for redemptions by ESL’s investors, Lampert and the other Culpable Insiders began a scheme to
strip Sears of assets. The scheme ultimately included five transactions that were consummated:
(i) the December 2011 Orchard spinoff; (ii) the October 2012 SHO rights offering; (iii) the
November 2012 Sears Canada partial spinoff; (iv) the April 2014 Lands’ End spinoff; and (v) the
July 2015 Seritage transaction.
143.

Lampert and the other Culpable Insiders created a false record to conceal the

fraudulent nature of these transactions. This included causing reviews of certain of these
transactions by committees of independent directors based on solvency opinions by Duff &
Phelps that were premised on the unrealistic projections. These processes failed to protect, and
indeed ignored, the interests of creditors.
A.

The December 2011 Orchard Spinoff Wrongfully Transferred
More Than $133 Million of Value from Sears to Its Shareholders.
144.

The Orchard spinoff was the first step in Lampert’s plan to strip Sears of assets.

145.

Orchard was a regional home improvement retailer with 89 stores, all located in

California. Orchard was acquired by Sears Roebuck in 1996. In 2005, Sears Roebuck sold a
19.9% stake in Orchard to Ares Capital Management (“Ares”), a hedge fund, retaining the
remaining 80.1%.

51

 19-08250-rdd

146.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 53 of 110

Main Document

At the time of the spinoff, Orchard was profitable, much more so than the rest of

Sears. Indeed, Orchard had posted positive EBITDA each and every year since its initial public
offering in 1993. Orchard had also posted an EBITDA margin of between 10.5% and 12.6%
every year since the Kmart/Sears merger. Orchard had earned profits of $8.7 million in FY
2010, the fiscal year prior to the spinoff.
147.

Sears had been planning a spinoff of Orchard since at least April 2010, when it

made a formal request for a private letter ruling from the IRS that the spinoff would be tax free.
Yet, in that time, Sears never pursued a third-party sale of Orchard.
1.

Sears Received No Consideration for the Orchard Spinoff.

148.

In December 2011, Sears spun off its entire 80.1% common stock and 100%

preferred stock stake in Orchard as a dividend to its shareholders for no consideration. Each
Sears shareholder received 0.045163493 Orchard common class A shares and 0.045163493
Orchard preferred shares per share of Sears held. After the spinoff, Lampert and ESL held 48%
of Orchard common stock; Ares, 19.9%; Fairholme, 12.2%; Tisch, 3%; and other public
shareholders, 15.9%. After the spinoff, Lampert and ESL also held 61.2% of Orchard preferred
stock; Fairholme, 15.2%; Tisch, 3.7%; and other public shareholders, 19.9%.
149.

Based on its market capitalization after its first day of trading (December 31,

2011), including both common and preferred shares, Orchard was worth at least $161 million.
2.

The Culpable Insiders Acted with Fraudulent Intent.

150.

The Orchard spinoff was approved by a Board that included Lampert, Mnuchin,

and Tisch. These Culpable Insiders acted with the intent to hinder, delay, and defraud Sears’
creditors through the Orchard spinoff. This intent can be inferred from several traditional
“badges of fraud.”

52

 19-08250-rdd

151.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 54 of 110

Main Document

First, the transfer was to insiders. The Culpable Shareholders owned

approximately 80.1% of Sears’ stock, and thus received nearly 64.2% of Orchard common stock,
and 80.1% of Orchard preferred stock. Specifically, Lampert and ESL owned 61.2% of Sears’
stock, Fairholme owned 15.2% of Sears’ stock, and Tisch owned 3.7% of Sears’ stock. Thus,
Lampert and ESL received Orchard stock worth at least $81 million, Fairholme received Orchard
stock worth at least $20 million, and Tisch received Orchard stock worth at least $5 million. In
total, the Culpable Shareholders received at least $106 million in value from the Orchard spinoff.
152.

Second, Lampert and ESL (and William Crowley of ESL) received special rights

under a shareholders’ agreement between ESL, Lampert, Crowley, Ares, and Orchard. These
rights included: (i) a right of first offer should Ares seek to sell its shares; (ii) a “tag-along” right
should Ares sell its shares to a third party; (iii) a “drag-along” right should ESL arrange a sale of
a large percentage of Orchard’s shares to a third party; (iv) preemptive rights with respect to
Orchard’s future debt offerings; (v) registration rights with respect to certain unregistered
securities that ESL might acquire; and (vi) the right, along with Ares, to approve the composition
of the boards of Orchard’s subsidiaries and its annual budget. These rights were not enjoyed by
the other shareholders of Sears who received shares of Orchard in the spinoff.
153.

Third, Sears received no consideration in the spinoff. The shareholders paid

nothing to Sears in exchange for the Orchard stock that they received.
154.

Fourth, the transfer was unusual and not in the ordinary course of business.

155.

Fifth, the Orchard spinoff was not an isolated transaction, but rather the first step

in an ongoing scheme to transfer Sears’ most valuable assets to the Culpable Shareholders at the
expense of Sears’ creditors. At the time of the Orchard spinoff, the Culpable Insiders already
intended to continue with future transactions (including the SHO rights offering, the Sears

53

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 55 of 110

Main Document

Canada partial spinoff, the Lands’ End spinoff, and the Seritage transaction) that would take
Sears past the point of insolvency. In the aggregate, the contemplated transactions that were part
of this scheme would result in the divestiture of a substantial percentage of Sears’ assets.
B.

The October 2012 SHO Rights Offering Wrongfully Transferred
At Least $231 Million of Value from Sears to Its Shareholders.
156.

The Orchard spinoff was followed by the SHO rights offering. The SHO rights

offering was a further step in the same scheme to divest a declining Sears of its valuable assets.
157.

SHO was a wholly owned direct subsidiary of Sears. SHO operated stores that

sold appliances and tools under Sears’ brands. SHO stores were generally smaller than Sears’
other stores and did not carry the full line of Sears products.
158.

At the time of the spinoff, SHO was profitable, much more so than the rest of

Sears. SHO had annual EBITDA of approximately $80 million. In mid-2012, Duff & Phelps
valued SHO in the range of $345 million to $435 million.
1.

The SHO Subscription Rights Were Transferred
from Sears to Sears’ Shareholders for No Consideration.

159.

Sears filed a registration statement on Form S-1 for 23.1 million shares, or 100%,

of common stock of SHO on April 30, 2012. Sears also created 105,919,089 rights to purchase
shares of SHO (the “SHO Rights”). The SHO Rights gave their holders the option to purchase
0.22 shares of common stock of SHO at an exercise price payable to Sears of $15 per share.
160.

Sears distributed all 105,919,089 of the SHO Rights to its shareholders on

September 7, 2012, of which approximately 80.8% were given to the Culpable Shareholders.
The shareholders did not pay Sears any consideration in exchange for the SHO Rights.
161.

The SHO Rights were valuable securities. Between September 12 and October 2,

2012, the SHO Rights traded on NASDAQ. The volume-weighted average trading price of the
SHO Rights over this period was $2.18 per right. Based on this price, the 105,919,089 SHO
54

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 56 of 110

Main Document

Rights were worth at least $231 million. As reflected in contemporaneous Board minutes, the
SHO Rights were intended to have a substantial positive trading price.
162.

In fact, the value transferred was substantially higher. After its first day of

trading, SHO had a market capitalization of $709 million. The shareholders paid aggregate
consideration of $346.5 million to exercise the SHO Rights, implying a transfer of $362 million
from Sears to its shareholders.
2.

The Culpable Insiders Acted with Fraudulent Intent.

163.

The SHO rights offering was approved by a Board that included Lampert,

Mnuchin, and Tisch. These Culpable Insiders acted with the intent to hinder, delay, and defraud
Sears’ creditors through the SHO rights offering. This intent can be inferred from several
traditional “badges of fraud.”
164.

First, the transfer was to insiders. The Culpable Shareholders owned nearly

80.8% of Sears’ stock, and thus received nearly 80.8% of the SHO Rights. Specifically, Lampert
and ESL owned 62% of Sears’ stock, Fairholme owned 15.1% of Sears’ stock, and Tisch owned
3.6% of Sears’ stock. Thus, based on the trading price of the rights (the more conservative
measure), Lampert and ESL received SHO Rights worth at least $144 million, Fairholme
received SHO Rights worth at least $35 million, and Tisch received SHO Rights worth at least
$8 million. In total, the Culpable Shareholders received SHO Rights worth at least $187 million
(based on the trading price of the rights) or $226 million (based on the difference between the
stock price after the first day of trading and the subscription price).
165.

Second, Sears received no consideration for the distribution of the SHO Rights

and inadequate consideration for the exercise of the SHO Rights. (Sears received a pre-spin
dividend of $100 million, but that dividend was paid with the proceeds of a draw on a $250

55

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 57 of 110

Main Document

million Senior ABL Facility, collateralized by the assets of SHO. The assets of SHO, as a
wholly owned subsidiary, already belonged to Sears.)
166.

Third, the transfer was unusual and not in the ordinary course of business.

167.

Fourth, the SHO rights offering was not an isolated transaction, but rather a

continued step in an ongoing scheme to transfer Sears’ most valuable assets to the Culpable
Shareholders at the expense of Sears’ creditors. At the time of the SHO rights offering, the
Culpable Insiders had already completed the Orchard spinoff and intended to continue with
future transactions (including the Sears Canada partial spinoff, the Lands’ End spinoff, and the
Seritage transaction) that would take Sears past the point of insolvency. In the aggregate, the
contemplated transactions that were part of this scheme would result in the divestiture of a
substantial percentage of Sears’ assets.
168.

Fifth, the SHO rights offering was premised on unrealistic, bad-faith projections

of Sears’ future performance. Sears retained Duff & Phelps to provide a solvency opinion to
support the transaction. Duff & Phelps was provided with projections from management
regarding Sears’ performance (the “2012 Solvency Projections”). These 2012 Solvency
Projections—which were not done in the ordinary course, but instead to justify the SHO
transaction—predicted, incredibly, that revenue, EBITDAP, and EBITDAP margin, which had
been declining, would instead begin to grow through 2017.

SHO & Sears Canada Solvency Projections Provided by Sears to D&P
FY12
FY13
FY14
Revenue
$ 34,225 $ 34,678 $ 36,066
Gross Margin
$ 12,689 $ 13,047 $ 13,749
EBITDAP
$
901 $ 1,400 $ 1,997
EBITDAP Margin
2.6%
4.0%
5.5%

56

 19-08250-rdd

169.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 58 of 110

Main Document

Sears’ actual results fell dramatically short of the projections. Rather than turning

around, revenue steadily fell; and EBITDAP and EBITDAP margin fell and remained negative.
The material deviations of Sears’ actual results from the 2012 Solvency Projections already were
known by the time of the Lands’ End spinoff (with respect to FY 2012 and FY 2013) and by the
time of the Seritage transaction (with respect to FY 2012, FY 2013, and FY 2014).

Budget

SHO & Sears Canada Solvency Projections

Actual

Budget

SHO & Sears Canada Solvency Projections

Actual

Budget

SHO & Sears Canada Solvency Projections

Actual

Budget

SHO & Sears Canada Solvency Projections

Actual

57

 19-08250-rdd

170.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 59 of 110

Main Document

A Credit Suisse analyst concluded in February 2012 (after the SHO spinoff was

announced) that Lampert was stripping valuable assets from a failing venture:
The actions taken last week once again show the brilliance of Eddie Lampert, as
he took control of what still may turn out to be an unwinnable situation.
Effectively, we read his multiple announcements as saying: I now see that
returning to positive operating cash flow levels is likely impossible, so let me
keep the ship afloat while I dispose of the dinnerware and other valuable items
before abandoning. (Our interpretation). The company needs to portray an image
of stability even as the assets leave through the back door as that is the best way
to maximize asset values. It will likely end badly, but by delaying that, the
company can take out many of the valuable assets.
171.

The next month, Credit Suisse again remarked: “Over time, selling off the

profitable assets is unlikely to be a winning strategy. Sears already announced that it is spinning
off 20% of its EBITDA later this year [with SHO], and if it sells Lands’ End, that may represent
a large part of its remaining US EBITDA. Combined with selling some of its best locations, one
has to wonder why they are digging the turnaround hole deeper before attempting to climb out,
unless they are not planning that climb.”
C.

The November 2012 Sears Canada Spinoff Wrongfully Transferred
More Than $500 Million of Value from Sears to Its Shareholders.
172.

The Orchard spinoff and the SHO rights offering were followed by the Sears

Canada partial spinoff. The Sears Canada partial spinoff was yet another step in a continued
scheme to divest a declining Sears of its valuable assets.
173.

Prior to the spinoff, Sears indirectly owned 95.5% of Sears Canada (through Sears

Roebuck and certain of its subsidiaries). The remaining 4.5% was publicly traded on the
Toronto Stock Exchange (TSX:SRSCQ).

58

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 60 of 110

Main Document

1.

Sears Received No Consideration for the Sears Canada Spinoff.

174.

In November 2012, Sears spun off 44.5% of Sears Canada, or 44,335,560 shares

of Sears Canada, to its shareholders. Sears’ shareholders paid no consideration to Sears for the
Sears Canada shares. This reduced Sears’ remaining stake in Sears Canada to just 51%.
175.

Based on the trading price of the minority stake on the day before the spinoff was

announced (May 16, 2012), the 44.5% stake was worth at least $621 million. Based on the
trading price of the minority stake on the day before the final approval of the spinoff was
obtained by the Sears’ Board (October 21, 2012), the 44.5% stake was still worth at least $501
million.
176.

Despite analyses from Sears’ tax advisors suggesting that a pre-spin dividend by

Sears Canada would have significant tax benefits (including an opportunity to utilize either the
foreign tax credit or Sears’ net operating loss), Sears Canada did not pay any pre-spin dividend.
Instead, just two months after the spinoff, on December 31, 2012, Sears Canada paid a $102
million dividend. If this dividend had been paid before the spinoff, 95.5% of it would have been
paid to Sears (and 4.5% to Sears Canada’s public shareholders). Instead, because the dividend
was paid after the spinoff, only 51% of the dividend was paid to Sears. The value representing
the difference between 51% and 95.5% was instead paid to Sears’ shareholders (who became
Sears Canada’s shareholders as a result of the partial spinoff). The primary beneficiaries were
Lampert and ESL, followed by Fairholme and Tisch.
2.

The Culpable Insiders Acted with Fraudulent Intent.

177.

The Sears Canada partial spinoff was approved by a Board that included Lampert,

Mnuchin, and Tisch. These Culpable Insiders acted with the intent to hinder, delay, and defraud
Sears’ creditors through the Sears Canada partial spinoff. This intent can be inferred from
several traditional “badges of fraud.”
59

 19-08250-rdd

178.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 61 of 110

Main Document

First, the transfer was to insiders. The Culpable Shareholders owned 81.2% of

Sears’ stock, and thus personally received 81.2% of the distribution, or nearly 36.3% of the
equity in Sears Canada. Specifically, Lampert and ESL owned 61.8% of Sears’ stock, Fairholme
owned 15.8% of Sears’ stock, and Tisch owned 3.6% of Sears’ stock. Thus, Lampert and ESL
received stock in Sears Canada worth at least $385 million, Fairholme received stock in Sears
Canada worth at least $99 million, and Tisch received stock in Sears Canada worth at least $23
million. In total, the Culpable Shareholders received at least $507 million in value from the
Sears Canada partial spinoff.
179.

Second, Sears received no consideration for the Sears Canada shares.

180.

Third, the transfer was unusual and not in the ordinary course of business.

181.

Fourth, the Sears Canada partial spinoff was not an isolated transaction, but rather

a continued step in an ongoing scheme to transfer Sears’ most valuable assets to the Culpable
Shareholders at the expense of Sears’ creditors. At the time of the Sears Canada partial spinoff,
the Culpable Insiders had already completed the Orchard spinoff and the SHO rights offering and
intended to continue with future transactions (including the Lands’ End spinoff and the Seritage
transaction) that would take Sears past the point of insolvency. In the aggregate, the
contemplated transactions that were part of this scheme would result in the divestiture of a
substantial percentage of Sears’ assets.
182.

Fifth, the Sears Canada partial spinoff was premised on unrealistic, bad-faith

projections of Sears’ future performance. For the Sears Canada partial spinoff, Duff & Phelps
undertook only minor updates to its solvency analysis for the SHO rights offering, essentially
updating the analysis to account for the SHO transaction. As with the SHO rights offering, Duff

60

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 62 of 110

Main Document

& Phelps continued to predict, unrealistically, that revenue, EBITDAP, and EBITDAP margin,
which had been declining, would instead begin to grow through 2017.
D.

The April 2014 Lands’ End Spinoff Wrongfully Transferred
More Than $1 Billion of Value from Sears to Its Shareholders.
183.

The April 2014 Lands’ End spinoff also constitutes a fraudulent transfer and an

illegal dividend. The Lands’ End spinoff transferred the common stock of the Lands’ End
business (worth more than $1 billion at the time) from Sears to its shareholders, the largest of
whom were the Culpable Shareholders. The shareholders paid Sears no consideration for Lands’
End. The transaction left Sears unable to pay its debts and with unreasonably small capital.
184.

Lands’ End is a multi-channel retailer of casual clothing, accessories, and home

products. Sears acquired Lands’ End in June 2002 for $1.86 billion. Sears owned Lands’ End
indirectly through Sears Roebuck, its wholly owned subsidiary. Because of its strong cash flow
and profitability (particularly in comparison to Sears’ other business units), Lands’ End was one
of Sears’ “crown jewels.”6 In 2012, for example, Lands’ End had revenue of $1.6 billion
(including net debt) and gross margin of $704.1 million.
1.

Lampert Insists on a Spinoff to Benefit Shareholders, Rather than
Alternatives that Would Have Generated More Proceeds for Sears.

185.

The Non-Core Committee began planning a potential spinoff of Lands’ End in

2012. Despite planning the Lands’ End spinoff for at least two years, Sears never seriously
pursued any alternatives, including a third-party sale of Lands’ End, which would have
maximized the proceeds to Sears and left such proceeds available to creditors. Nor did Sears
engage an investment banker to conduct a sale process or obtain an independent valuation. As

6

Suzanne Kapner, “Sears Weighs Spinoff of Lands’ End; Move Could Unlock Value as Company Struggles with
Its Sears and Kmart Chains,” The Wall Street Journal, Oct. 30, 2012.

61

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 63 of 110

Main Document

Lampert told counsel for the Subcommittee, there was speculation “that [Sears was] shopping
around Lands’ End, which was never true.”
186.

As Lampert and other insiders knew, prospective buyers existed. On January 9,

2014, Sears received an unsolicited indication of interest from Leonard Green & Partners and the
Tommy Hilfiger investment group (“LGP/TH”). LGP/TH stated that they were “highly
interested” in investing in Lands’ End, which they valued at $1.6 billion (including net debt).
LGP/TH proposed a “sponsored spin” transaction that would give LGP/TH a 25% stake in
Lands’ End (alongside Sears’ shareholders) and deliver proceeds of either $850 million or
$1 billion (depending on the transaction structure) to Sears.
187.

Lampert summarily rejected this opportunity. Just six days later, Lampert

personally told LGP/TH that the proposed transaction was a “non-starter”—not because it failed
to maximize proceeds to Sears, but because it would have diluted his and ESL’s stake in Lands’
End relative to a non-sponsored spin. As Schriesheim (Sears’ then-CFO) explained to another
Sears employee at the time, “[Lampert] was trying to optimize cash for [Sears] while maximizing
his (esl) equity stake . . . because he knows that [Lands’ End] is worth a great deal outside of
[Sears]” (emphasis added).
188.

Ultimately, Lands’ End was distributed to Lampert, ESL, and Sears’ other

shareholders for no consideration, following a pre-spin dividend from Lands’ End of $500
million. Lands’ End’s stock price on its first day of trading confirms that the standalone
company (after paying the pre-spin dividend) was worth more than $1 billion. Lampert and
ESL, as the largest Sears shareholders, were by far the largest beneficiaries of the transaction,
receiving Lands’ End stock then worth at least $490 million.

62

 19-08250-rdd

189.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 64 of 110

Main Document

When asked by counsel for the Subcommittee why alternatives that would have

resulted in greater proceeds to Sears were not pursued, Lampert said the spinoff was “just a way
of separating the two companies” (which, of course, also would have been accomplished by a
third-party sale). When pressed on the alternative of a sale, Lampert said Lands’ End was spun
off, rather than sold, because it was valuable, and he wanted shareholders—of which, of course,
he and ESL were by far the largest—to enjoy that value. As intended, that benefit to the
shareholders, however, was accomplished at the expense of the Company and its creditors. In
Lampert’s own words, he “didn’t think hard about the creditors in the Lands’ End deal.”
2.

Lampert Limits the Pre-Spin Dividend to Benefit the New Shareholders
of Lands’ End, Including ESL and Himself, at the Expense of Sears.

190.

Lampert also rejected suggestions to increase Lands’ End’s new borrowings in

order to support a larger pre-spin dividend. After the transaction was announced, the lead banker
at Bank of America Merrill Lynch (the lead arranger for the new debt) suggested to Schriesheim
and Lampert that the transaction could deliver “significantly more cash to Sears.” The lead
banker advised that Lands’ End could borrow 4.5x of its full year 2013 EBITDA and dividend
that same amount to Sears before the spinoff. He further stated that this level of debt “would
NOT be considered overly aggressive by the debt markets—particularly if [Lands’ End’s] full
year 2013 EBITDA showed nice improvement over full years 2012 levels” (which it did).
191.

Lands’ End’s 2013 EBITDA (according to the Duff & Phelps solvency analysis)

was $141 million. Thus, according to the lead banker’s initial advice, Lands’ End could have
paid Sears a pre-spin dividend of approximately $635 million. Indeed, once Lands’ End’s strong
results for full year 2013 became known, Bank of America suggested that Lands’ End could in
fact borrow an amount equal to 5.3x its 2013 EBITDA, which would have resulted in a pre-spin

63

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 65 of 110

Main Document

dividend to Sears of approximately $747 million. Instead, at Lampert’s direction, Lands’ End
borrowed only $515 million and paid a pre-spin dividend of only $500 million.
192.

Lampert overruled the lead banker’s advice because following it would have

interfered with his ongoing scheme to loot Sears and decreased the value improperly transferred
to shareholders, particularly ESL and himself.
3.

The Lands’ End Spinoff Left Sears and
Sears Roebuck Insolvent on a Cash-Flow Basis.

193.

Sears and Sears Roebuck were insolvent on a cash-flow basis after the Lands’

End spinoff. At the time of the Lands’ End spinoff, Sears had existing debt obligations with an
aggregate principal amount of more than $3.8 billion. Together with interest, Sears required
more than $4.7 billion (and more than $4.3 billion by 3Q 2018 alone) to pay off its debt. The
schedule under which these obligations would come due was as follows:

194.

Sears’ total cash and cash equivalents immediately after the Lands’ End spinoff

(including the pre-spin dividend) were approximately $842 million. Even assuming that Sears
used all of these funds for principal and interest payments (rather than to fund continued

64

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 66 of 110

Main Document

operating losses, as actually occurred), Sears still would have required more than $3.4 billion of
additional free cash flow by 3Q 2018. Indeed, Sears would have required $841 million by 1Q
2016, another $363 million between 2Q 2016 and 1Q 2018, then $976 million in 2Q 2018,
followed by another $1.286 billion in 3Q 2018:

195.

Sears had no basis to expect to earn anything close to what it needed. After the

Lands’ End spinoff, it could not reasonably have expected to earn $841 million in free cash flow
by 1Q 2016 (when the asset-based loan (“ABL”) came due). In reality, Sears ultimately saw free
cash flow of approximately negative $1.7 billion in FY 2014, negative $2.4 billion in FY 2015,
and negative $1.5 billion in FY 2016. After Lands’ End, the only way Sears could have made
the ABL principal payment due in 1Q 2016 was by selling core assets. And that, of course, is
what Sears ultimately did, paying down the ABL with part of the proceeds of the Seritage
transaction (discussed in more detail below).
196.

But even with non-ordinary-course sales of core assets, after the Lands’ End

spinoff, Sears could not reasonably have funded $4.3 billion in debt principal and interest
payments by 3Q 2018 (when the Second Lien Notes would come due). Not coincidentally, 3Q

65

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 67 of 110

Main Document

2018 is when Sears ultimately filed for bankruptcy, with $89 million of the Second Lien Notes
outstanding (having repaid $946 million of Second Lien Notes—$936 million of which followed
the Seritage transaction—and exchanged $215 million of Second Lien Notes into other second
lien debt).
197.

In light of Sears’ declining financial performance over the preceding years and the

numerous adverse qualitative trends, as detailed above, it was not reasonable to assume that
Sears could achieve the level of cash flow necessary for timely debt principal and interest
payment. In the three immediately prior fiscal years to the Lands’ End transaction, Sears had
failed to generate any cash flow from operations. Nor did it generate any earnings to cover
interest expenses in the fiscal year immediately prior to the Lands’ End transaction. In that year,
Sears also had negative free cash flow of $1.4 billion and negative Adjusted EBITDA of $337
million. And in the four immediately prior fiscal years, FYs 2010–2013, Sears had suffered a
cumulative net loss of $5.3 billion.
198.

Duff & Phelps, the valuation advisor hired to opine on Sears’ solvency at the time

of the spinoff, opined that Sears was solvent only by adopting management’s speculative topdown projections about future performance. Specifically, Duff & Phelps was provided with
three-year projections created by management for FY 2014 through FY 2016, which Duff &
Phelps extrapolated into five- and ten-year projections (the “2014 Solvency Projections”). The
first projection year was prepared in accordance with the top-down planning process described
above. The latter two years of projections were, as Duff & Phelps knew, prepared solely for
Duff & Phelps’ opinion, rather than for any ordinary course business purpose.

66

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 68 of 110

Main Document

Lands' End Solvency Projections - Provided by
Sears to D&P
FY14
FY15
FY16
Revenue
$ 33,420 $ 34,927 $ 36,041
Gross Margin
$ 12,132 $ 12,832 $ 13,467
EBITDAP
$ 1,237 $ 1,884 $ 2,410
EBITDAP Margin
3.7%
5.4%
6.7%

199.

The 2014 Solvency Projections were unrealistic and unreasonable. In the base

case, Duff & Phelps assumed that revenue, gross margin, Earnings Before Interest, Taxes,
Depreciation, Amortization, Rent Expense, and Pension Expense (“EBITDARP”), and
EBITDAP would increase rather than continuing to decrease (and, in the case of EBITDAP,
would turn positive instead of negative), and would continue to increase dramatically over the
entire three-year projection period.

Budget

Lands' End Solvency Projections

Actual

Budget

Lands' End Solvency Projections

Actual

Budget

Lands' End Solvency Projections

Actual

67

 19-08250-rdd

Doc 1

Budget

200.

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 69 of 110

Lands' End Solvency Projections

Main Document

Actual

Even in the sensitivity case, Duff & Phelps assumed that Sears’ revenue decline

would slow and then turn to growth and that EBITDAP and EBITDAP margin would become
positive and increase (rather than remaining negative and continuing to decrease).

201.

In other words, even the “sensitivity” case assumed a substantial turnaround in

Sears’ profitability. As detailed above, these optimistic assumptions were not supported by
Sears’ historical financial performance, by the initiatives included within Sears’ FY 2014 Annual
Plan, or by the prevailing conditions affecting Sears’ operating performance. Duff & Phelps did
not consider the far more realistic likelihood that Sears’ results would stay on the same
downward track, or that they would, at best, stabilize at 2013 levels.

68

 19-08250-rdd

202.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 70 of 110

Main Document

Without these unwarrantedly optimistic assumptions, Sears would have had

negative free cash flow, and thus would be unable to make scheduled debt principal and interest
payments starting between 2014 and 2016. Indeed, under Duff & Phelps’ own sensitivity case at
the time of the Lands’ End spinoff, Sears would have been unable to repay more than $2.2
billion of existing debt at maturity. Duff & Phelps simply assumed, without explanation, that
Sears would be able to refinance that debt.
203.

Sears Roebuck was also insolvent on a cash-flow basis. Sears Roebuck was a

guarantor for substantially all of Sears’ debt, including $2.1 billion under the First Lien Credit
Agreement and $1.24 billion in Second Lien Notes. And Sears Roebuck was also jointly and
severally liable for Sears’ pension liabilities (on the order of $2 billion) as a member of a
“controlled group.” Sears Roebuck had less cash flow than Sears and many of the same
obligations as Sears. Once Sears failed to pay its joint obligations with Sears Roebuck, Sears
Roebuck would also have also been unable to pay them.
4.

The Lands’ End Spinoff Left Sears and Sears
Roebuck with Unreasonably Small Capital.

204.

Sears and Sears Roebuck also had unreasonably small capital after the Lands’ End

spinoff.
205.

As detailed above, Sears’ multi-year performance leading up to the Lands’ End

spinoff demonstrated that it was unable to generate sufficient profits to sustain operations or
adequately address existing liabilities. Indeed, Sears could not generate any profits, and could
only temporarily sustain its operations by selling off core assets and falling further into debt.
206.

After the Lands’ End spinoff, Sears had insufficient capital or reserves to account

for its normal business operations and to repay its existing debt load, much less sustain
operations through any difficulties likely to arise in its line of business, including general or

69

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 71 of 110

Main Document

industry-wide economic downturn. Sears was also left with insufficient capital or reserves even
to survive a continuation of established trends in its free cash flow, net sales, margins, and net
profits (losses). Sears’ projections that its performance would suddenly reverse in FY 2014—
just as Sears had incorrectly projected the year before (FY 2013), the year before that (FY 2012),
and the year before that (FY 2011)—were unreasonable.
207.

Indeed, if Duff & Phelps’ sensitivity case performance projections were used in

Duff & Phelps’ market multiples analysis, Sears would show an equity deficit of $3.1 billion.
Duff & Phelps calculated this equity deficit in the model within its work papers, but elected not
to present the result in its presentation.
208.

Sears Roebuck was also left with unreasonably small capital. The CFO’s

Certification to the board of directors of Sears Roebuck in support of the Lands’ End transaction
showed that Sears Roebuck had total equity of $6.384 billion. But that valuation relied upon an
$8.254 billion intercompany receivable due to Sears Roebuck, on information and belief, largely
or entirely from Sears. Because Sears was insolvent and had unreasonably small capital, that
intercompany receivable was not collectable. As a result, even this single correction reveals that
Sears Roebuck was also insolvent and also had unreasonably small capital.
5.

The Culpable Insiders Acted with Fraudulent Intent.

209.

The Lands’ End spinoff was approved by a Board that included Lampert,

Mnuchin, Tisch, and Alvarez. The Culpable Insiders acted with the intent to hinder, delay, and
defraud Sears and Sears Roebuck’s creditors through the Lands’ End spinoff. This intent can be
inferred from several traditional “badges of fraud.”
210.

First, the transfer was to insiders. In Lampert’s words, he wanted to give Lands’

End to “ourselves.” The Culpable Shareholders owned approximately 74.7% of Sears’ stock,
and thus personally received approximately 74.7% of the equity of Lands’ End. Specifically,
70

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 72 of 110

Main Document

Lampert and ESL owned 48.4% of Sears’ stock, Fairholme owned 22.8% of Sears’ stock, and
Tisch owned 3.5% of Sears’ stock. Thus, Lampert and ESL received Lands’ End stock worth at
least $490 million, Fairholme received Lands’ End stock worth at least $231 million, and Tisch
received Lands’ End stock worth at least $36 million. In total, the Culpable Shareholders
received at least $756 million in value from the Lands’ End spinoff.
211.

Second, Lands’ End comprised a significant percentage of Sears’ EBITDA-

producing assets. In FY 2012 (the last year in which Sears had positive EBITDA), Lands’ End
comprised 17.3% of Sears’ EBITDA. The year before, FY 2011, Lands’ End had comprised a
majority, 52.3%, of Sears’ EBITDA. Lands’ End likely comprised an even higher percentage of
Sears Roebuck’s EBITDA-producing assets (assuming that Sears, Sears Roebuck, and Kmart all
had positive EBITDA).
212.

Third, Sears and Sears Roebuck received no consideration in the spinoff. The

shareholders paid nothing to Sears or Sears Roebuck in exchange for the Lands’ End stock that
they received. (As noted, the pre-spin dividend was paid with funds borrowed by Lands’ End,
which, as a wholly owned subsidiary, already belonged to Sears and Sears Roebuck.)
213.

Fourth, the transfer was unusual and not in the ordinary course of business.

214.

Fifth, as noted above, Sears and Sears Roebuck were insolvent prior to the

transaction, or became insolvent as a result of the transaction, under the cash-flow test.
215.

Finally, the Culpable Insiders (and Duff & Phelps) knew or should have known

that the 2014 Solvency Projections could not realistically be achieved. By this time, Sears had
fallen short of the performance projections in its four immediately preceding Annual Plans, for
fiscal years 2010 through 2013. Sears also had fallen short of the multi-year projections that had
been submitted to Duff & Phelps in 2012 for its analysis of the SHO rights offering and Sears

71

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 73 of 110

Main Document

Canada partial spinoff. These shortcomings were material. For example, Sears’ actual
EBITDAP fell short of its Annual Plan projections by $900 million in FY 2012 and $1.7 billion
in FY 2013.
216.

In the words of former Sears CEO Alan Lacy: “In 2014, with the Lands’ End

spinoff, and then the Seritage spinoff . . . , that’s when it seemed to shift into, [Lampert’s]
managing for cash flow, or liquidation. Everybody knew how the movie was going to end. It
was just a question of how many minutes are left.”
E.

The July 2015 Seritage Transaction Wrongfully Transferred More Than
$649 Million to Seritage and More Than $399 Million to Sears’ Shareholders.
217.

Ever since the Kmart/Sears merger, analysts and financial journalists have

speculated that Lampert’s intentions for Sears involved some type of “real estate play.” The
Seritage transaction, which closed in July 2015, proved them right.
218.

The Seritage transaction constituted a fraudulent transfer and an illegal dividend.

The sale-and-lease-back agreement, and related agreements, between Sears and Seritage (the
“Sale-and-Lease-Back”)7 undervalued the real estate by hundreds of millions of dollars and
saddled Sears with grossly one-sided and costly lease terms, and the Seritage rights offering
transferred highly valuable subscription rights to Sears’ shareholders (again, principally to the
benefit of the Culpable Shareholders) for no consideration.
219.

First, Sears sold to the Seritage Defendants the title (or joint venture interests) for

the land under 266 of its most profitable stores for a purchase price of approximately $2.58

7

The Sale-and-Lease-Back comprises several related contracts (and amendments thereto), including:
(i) the Subscription, Distribution and Purchase and Sale Agreement by and between Sears and Seritage dated
June 8, 2015; (ii) the Contribution and Sale Agreement between Kmart Corporation, Marin Access LLC, Kmart
of Washington, LLC, Plaza Guaynabo Limited Partnership, S.E., Sears Roebuck, Sears, Roebuck de Puerto
Rico, Inc., Sears Development Co., Seritage KMT Finance LLC, and Seritage SRC Finance LLC dated July 7,
2015; and (iii) the Master Lease by and among Seritage SRC Finance LLC, Seritage KMT Finance LLC, Kmart
Operations LLC, and Sears Operations LLC dated July 7, 2015.

72

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 74 of 110

Main Document

billion,8 while simultaneously agreeing to lease those spaces back from the Seritage Defendants.
The purchase price was ostensibly based upon appraisals of the properties by C&W. But the
appraisals were fundamentally flawed, and, as a result, the transferred real estate was
undervalued by approximately $649 to $749 million.
220.

Second, Sears transferred subscription rights to purchase shares in Seritage

common stock to the Culpable Shareholders and other Sears shareholders for no consideration.
The trading price of the subscription rights reflects that they were worth approximately $400
million. And for Lampert, ESL, the ESL Shareholders, and Fairholme, the value of the
subscription rights was even greater. Those insiders benefited from a side agreement pursuant to
which they exchanged some of their subscription rights plus cash for other classes of Seritage
stock and interests in the Seritage Operating Partnership, which were particularly valuable.
221.

Sears’ financial condition was even worse in July 2015, when the Seritage

transaction closed, than it had been fourteen months earlier when Lands’ End was spun off. That
was due in part to Sears’ continuing losses (it recorded a net loss of $1.68 billion in FY 2014)
and in part to the Lands’ End spinoff itself, which divested Sears of one of its few profitable
subsidiaries. Yet Sears transferred the Seritage subscription rights for no consideration and the
real estate for grossly inadequate consideration. The inadequate consideration is confirmed by
Seritage’s stock price increase on its first day of trading, closing at $37.73 (up 27.6% from
$29.58)—a one-day increase in Seritage’s market capitalization of $453 million.
222.

By April 15, 2016, less than one year later, Seritage’s stock price had increased

more than 50%, to $56.47, giving it a market capitalization of $3.2 billion. Seritage also paid

8

Sears received cash consideration of $2,582,572,012.35. Certain public disclosures inaccurately referred to a
purchase price of approximately $2.7 billion. The higher figure was calculated by improperly counting the fees
paid to the third-party professionals who worked on the transaction and other amounts that were, in reality, paid
to Seritage rather than Sears.

73

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 75 of 110

Main Document

quarterly dividends since December 2015 totaling approximately $209 million. On information
and belief, the Culpable Shareholders have received approximately $131 million of dividends
from Seritage.
223.

The terms of the Seritage transaction—including the price Seritage paid Sears for

the properties, the rent and other terms of the leases between Sears and Seritage, and the terms of
the rights offering—were established unilaterally by Lampert and others who reported to him,
and without negotiation. Lampert, however, was grossly conflicted because, once the transaction
went through, he and ESL would be by far the largest shareholders of Seritage. No consideration
was given to the interests of creditors.
1.

Sears Fails to Give Meaningful Consideration
to Value-Maximizing Alternatives.

224.

The Seritage transaction was developed and approved in the face of an

approaching liquidity and operational crisis for Sears. In mid-2014, shortly after the Lands’ End
spinoff, Sears’ managers began to predict a liquidity shortfall the following year. As set forth
above, following the Lands’ End spinoff, the PBGC expressed serious concerns about Sears’
viability and threatened to terminate its pension plan—an event that would result in a violation of
Sears’ credit agreements, and thus a potential death knell for the Company—unless Sears
provided substantial additional assurance to protect the PBGC’s interest as the plan’s insurer.
Major suppliers, also concerned about the Company’s viability, began tightening credit terms.
225.

Moreover, in Fall 2014, Sears’ auditor, Deloitte & Touche (“Deloitte”), raised

concerns about Sears’ ability to continue as a going concern. Deloitte identified several facts
indicating that Sears might not be able to continue as a going concern, including, among other
things, negative operating cash flows, recurring losses from operations, consecutive years of
declining margins, dependence on revolving credit arrangements with limited availability, and

74

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 76 of 110

Main Document

small cushions on debt covenant ratios. Given the Company’s worsening financial situation,
Deloitte conducted the year-end audit assuming that Sears would earn negative $500 million in
EBITDA and need $1.6 billion in capital in FY 2015. Deloitte ultimately concluded that Sears
could remain a going concern, through FY 2015, by monetizing its real estate portfolio.
226.

A potential real estate Sale-and-Lease-Back transaction was presented to Sears’

Board as early as September 9, 2014 (alongside alternatives such as a real estate loan, a REMIC
loan, and borrowing against treasury shares).
227.

Other alternatives—such as selling the real estate to third parties or creating a

business unit or subsidiary of Sears that could lease the real estate to other tenants, while
allowing Sears to retain the upside benefit of the real estate—were not presented or seriously
considered.
228.

Lampert was the driving force behind the Sale-and-Lease-Back transaction. As a

result, the Sale-and-Lease-Back proposal was developed, while other alternatives were not
seriously considered. By September 21, 2014, the Company was moving forward with the
creation of a REIT. Because legal restrictions on ownership concentration in REITs would have
prevented Sears’ largest shareholders—Lampert, the ESL Shareholders, and Fairholme—from
owning the same percentage of the REIT as they owned of Sears, substantial attention was
devoted to developing transaction features that would benefit these large shareholders. By
October 2014, Sears’ internal liquidity planning scenarios began to assume proceeds from a Saleand-Lease-Back transaction. By November 2014, the principal elements of the transaction—
including the creation of a new REIT, an estimate of the number of properties to be sold to the
REIT, and the terms of the master lease whereby the REIT would lease back the properties to
Sears—were in place.

75

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 77 of 110

Main Document

2.

The Seritage Subscription Rights Were Transferred
from Sears to Sears’ Shareholders for No Consideration.

229.

Pursuant to a “Subscription, Distribution and Purchase and Sale Agreement”

between Sears and Seritage dated June 8, 2015, the newly created REIT (Seritage) issued and
delivered to Sears 106,597,798 unitized subscription rights (“Seritage Rights”). The Seritage
Rights gave their holders the option to purchase new shares of common stock of Seritage at an
exercise price payable to Seritage of $29.58 per share. The balance of Seritage’s capital
structure consisted of third-party financing secured by the real estate to be acquired from Sears.
230.

Sears distributed all 106,597,798 of the Seritage Rights to its shareholders that

same day, of which 81,359,794, or 76.3%, were given to the Culpable Shareholders. The
shareholders did not pay Sears any consideration in exchange for the Seritage Rights.
231.

The Seritage Rights were valuable securities. Between June 9 and 26, 2015, the

Seritage Rights traded on the NYSE. The volume-weighted average trading price of the Seritage
Rights over this period was $3.75 per right. Based on this price, the 106,597,798 Seritage Rights
were worth at least $399 million. As Sears’ CFO wrote in an email before the closing, “the
market thinks [Sears] is selling something for about $600M less than it is worth.”
232.

In fact, the Seritage Rights were worth materially more than this amount, because

the trading price did not account for the more valuable interests that Lampert, the ESL
Shareholders, and Fairholme were able to obtain by “exchanging” their excess rights (which they
did not trade on the NYSE) plus cash with Seritage for Class B and Class C shares of Seritage
and operating partnership interests. These other interests were worth more than Seritage
common stock because they gave Lampert, the ESL Defendants, and Fairholme the special
ability to block a change of control.

76

 19-08250-rdd

233.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 78 of 110

Main Document

As reflected in Lampert’s contemporaneous comments to Sears’ Board, the

Seritage Rights were intended to have a substantial positive trading price. Specifically, the
minutes reflect that Lampert told the Board that he wanted the Seritage Rights to “be attractive to
investors” and to provide “value to Sears’ shareholders who chose to sell their rights.”
3.

In Preparation for the Sale-and-Lease-Back Transaction,
Real Estate and Joint Venture Interests Are Transferred
to KMT Mezz, SRC Mezz, and SPS Portfolio Holdings LLC
for No Consideration or for Inadequate Consideration.

234.

As preparatory steps for the sale of KMT Mezz, SRC Mezz, and SPS Portfolio

Holdings LLC to Seritage, certain real estate assets were transferred from Sears Roebuck and
Kmart Corporation (and their subsidiaries) to KMT Mezz, SRC Mezz, and SPS Portfolio
Holdings LLC—either for no consideration or for inadequate consideration.
235.

First, various Kmart Corporation subsidiaries (including the entities listed in

footnote 1) contributed properties to Seritage KMT Finance LLC for no consideration (or
distributed the properties to Kmart Corporation for no consideration to contribute to Seritage
KMT Finance LLC for no consideration). Certain other subsidiaries of Kmart Corporation
(including Kmart of Washington, LLC) also sold properties to Seritage KMT Finance LLC for
inadequate consideration (based on the appraisals described below).
236.

Second, Sears Roebuck and various Sears Roebuck subsidiaries contributed

properties to Seritage SRC Finance LLC for no consideration. Certain other subsidiaries of
Sears Roebuck (including Sears Development Co.) also sold properties to Seritage SRC Finance
LLC for inadequate consideration (based on the appraisals described below).
237.

Third, Sears Roebuck contributed its joint venture interests in GS Portfolio

Holdings LLC and MS Portfolio LLC, for no consideration, to Seritage GS Holdings LLC and
Seritage MS Holdings LLC, respectively.

77

 19-08250-rdd

238.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 79 of 110

Main Document

Fourth, Kmart Corporation contributed Seritage KMT Finance LLC to KMT

Mezz for no consideration.
239.

Fifth, Sears Roebuck contributed Seritage SRC Finance LLC, Seritage GS

Holdings LLC, and Seritage MS Holdings LLC to SRC Mezz for no consideration.
4.

The Sale-and-Lease-Back Undervalued the Transferred
Real Estate Assets and Joint Venture Interests.

240.

On or about July 7, 2015, Sears and Seritage closed on the Sale-and-Lease-Back

of 266 Sears stores. These 266 properties were selected to include only stores that generated
sufficient EBITDA to be able to pay the assigned rent to Seritage, and thus represented Sears’
most valuable available properties.
241.

Seritage paid Sears a total of $2.58 billion for the real estate assets and joint

venture interests, a purchase price that was purportedly based in primary part on appraisals
performed by C&W. This purchase included: (i) the purchase of KMT Mezz from Kmart
Corporation; (ii) the purchase of SRC Mezz and SPS Portfolio Holdings LLC from Sears
Roebuck; and (iii) the purchase of certain other real estate assets from Kmart Corporation (and
one of its subsidiaries) and Sears Roebuck.
242.

C&W’s appraisals were fundamentally flawed and undervalued the properties by

between $649 and $749 million, which in turn meant Seritage underpaid at least that much for
the properties, for two principal reasons.
243.

First, as dictated by the terms of C&W’s engagement agreement, in valuing the

properties, C&W considered only the “income capitalization” approach, i.e., the present value of
the future rental payments that Sears would make to Seritage.
244.

Second, C&W improperly, and systematically, utilized lower than average market

rents. Overall, C&W’s market rents, on a portfolio-wide basis, were 30.2% below average

78

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 80 of 110

Main Document

comparable market rents. Since the $2.58 billion purchase price was determined based on a
“direct capitalization method” (i.e., treating the rental income streams from these properties as
perpetuities and dividing the net operating income by a capitalization rate), the use of low rents
had the net effect of substantially lowering the price that Seritage paid Sears for the properties.
C&W employed different rationales to lower the rents for different properties, but the overall
result was a substantially below-market average rent, often below the low end of all other
comparables considered.
245.

Third, C&W further reduced the rent streams it used to value the properties by

between 20% and 35%. This reduction in rent payable by Sears was purportedly intended to
offset the benefit to Seritage of the recapture and redevelopment rights and the other unusual
features of the planned master lease. But by using this under-market rent as the basis for its
appraisals, C&W materially undervalued the properties.
246.

As some of the C&W appraisals acknowledged, because C&W valued the

property using the rental rate that Sears would pay Seritage, C&W should have adjusted the
capitalization rate downward (thereby increasing its valuations) to adjust for the effect of the
below-market rent. However, instead of applying lower capitalization rates, C&W routinely
applied rates at the high end of its calculated range. Indeed, C&W’s average capitalization rate
of 8.16% was higher than the averages in both datasets that C&W consulted. As C&W has
acknowledged, it is a matter of simple arithmetic that applying a higher capitalization rate to the
same expected cash flow results in lowering the resulting appraised value.
247.

That C&W’s rents were systematically too low—and thus that the $2.58 billion

purchase price was too low—is confirmed by Seritage’s subsequent ability to achieve a
staggering 3.5x to 4.5x “rental uplift” upon re-leasing space formerly occupied by Sears. Further

79

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 81 of 110

Main Document

confirmation can be found in Sears’ subsequent sales, through the Petition Date, of 36 properties
at prices that were, on average, 40% higher than C&W’s valuation.
248.

After correcting for these and other errors, a fair valuation would have resulted in

a purchase price at least $649 to $749 million more than Seritage paid Sears.
5.

Onerous Master Lease Terms Further Benefited Seritage at Sears’ Expense.

249.

The Sale-and-Lease-Back contained one-sided terms that benefited Seritage and

harmed Sears. Two terms in particular were unfair to Sears: (i) Seritage’s right to “recapture” up
to 50% of the space at most of the stores it purchased, and 100% of the space at the remaining
stores; and (ii) Sears’ obligation to pay a punitive termination fee calculated as one year’s rent if
Sears elected to terminate the lease with respect to individual stores.
250.

Seritage’s recapture right harmed Sears because it left Sears’ most profitable

stores vulnerable to eviction or having their footprint materially reduced. Specifically, this
clause allowed Seritage to recapture up to 50% of the space at 224 properties, and 100% at 21
other properties (plus auto care centers). Notably, the agreement imposed no limitation on
Seritage’s right to lease the space to anyone, including competitors of Sears.
251.

Sears’ liability to pay a punitive termination fee harmed Sears because it

increased the cost of Sears’ stated strategy of closing unprofitable stores. Moreover, Sears was
prohibited from exercising the termination right in such a way as to reduce aggregate rent under
the Sale-and-Lease-Back by more than 20% per year.
252.

Taken together, the Sale-and-Lease-Back terms ensured that Sears would continue

to pay Seritage rent, even for unprofitable stores, and that Seritage could invest those funds in
redevelopments that ousted Sears from its most profitable stores. As noted, Duff & Phelps,
Sears’ advisor on the transaction, estimated the value to Seritage of these unusual lease terms at

80

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 82 of 110

Main Document

between $204 and $409 million. To date, Sears has paid Seritage more than $570 million in rent,
termination fees, or tenant reimbursements.
253.

The Sale-and-Lease-Back was not the product of an arm’s-length negotiation

process. Since Seritage did not exist prior to the transaction, all decisions about Seritage were
made by Sears personnel and—as Robert Schriesheim, former CFO of Sears, explained to
counsel for the Subcommittee—mainly by Lampert himself. Jeffrey Stollenwerck, Sears’ head
of real estate, similarly stated that he was not aware of any “negotiation” of the Sale-and-LeaseBack or of any person tasked with protecting Sears’ interests.
254.

Nor did Sears allow a disinterested committee of the Board (such as the RPT

Committee) to negotiate the terms. The RPT Committee, in evaluating the transaction, did not
have an independent real estate appraisal firm and never considered hiring one. Indeed, the RPT
Committee’s sole focus in reviewing the transaction was whether Lampert and ESL were getting
a better deal than other Sears shareholders. The RPT Committee did not consider, and was not
authorized to consider, any of the other key aspects of the transaction, including the price of the
rights offering, the value of the property itself, the one-sided lease terms, and the Company’s
solvency. The RPT Committee did not consider Sears’ creditors and whether the transaction
would harm them.
255.

The transaction’s one-sided terms are the predictable result of this flawed process.

6.

The Seritage Transaction Left Sears and the Real Estate
Transferors Insolvent under the Balance-Sheet Test.

256.

After the Seritage transaction, Sears had a negative net asset value and was thus

insolvent under the balance-sheet test. Due to Sears’ prolonged negative earnings and the lack of
any reasonable indication that the problems were temporary, Sears could not be valued under the
income approach (discounted cash flow) or the market-multiples approach.

81

 19-08250-rdd

257.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 83 of 110

Main Document

Using the asset approach—i.e., fair value of its net assets under the premise of an

orderly (or disorderly) liquidation—the fair value of Sears’ total assets at the time was no more
than $13.3 billion in an orderly liquidation, which would have yielded net equity of negative
approximately $1.5 billion (and a net asset value of negative approximately $2.3 billion after
considering the estimated wind-down of corporate overhead).
258.

While Duff & Phelps opined that Sears was solvent and had adequate capital

following the Seritage transaction, it managed to reach that conclusion only by committing
fundamental errors, including relying on bad faith, unachievable projections provided to it by the
Company’s management. Indeed, as noted, of the three years of management projections that
Duff & Phelps cited, the projections for two years (all but the then-current year) were developed
solely for the Duff & Phelps solvency and capital adequacy opinion itself. Duff & Phelps also
overvalued Sears’ inventory, real estate, property, plant, equipment, and trade names by billions
of dollars.
259.

Indeed, Duff & Phelps’ solvency analysis for Seritage made assumptions even

more favorable to Sears than had been made for Lands’ End. For Lands’ End, Duff & Phelps
had used EV/EBITDARP multiples of 6.5x to 7.5x, below the median of Sears’ “peer” retailers.
Yet, just one year later, for Seritage, Duff & Phelps used multiples of 10.5x to 11.5x, exceeding
the median of the “peer” retailers, despite Sears’ diminished and declining performance and the
inclusion of far more successful competitors such as Walmart, Target, and Home Depot.
260.

Duff & Phelps also improperly utilized inflated trademark valuations for the

Kenmore, Craftsman, and Diehard (the “KCD”) brands that did not represent the value Sears
itself ascribed to those brands. Instead, as stated by Myron Marcinkowski, the head of Duff &
Phelps North American Valuation Practice, Duff & Phelps valued the brands using a

82

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 84 of 110

Main Document

“hypothetical strategy” to “monetize and exploit the brands” that Sears “never implemented.”
Notably, Duff & Phelps never conducted any study to determine whether Sears’ “hypothetical
strategy” would maximize the revenue associated with these brands. As a result of this
“strategy,” despite falling revenue at Sears, a declining number of Sears stores, and decreasing
KCD brand revenue, Duff & Phelps noted a $2.8 billion valuation of the KCD brands. If Duff &
Phelps had valued the KCD brands based on Sears’ “given strategy,” as Ernst & Young (“E&Y”)
did as part of its impairment analysis, the KCD brands would be valued at $1.096 billion, almost
a third of the figure in the solvency analysis. If Duff & Phelps had used the more realistic
figures that E&Y had, then, at the time of the Seritage transaction, Sears would have had a net
equity of negative $1.8 billion and been insolvent.
261.

Duff & Phelps also lowered the variances used for its “sensitivity case.” For

Lands’ End, Duff & Phelps had used a cumulative variance of 12.4% for revenue and 69.4% for
EBITDAP. However, for Seritage, Duff & Phelps reduced the cumulative variance for revenue
to 3.7% and the cumulative variance for EBITDAP to 40.8%.
262.

The other Real Estate Transferors were also insolvent on a balance-sheet basis.

263.

Sears Roebuck and Kmart Corporation were co-obligors or guarantors for most of

Sears’ debt, including $1.123 billion under the First Lien Credit Agreement, $1.24 billion of
Second Lien Notes, and a $200 million Secured Short-Term Loan from ESL. Sears
Development Co. was also a co-obligor for the Secured Short-Term Loan. And each of the Real
Estate Transferors was jointly and severally liable for Sears’ pension liabilities (on the order of
$2.3 billion) as members of a “controlled group.” Because Sears was insolvent, and thus unable
to pay these massive joint obligations, the other Real Estate Transferors were also insolvent.

83

 19-08250-rdd

264.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 85 of 110

Main Document

For example, in support of the Seritage transaction, Duff & Phelps opined that

Sears Roebuck had a net asset value of $3.959 billion as of April 4, 2015. But Duff & Phelps’
valuation relied upon a $6.59 billion intercompany receivable due to Sears Roebuck largely from
Sears. Because Sears was insolvent, that intercompany receivable was uncollectable. Correcting
even that single error reveals that Sears Roebuck was insolvent on a balance-sheet basis. In fact,
Sears Roebuck was even more deeply insolvent. Duff & Phelps also overvalued Sears
Roebuck’s inventory, real estate, PP&E, and trade names, and undervalued its pension liabilities
and corporate overhead, in the same manner (described above) as it had for Sears.
265.

Duff & Phelps did not even consider the solvency of Sears Development Co. or

Kmart of Washington, LLC.
7.

The Seritage Transaction Left Sears and the Real Estate
Transferors Insolvent under the Cash-Flow Test.

266.

Sears also was insolvent under the cash-flow test, both before and after the

Seritage transaction.

84

 19-08250-rdd

267.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 86 of 110

Main Document

At the time of the Seritage transaction, Sears had existing debt obligations with an

aggregate principal amount of more than $3.7 billion. Together with interest, Sears required a
total of more than $4.7 billion (and more than $4.2 billion by 4Q 2019) to pay off that debt. The
schedule under which these obligations would come due was as follows:

85

 19-08250-rdd

268.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 87 of 110

Main Document

Sears’ total cash and cash equivalents immediately after the Seritage transaction

(including the $2.58 billion purchase price) were approximately $3 billion. By quarter end, after
paying down the ABL due in 1Q 2016, Sears had just over $1.8 billion in cash and cash
equivalents remaining. Even assuming that Sears were to use all of these funds for debt
principal and interest payment (rather than continued operating losses, as actually occurred),
Sears would still require more than $1.2 billion of additional free cash flow by 4Q 2019, and
more than $460 million of that by 3Q 2018:

269.

After the Seritage transaction, Sears could not reasonably have expected to earn

$460 million in free cash flow by 3Q 2018 (when the Second Lien Notes, among other debts,
came due). Indeed, assuming that Sears’ results merely stayed flat after the transaction, rather
than continuing to decline as they had over the preceding years, Sears would have a cash balance
of negative $1.1 billion—i.e., it would be out of cash—by the end of FY 2016, less than 18
months later.
270.

In reality, Sears ultimately saw free cash flow of approximately negative $2.4

billion in FY 2015, negative $1.5 billion in FY 2016, and negative $1.9 billion in FY 2017.

86

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 88 of 110

Main Document

Even with non-ordinary-course sales of Sears’ core assets, after the Seritage transaction, Sears
could not reasonably have funded these debt principal and interest payments. Not coincidentally,
3Q 2018 is when Sears ultimately filed for bankruptcy, $89 million of the Second Lien Notes
outstanding (having repaid $946 million of Second Lien Notes—$936 million of which followed
the Seritage transaction—and exchanged $215 million of Second Lien Notes into other second
lien debt).
271.

In light of Sears’ declining financial performance over the preceding years and the

numerous adverse qualitative trends, as detailed above, there was no good-faith basis to assume
that Sears could achieve the required levels of cash flow. In the four immediately prior fiscal
years, 2011–2014, Sears had failed to generate any cash flow from operations or any earnings to
cover interest expenses. In the immediately prior year, FY 2014, Sears had negative free cash
flow of $1.7 billion and negative EBITDAP of approximately $750 million. And in the four
immediately prior fiscal years, 2011–2014, Sears had suffered a cumulative net loss of
approximately $7 billion.
272.

As with Lands’ End, Duff & Phelps’ contrary cash-flow analysis was

fundamentally flawed because it relied upon overly optimistic projections of future performance
from management. Duff & Phelps was provided with three-year projections for FYs 2015–2017
from management, and Duff & Phelps then extended these projections into five- and ten-year
projections (the “2015 Solvency Projections”).

Seritage Solvency Projections - Provided by
Sears to D&P
FY15
FY16
FY17
Revenue
$ 28,085 $ 29,149 $ 29,617
Gross Margin
$ 9,780 $ 10,184 $ 10,401
EBITDAP
$
316 $
573 $
771
EBITDAP Margin
1.1%
2.0%
2.6%

87

 19-08250-rdd

273.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 89 of 110

Main Document

The 2015 Solvency Projections were unrealistic and unattainable. As in 2014, in

the base case, Duff & Phelps assumed that revenue, gross margin, EBITDARP, and EBITDAP
would begin to increase rather than continuing to decrease (and, in the case of EBITDAP, would
turn positive instead of remaining negative). Sears’ projections that its performance would
suddenly reverse in FY 2015—just as Sears had incorrectly projected the year before (FY 2014),
the year before that (FY 2013), the year before that (FY 2012), and the year before that
(FY 2011)—had no good-faith basis.

Budget

Seritage Solvency Projections

Actual

Budget

Seritage Solvency Projections

Actual

Budget

Seritage Solvency Projections

Actual

88

 19-08250-rdd

274.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 90 of 110

Main Document

Even in the sensitivity case, Duff & Phelps assumed that Sears’ revenue decline

would slow and then turn to growth and that EBITDAP and EBITDAP margin would become
positive and increase (rather than remaining negative and continuing to decrease). In other
words, even the “sensitivity” case assumed a dramatic and immediate turnaround in the
Company’s profitability.

275.

Budget

Seritage Solvency Projections

Actual

Budget

Seritage Solvency Projections

Actual

As detailed above, these optimistic assumptions were inconsistent with Sears’

historical financial performance, by the initiatives included within Sears’ FY 2015 Annual Plan,
or by the prevailing conditions affecting Sears’ operating performance.
276.

Even under Duff & Phelps’ base case, Sears would not have been able to pay

$959 million of debt that would come due in 2018 and $362 million more of debt that would
come due in 2019. And in Duff & Phelps’ sensitivity case, Sears would have been unable to pay
almost $959 million of debt that would come due in 2018 (44% of the debt maturing that year)
and $362 million of debt that would come due in 2019. Duff & Phelps simply assumed that

89

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 91 of 110

Main Document

Sears would be able to refinance these amounts, which, under a more realistic view of expected
future performance, was speculative.
277.

The other Real Estate Transferors were also insolvent on a cash-flow basis.

278.

As noted, Sears Roebuck, Kmart Corporation, and Sears Development Co. were

co-obligors or guarantors for much of Sears’ debt, including under the First Lien Credit
Agreement, the Second Lien Notes, and the Secured Short-Term Loan. And each of the Real
Estate Transferors was jointly and severally liable for Sears’ pension liabilities (on the order of
$2.3 billion) as members of a “controlled group.” Because Sears was insolvent, and thus unable
to pay these massive joint obligations, the other Real Estate Transferors were also insolvent. The
other Real Estate Transferors had less cash flow than Sears and many of the same obligations as
Sears. Once Sears failed to pay its joint obligations, the other Real Estate Transferors would also
have also been unable to pay them.
279.

Duff & Phelps did not consider the cash-flow solvency of Sears Roebuck or

Kmart Corporation and did not consider the solvency of Sears Development Co. or Kmart of
Washington, LLC at all.
8.

Sears and the Real Estate Transferors Had Unreasonably
Small Capital at the Time of the Seritage Transaction.

280.

In addition, Sears, Sears Roebuck, and the Real Estate Transferors had

unreasonably small capital after the Seritage transaction.
281.

Lampert himself acknowledged the Company’s near-insolvent state by warning

the Sears Board that, without the Seritage transaction, “management would be operated more in
‘liquidation mode’ than ‘operating mode.’”
282.

As detailed above, Sears’ multi-year performance history leading up to the

Seritage transaction demonstrated that it was unable to generate sufficient profits to sustain

90

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 92 of 110

Main Document

operations. Indeed, Sears could not generate any profits, and could only temporarily stave off
complete collapse by selling core assets and incurring further secured debt that it would be
unable to generate sufficient cash flow to repay.
283.

Indeed, if Duff & Phelps’ sensitivity case performance projections were used in

Duff & Phelps’ DCF analysis, Sears would show a much more narrow equity cushion of $431
million instead of $2.2 billion. Duff & Phelps’ valuation model was set up to run the sensitivity
case projections through its DCF analysis, but Duff & Phelps elected either not to run this
scenario or not to present the result in its presentation (contrary to its inclusion of such results in
the prior year for its Lands’ End solvency analysis).
284.

The same is true for the other Real Estate Transferors, for whom Duff & Phelps

did not separately consider capital adequacy. For example, as noted, Duff & Phelps’ analysis in
support of the transaction assigned total equity to Sears Roebuck in an amount less than the
purported multi-billion-dollar intercompany receivable due to Sears Roebuck from Sears that
was, in reality, not collectable.
9.

The Culpable Insiders Acted with Actual Fraudulent Intent.

285.

The Seritage transaction was approved by a Board that included Lampert,

Mnuchin, Tisch, Alvarez, and Kamlani. The Culpable Insiders had the actual intent to hinder,
delay, and defraud Sears and the Real Estate Transferors’ creditors with the Seritage transaction.
This intent can be inferred from the traditional “badges of fraud.”
286.

First, the transfer was to insiders. The Culpable Shareholders owned

approximately 76.3% of Sears’ stock, and thus personally received approximately 76.3% of the
Seritage Rights. Specifically, Lampert and ESL owned 47.8% of Sears’ stock, Fairholme owned
25% of Sears’ stock, and Tisch owned 3.5% of Sears’ stock. Thus, Lampert and ESL received
Seritage Rights worth at least $191 million, Fairholme received Seritage Rights worth at least
91

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 93 of 110

Main Document

$100 million, and Tisch received Seritage Rights worth at least $14 million. In total, the
Culpable Shareholders received Seritage Rights worth at least $305 million (and likely far more
due to the additional value of the exchange agreements between Lampert, ESL, and Fairholme
and Seritage).
287.

The Sale-and-Lease-Back was made with a new entity controlled by these same

insiders. Moreover, Lampert, ESL, the ESL Shareholders, and Fairholme also enjoyed a side
agreement that exchanged their excess subscription rights plus cash for special controlling
interests in Seritage. As the sole limited partners of the Seritage Operating Partnership, Lampert
and ESL have the ability to veto any “change in control” (such as a merger, consolidation,
conversion, or other combination). Lampert became the chairman of Seritage’s board of trustees,
and Thomas Steinberg, a long-time investor in ESL, became another trustee.
288.

Second, Sears received no consideration for the rights offering, and inadequate

consideration for the Sale-and-Lease-Back.
289.

Third, the transfer was unusual and not in the ordinary course of business. The

transaction sold Sears’ crown jewels, putting its most profitable stores at risk of being
“recaptured” and leased to its competitors.
290.

Fourth, as noted above, Sears was insolvent, or became insolvent, under both the

balance-sheet and cash-flow tests.
291.

Fifth, Lampert, ESL, the ESL Defendants, and Fairholme also intended to use the

proceeds of the transaction to repurchase debt held by themselves. Some of the proceeds of the
Seritage transaction were used for an all-cash tender offer of Sears’ Second Lien Notes—$205
million of which were held by Lampert and ESL—at near par (99 cents on the dollar).

92

 19-08250-rdd

292.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 94 of 110

Main Document

Sixth, Sears and the Culpable Shareholders (through their ownership and control

of Seritage) maintained possession and control of the transferred real estate assets.
293.

Notably, prior to the transaction, the Culpable Insiders also were aware of analyst

reports and financial journalism that opined that the transaction was unfair to Sears. In the words
of Evercore’s analyst, Sears’ strategy was to “[p]ut 250 of the best stores in the REIT, get $2B in
cash and hope that this is sufficient to fund the business for 2 years to get past fraudulent
conveyance statutes.”
294.

An inquiry from a reporter of The Wall Street Journal prior to the transaction,

raising concern about the harm to creditors from recent spinoffs, was elevated from Sears’ public
relations team to Lampert himself. Sears never responded to the reporter.
Recent Related-Party Loans with Lampert, ESL, and Fairholme
295.

Between April 2016 and September 2018, Lampert, ESL, and/or Fairholme made

$3.22 billion in loans to Sears, all of them fully-secured or over-secured by collateral such as
inventory, receivables, real estate, and intellectual property.
Transaction

Date of
Loan

2016 Term Loan Facility

4/8/2016

New Money
Loan
Amount
$750

2016 Secured Loan
Facility
Second Lien Credit
Agreement
First Amendment to
Second Lien Credit
Agreement (re: New Line
of Credit Facility)
Third Amendment to
Second Lien Credit
Agreement (re:
Incremental LOC Facility)
Letter of Credit Facility

4/8/2016

500

21 real properties

9/1/2016

300

7/7/2017

500

Inventory, receivables, and other
related assets
Inventory, receivables, and other
related assets

2/7/2018

100

12/28/2016

200

Letter of Credit Facility 8/3/2017
Incremental
Commitments
2017 Secured Loan
1/3/2017
Facility
First Amendment to 10/28/2017
2017 Secured Loan
Facility (re: First
Incremental Loan)

71

500
200

Main Collateral

Lenders

ESL
Affiliate
Take-Up
20.0%

Interest
Rate

Domestic inventory, credit card, and
pharmacy receivables

JPP, LLC, JPP II, LLC,
Company Domestic Pension
Plan
JPP, LLC, JPP II, LLC,
Cascade Investment LLC
JPP, LLC, JPP II, LLC

50.0%

8.000%

100.0%

L + 750

JPP, LLC, JPP II, LLC

78.7%

L + 750

Inventory, receivables, and other
related assets

JPP, LLC, JPP II, LLC

100.0%

L + 750

Domestic inventory, credit card and
pharmacy receivables, and certain
real estate
Domestic inventory, credit card and
pharmacy receivables, and certain
real estate
69 real properties

JPP, LLC, JPP II, LLC

100.0%

5.750%

JPP, LLC, JPP II, LLC

100.0%

5.750%

JPP, LLC, JPP II, LLC

100.0%

8.000%

1L: 76 real properties (Original TL
and Incremental TL) 2L: 16 real
properties (Incremental TL Only)

JPP, LLC, JPP II, LLC

100.0%

11.000%

93

L + 750

 19-08250-rdd

Doc 1

Second Amendment to
2017 Secured Loan
Facility (re: Second
Incremental Loan)
2018 Term Loan Facility

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 95 of 110

Main Document

3/8/2018

100

76 real properties

JPP, LLC, JPP II, LLC

100.0%

L + 900

1/4/2018

100

JPP, LLC, JPP II, LLC

100.0%

L + 1,250

Amendments to 2018 1/29/2018
Term Loan Facility (re:
Incremental Borrowings)
Mezzanine Loan
3/14/2018
Facilities

150

Ground leases and unencumbered IP
except Kenmore and DieHard brands
Ground leases and unencumbered IP
except Kenmore and DieHard brands

JPP, LLC, JPP II, LLC

60.0%

L + 1,250

Equity of SRC O.P. LLC (parent of
entities that own the 138 real
properties securing the Secured Loan
Facilities)
Equity of SRC O.P. LLC (parent of
entities that own the 138 real
properties securing the Secured Loan
Facilities)
Domestic inventory, credit card and
pharmacy receivables
69 real properties

JPP, LLC, JPP II, LLC

100.0%

L + 1,100

JPP, LLC, JPP II, LLC

100.0%

L + 1,100

JPP, LLC, JPP II, LLC

56.0%

L + 850

JPP, LLC, JPP II, LLC

100.0%

L + 900

20 real properties (in addition to the
68 of the original real properties)

JPP, LLC, JPP II, LLC

100.0%

L + 900

384

Mezzanine Loan
Facilities Amendment
(re: Additional Loans)

6/29/2018

129

FILO Loan Facility

3/21/2018

125

Consolidated Secured
6/4/2018
Loan Facility Note B
Consolidated Secured 9/12/2018
Loan Facility Amendment
(re: Additional Note B
Loans)

93
38

296.

These loans are referred to as the “Recent Related-Party Loans.”

297.

Because the Recent Related-Party Loans involved self-dealing between the

Company and controlling shareholders, the Directors and controlling shareholders had a duty to
ensure that their terms were entirely fair. But the Recent Related-Party Loans were not entirely
fair: Sears was charged excessive interest. As a result of the Recent Related-Party Loans, Sears
had already paid Lampert and ESL, prior to the Petition Date, more than $376 million in cash
fees and interest payments, and it paid Fairholme approximately $1 million.
298.

Review by the RPT Committee failed to ensure the entire fairness of the Recent

Related-Party Loans. The RPT Committee was often asked to approve these transactions on an
expedited basis and in circumstances in which failure to approve the transaction would result in
Sears running out of cash, being unable to meet ordinary course obligations, defaulting on loan
covenants (which would allow certain creditors to exercise their “cash dominion” rights), or
other similarly dire consequences. As a result, the RPT Committee had little opportunity to
meaningfully negotiate the terms of these related-party loans. A representative from Centerview
(the financial advisor to the RPT Committee) confirmed to counsel for the Subcommittee that

94

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 96 of 110

Main Document

these transactions “were presented to the special committee on short notice,” which required
Centerview to perform its work “on an expedited timeframe.”
299.

For example, a December 29, 2016 email from Riecker to Sears’ Board requested

approval for a related-party loan in excess of $320 million by January 3, 2017—only three
business days later. Riecker warned that, without the loan, the Company would be out of cash
(and overdrawn by $24 million) by January 3.
300.

In many instances, no “market check”—that is, a process by which the RPT

Committee or Centerview would solicit competing proposals for third-party loans—was
conducted. And the market checks that were conducted were often flawed because the third
parties contacted were not provided sufficient time to conduct due diligence.
301.

Sears had no internal plans reflecting the aggregate amount of additional

financing it expected to need in order to turn around its operations. Although Lampert and the
members of the RPT Committee knew that the related-party loans being requested and approved
would not be sufficient to meet the Company’s long-term liquidity needs (as repeatedly reflected
in Centerview’s presentations to the RPT Committee), they took no action to attempt to obtain a
comprehensive third-party financing solution sufficient to meet the Company’s long-term
liquidity needs.
Sears Files for Bankruptcy
302.

On October 15, 2018, Sears and certain affiliates filed for bankruptcy protection

under Chapter 11 of the Bankruptcy Code.

95

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 97 of 110

Main Document

Count 1
Avoidance of the Orchard Spinoff as an Actual Fraudulent Transfer
Against Lampert, ESL Defendants, Fairholme, and Tisch
(11 U.S.C. §§ 544(b), 550(a)(1), and (2), 1107; NY DCL § 276;
6 Del. C. § 1304(a)(1); 740 Ill. Comp. Stat. 160/5(a)(1))
303.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
304.

The Orchard Spinoff resulted in transfers of interests in the property of Sears and

Sears Roebuck—namely, 80.1% of the common stock and 100% of the preferred stock of
Orchard—to Sears’ shareholders, including Lampert, the ESL Defendants, Fairholme, and Tisch
(the “Orchard Transfers”). The transferred property was worth at least $133 million.
305.

Sears and Sears Roebuck made the Orchard Transfers to and for the benefit of

Sears’ shareholders, including Lampert, the ESL Defendants, Fairholme, and Tisch.
306.

The Orchard Transfers were made with an actual intent to hinder, delay, and/or

defraud Sears and Sears Roebuck’s creditors, to the detriment and harm of such creditors. Such
intent can be inferred from, among other things, the traditional badges of fraud surrounding the
Orchard Transfers.
307.

As a result of the Orchard Transfers, Sears and Sears Roebuck and their creditors

have been harmed.
308.

Under Sections 544(b) and 1107(a) of the Bankruptcy Code, as debtors in

possession, Sears and Sears Roebuck may avoid any transfer for an interest of the debtor in
property that is voidable under applicable non-bankruptcy law by any creditor holding an
unsecured, allowable claim. Creditors of Sears and Sears Roebuck exist who could avoid the
Orchard Transfers under applicable non-bankruptcy law.
309.

The Orchard Transfers are avoidable as an actual fraudulent transfer under

Sections 544 and 550 of the Bankruptcy Code and applicable state law.
96

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 98 of 110

Main Document

Count 2
Avoidance of the SHO Rights Transfers as an Actual Fraudulent Transfer
Against Lampert, the ESL Defendants, Fairholme, and Tisch
(11 U.S.C. §§ 544(b), 550(a)(1), and (2), 1107; NY DCL § 276;
6 Del. C. § 1304(a)(1); 740 Ill. Comp. Stat. 160/5(a)(1))
310.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
311.

The SHO transaction resulted in transfers of interests in the property of Sears—

namely, the SHO Rights and SHO shares—to Sears’ shareholders, including Lampert, the ESL
Defendants, Fairholme, and Tisch (the “SHO Rights Transfers”). The transferred rights were
worth at least $231 million.
312.

Sears made the SHO Rights Transfers to and for the benefit of Sears’

shareholders, including Lampert, the ESL Defendants, Fairholme, and Tisch.
313.

The SHO Rights Transfers were made with an actual intent to hinder, delay,

and/or defraud Sears’ creditors, to the detriment and harm of such creditors. Such intent can be
inferred from, among other things, the traditional badges of fraud surrounding the SHO Rights
Transfers.
314.

As a result of the SHO Rights Transfers, Sears and its creditors have been

harmed.
315.

Under Sections 544(b) and 1107(a) of the Bankruptcy Code, as a debtor in

possession, Sears may avoid any transfer for an interest of the debtor in property that is voidable
under applicable non-bankruptcy law by any creditor holding an unsecured, allowable claim.
Creditors of Sears exist who could avoid the SHO Rights Transfers under applicable nonbankruptcy law.
316.

The SHO Rights Transfers are avoidable as an actual fraudulent transfer under

Sections 544 and 550 of the Bankruptcy Code and applicable state law.
97

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 99 of 110

Main Document

Count 3
Avoidance of the Sears Canada Spinoff as an Actual Fraudulent Transfer
Against Lampert, ESL Defendants, Fairholme, and Tisch
(11 U.S.C. §§ 544(b), 550(a)(1), and (2), 1107; NY DCL § 276;
6 Del. C. § 1304(a)(1); 740 Ill. Comp. Stat. 160/5(a)(1))
317.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
318.

The Sears Canada partial spinoff resulted in transfers of interests in the property

of Sears and Sears Roebuck—namely, 44.5% of the stock of Sears Canada—to Sears’
shareholders, including Lampert, the ESL Defendants, Fairholme, and Tisch (the “Sears Canada
Transfers”). The transferred property was worth at least $621 million.
319.

Sears and Sears Roebuck made the Sears Canada Transfers to and for the benefit

of Sears’ shareholders, including Lampert, the ESL Defendants, Fairholme, and Tisch.
320.

The Sears Canada Transfers were made with an actual intent to hinder, delay,

and/or defraud Sears and Sears Roebuck’s creditors, to the detriment and harm of such creditors.
Such intent can be inferred from, among other things, the traditional badges of fraud surrounding
the Sears Canada Transfers.
321.

As a result of the Sears Canada Transfers, Sears and Sears Roebuck and their

creditors have been harmed.
322.

Under Sections 544(b) and 1107(a) of the Bankruptcy Code, as debtors in

possession, Sears and Sears Roebuck may avoid any transfer for an interest of the debtor in
property that is voidable under applicable non-bankruptcy law by any creditor holding an
unsecured, allowable claim. Creditors of Sears and Sears Roebuck exist who could avoid the
Sears Canada Transfers under applicable non-bankruptcy law.
323.

The Sears Canada Transfers are avoidable as an actual fraudulent transfer under

Sections 544 and 550 of the Bankruptcy Code and applicable state law.
98

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 100 of 110

Main Document

Count 4
Avoidance of the Lands’ End Spinoff as an Actual Fraudulent Transfer
Against Lampert, ESL Defendants, Fairholme, and Tisch
(11 U.S.C. §§ 544(b), 550(a)(1), and (2), 1107; NY DCL § 276;
6 Del. C. § 1304(a)(1); 740 Ill. Comp. Stat. 160/5(a)(1))
324.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
325.

The Lands’ End Spinoff resulted in transfers of interests in the property of Sears

and Sears Roebuck—namely, 100% of the stock of Lands’ End—to Sears’ shareholders,
including Lampert, the ESL Defendants, Fairholme, and Tisch (the “Lands’ End Transfers”).
The transferred property was worth at least $1 billion.
326.

Sears and Sears Roebuck made the Lands’ End Transfers to and for the benefit of

Sears’ shareholders, including Lampert, the ESL Defendants, Fairholme, and Tisch.
327.

The Lands’ End Transfers were made with an actual intent to hinder, delay,

and/or defraud Sears and Sears Roebuck’s creditors, to the detriment and harm of such creditors.
Such intent can be inferred from, among other things, the traditional badges of fraud surrounding
the Lands’ End Transfers.
328.

As a result of the Lands’ End Transfers, Sears and Sears Roebuck and their

creditors have been harmed.
329.

Under Sections 544(b) and 1107(a) of the Bankruptcy Code, as debtors in

possession, Sears and Sears Roebuck may avoid any transfer for an interest of the debtor in
property that is voidable under applicable non-bankruptcy law by any creditor holding an
unsecured, allowable claim. Creditors of Sears and Sears Roebuck exist who could avoid the
Lands’ End Transfers under applicable non-bankruptcy law.
330.

The Lands’ End Transfers are avoidable as an actual fraudulent transfer under

Sections 544 and 550 of the Bankruptcy Code and applicable state law.
99

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 101 of 110

Main Document

Count 5
Avoidance of the Lands’ End Spinoff as a Constructively Fraudulent Transfer
Against Lampert, the ESL Defendants, Fairholme, and Tisch
(11 U.S.C. §§ 544(b), 550(a)(1), and (2); NY DCL §§ 273, 274;
6 Del. C. § 1304(a)(1); 740 Ill. Comp. Stat. 160/5(a)(2))
331.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
332.

The Lands’ End Transfers were transfers of interests in the property of Sears and

Sears Roebuck made to and for the benefit of Sears’ shareholders, including Lampert, the ESL
Defendants, Fairholme, and Tisch.
333.

The Lands’ End Transfers were made for no consideration; without fair

consideration; or for less than reasonably equivalent value.
334.

The Lands’ End Transfers were made (a) when Sears and Sears Roebuck were

insolvent; (b) so as to render Sears and Sears Roebuck insolvent; or (c) so as to leave Sears and
Sears Roebuck with unreasonably small capital.
335.

The Lands’ End Transfers are avoidable as a constructively fraudulent transfer

under Sections 544 and 550 of the Bankruptcy Code and applicable state law.
Count 6
Recovery of the Lands’ End Illegal Dividend
Against the Lands’ End Directors, the ESL Defendants, and Fairholme
(8 Del C. §§ 170–174 and Delaware Common Law)
336.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
337.

The Lands’ End Directors approved and directed the payment of a dividend or

distribution of Lands’ End shares (the “Lands’ End Dividend”) by Sears to its shareholders. The
value of the Lands’ End Dividend was at least $1 billion.

100

 19-08250-rdd

338.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 102 of 110

Main Document

The Lands’ End Dividend was received by Sears’ shareholders, including

Lampert, Tisch, the ESL Defendants, and Fairholme.
339.

At the time of the Lands’ End Dividend, Sears’ liabilities exceeded its assets and

Sears had no net profits in that fiscal year or in the preceding fiscal year. As a result, the Lands’
End Dividend was illegal under Delaware law.
340.

The Lands’ End Directors are jointly and severally liable for the full amount of

the Lands’ End Dividend, which was declared and paid while they were directors of Sears. None
of the Lands’ End Directors dissented from the Lands’ End Dividend.
341.

Lampert, Tisch, the ESL Defendants, and Fairholme are also liable for the portion

of the Lands’ End Dividend each received because they had knowledge of facts indicating that
the Lands’ End Dividend was unlawful.
Count 7
Avoidance of the Seritage Rights Transfers as an Actual Fraudulent Transfer
Against Lampert, the ESL Defendants, Fairholme, and Tisch
(11 U.S.C. §§ 544(b), 550(a)(1), and (2), 1107; NY DCL § 276;
6 Del. C. § 1304(a)(1); 740 Ill. Comp. Stat. 160/5(a)(1))
342.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
343.

The Seritage transaction resulted in transfers of interests in the property of

Sears—namely, the Seritage Rights—to Sears’ shareholders, including Lampert, the ESL
Defendants, Fairholme, and Tisch (the “Seritage Rights Transfers”). The transferred rights were
worth at least $399 million.
344.

Sears made the Seritage Rights Transfers to and for the benefit of Sears’

shareholders, including Lampert, the ESL Defendants, Fairholme, and Tisch.
345.

The Seritage Rights Transfers were made with an actual intent to hinder, delay,

and/or defraud Sears’ creditors, to the detriment and harm of such creditors. Such intent can be
101

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 103 of 110

Main Document

inferred from, among other things, the traditional badges of fraud surrounding the Seritage
Rights Transfers.
346.

As a result of the Seritage Rights Transfers, Sears and its creditors have been

harmed.
347.

Under Sections 544(b) and 1107(a) of the Bankruptcy Code, as a debtor in

possession, Sears may avoid any transfer for an interest of the debtor in property that is voidable
under applicable non-bankruptcy law by any creditor holding an unsecured, allowable claim.
Creditors of Sears exist who could avoid the Seritage Rights Transfers under applicable nonbankruptcy law.
348.

The Seritage Rights Transfers are avoidable as an actual fraudulent transfer under

Sections 544 and 550 of the Bankruptcy Code and applicable state law.
Count 8
Avoidance of the Seritage Rights Transfers as a Constructively Fraudulent Transfer
Against Lampert, the ESL Defendants, Fairholme, and Tisch
(11 U.S.C. §§ 544(b), 550(a)(1), and (2); NY DCL §§ 273, 274;
6 Del. C. § 1304(a)(1); 740 Ill. Comp. Stat. 160/5(a)(2))
349.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
350.

The Seritage Rights Transfers were transfers of interests in the property of Sears

made to and for the benefit of Sears’ shareholders, including Lampert, the ESL Defendants,
Fairholme, and Tisch.
351.

The Seritage Rights Transfers were made for no consideration; without fair

consideration; or for less than reasonably equivalent value.
352.

The Seritage Rights Transfers were made (a) when Sears was insolvent; (b) so as

to render Sears insolvent; or (c) so as to leave Sears with unreasonably small capital.

102

 19-08250-rdd

353.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 104 of 110

Main Document

The Seritage Rights Transfers are avoidable as a constructively fraudulent transfer

under Sections 544 and 550 of the Bankruptcy Code and applicable state law.
Count 9
Recovery of the Seritage Illegal Dividend
Against the Seritage Directors, the ESL Defendants, and Fairholme
(8 Del. C. §§ 170–174 and Delaware Common Law)
354.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
355.

The Seritage Directors approved and directed the payment of a dividend or

distribution of the Seritage Rights (the “Seritage Dividend”) by Sears to its shareholders. The
value of the Seritage Dividend was at least $399 million.
356.

The Seritage Dividend was received by Sears’ shareholders, including Lampert,

the ESL Defendants, Fairholme, and Tisch.
357.

At the time of the Seritage Dividend, Sears’ liabilities exceeded its assets, and

Sears had no net profits in that fiscal year or in the preceding fiscal year. As a result, the
Seritage Dividend was illegal under Delaware law.
358.

The Seritage Directors are jointly and severally liable for the full amount of the

Seritage Dividend, which was declared and paid while they were directors of Sears. None of the
Seritage Directors dissented from the Seritage Dividend.
359.

Lampert, Tisch, the ESL Defendants, and Fairholme are also liable for the portion

of the Seritage Dividend each received because they had knowledge of facts indicating that the
Seritage Dividend was unlawful.

103

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 105 of 110

Main Document

Count 10
Avoidance of the Seritage Real Estate Transfers as an Actual Fraudulent Transfer
Against the Seritage Defendants
(11 U.S.C. §§ 544(b), 550(a)(1), and (2), 1107; NY DCL § 276;
6 Del. C. § 1304(a)(1); 740 Ill. Comp. Stat. 160/5(a)(1))
360.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
361.

The Seritage transaction resulted in transfers of interests in the property of Sears

and the Real Estate Transferors—namely, title to 266 parcels of real estate and certain
contractual rights under Sale-and-Lease-Back—to the Seritage Defendants (the “Seritage Real
Estate Transfers”). The transferred property was worth at least $649 to $749 million more than
the purchase price of $2.58 billion.
362.

Sears and the Real Estate Transferors made the Seritage Real Estate Transfers to

and for the benefit of the Seritage Defendants.
363.

The Seritage Real Estate Transfers were made with an actual intent to hinder,

delay, and/or defraud Sears and the Real Estate Transferors’ creditors, to the detriment and harm
of such creditors. Such intent can be inferred from, among other things, the traditional badges of
fraud surrounding the Seritage Real Estate Transfers.
364.

As a result of the Seritage Real Estate Transfers, Sears and the Real Estate

Transferors and each of their creditors have been harmed.
365.

Under Sections 544(b) and 1107(a) of the Bankruptcy Code, as debtors in

possession, Sears and the Real Estate Transferors may avoid any transfer for an interest of the
debtor in property that is voidable under applicable non-bankruptcy law by any creditor holding
an unsecured, allowable claim. Creditors of Sears and the Real Estate Transferors exist who
could avoid the Seritage Real Estate Transfers under applicable non-bankruptcy law.

104

 19-08250-rdd

366.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 106 of 110

Main Document

The Seritage Real Estate Transfers are avoidable as an actual fraudulent transfer

under Sections 544 and 550 of the Bankruptcy Code and applicable state law.
367.

The Sale-and-Lease-Back should be rescinded, and the Seritage Defendants

should turn over to Plaintiffs the real estate interests fraudulently transferred together with all
funds (more than $649 million) paid by Plaintiffs to the Seritage Defendants under color of the
Sale-and-Lease-Back. In the alternative, the Seritage Defendants should pay Plaintiffs damages
at least equal to the value of the transferred property.
Count 11
Avoidance of the Seritage Real Estate Transfers as a Constructively Fraudulent Transfer
Against the Seritage Defendants
(11 U.S.C. §§ 544(b), 550(a)(1), and (2); NY DCL §§ 273, 274;
6 Del. C. § 1304(a)(1); 740 Ill. Comp. Stat. 160/5(a)(2))
368.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
369.

The Seritage Real Estate Transfers were transfers of interests in the property of

Sears and the Real Estate Transferors made to and for the benefit of the Seritage Defendants.
370.

The Seritage Real Estate Transfers were made for no consideration; without fair

consideration; or for less than reasonably equivalent value.
371.

The Seritage Real Estate Transfers were made (a) when Sears and the Real Estate

Transferors were insolvent; (b) so as to render Sears and the Real Estate Transferors insolvent; or
(c) so as to leave Sears and the Real Estate Transferors with unreasonably small capital.
372.

The Seritage Real Estate Transfers are avoidable as a constructively fraudulent

transfer under Sections 544 and 550 of the Bankruptcy Code and applicable state law.
373.

The Sale-and-Lease-Back should be rescinded, and the Seritage Defendants

should turn over to Plaintiffs the real estate interests fraudulently transferred together with all
funds (more than $649 million) paid by Plaintiffs to the Seritage Defendants under color of the
105

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 107 of 110

Main Document

Sale-and-Lease-Back. In the alternative, the Seritage Defendants should pay Plaintiffs damages
at least equal to the value of the transferred property.
Count 12
Breach of Fiduciary Duty and Aiding and Abetting Breach of Fiduciary Duty Against
Lampert, the ESL Defendants, Fairholme, and the Recent Related-Party Loan Directors
374.

Plaintiffs repeat and reallege each of the allegations set forth above as if fully set

forth herein.
375.

Lampert owed a fiduciary duty to Sears as a director, as the Chairman of the

Board, and as the Chief Executive Officer. The Recent Related-Party Loan Directors owed a
fiduciary duty to Sears as directors. Lampert, the ESL Shareholders, and Fairholme also owed a
fiduciary duty to Sears because, as a control group, they owned a majority and/or controlling
interest of Sears and exercised control over the business affairs of Sears. ESL and the ESL
Lenders owed a fiduciary duty to Sears because they are affiliates of the ESL Shareholders and,
together with the other ESL Defendants, exercised actual control over Sears.
376.

These duties required Lampert, the ESL Defendants, Fairholme, and the Recent

Related-Party Loan Directors at all times to act faithfully on behalf of Sears and to conduct
themselves in a manner they reasonably believed to be in the best interests of the Company.
377.

Lampert, the ESL Defendants, and Fairholme breached their fiduciary duties

when they engaged in acts of self-dealing in the Recent Related-Party Loans. The Recent
Related-Party Loan Directors breached their fiduciary duties when they approved the Recent
Related-Party Loans.
378.

Each of Lampert, the ESL Defendants, Fairholme, and the Recent Related-Party

Loan Directors aided and abetted the others’ breaches of fiduciary duty by knowingly
participating in the breaches of duty.

106

 19-08250-rdd

379.

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 108 of 110

Main Document

As a result of these breaches, Lampert, the ESL Defendants, and Fairholme

received monetary and other benefits at the expense of Sears. Mnuchin and Tisch received
indirect monetary benefits at the expense of Sears through their investments in ESL.
380.

As a direct and proximate result of Lampert, the ESL Defendants, Fairholme, and

the Recent Related-Party Loan Directors’ acts and omissions, Sears paid (and Lampert, the ESL
Defendants, and Fairholme received) excessive interest and fees, and suffered other injury.
Lampert, the ESL Defendants, Fairholme, and the Recent Related-Party Loan Directors are liable
to the Company to compensate for these and other results of their breaches of fiduciary duties.
Prayer for Relief
WHEREFORE, Plaintiffs respectfully request that this Court enter judgment and grant
the following relief to the extent consistent with the Plan:
a.

a judgment against Lampert, the ESL Defendants, Fairholme, and Tisch
finding and declaring that the Orchard Transfers, the SHO Rights
Transfers, and the Sears Canada Transfers constitute actual fraudulent
transfers;

b.

a judgment against Lampert, the ESL Defendants, Fairholme, and Tisch
finding and declaring that the Lands’ End Transfers and the Seritage
Rights Transfers constitute actual and constructive fraudulent transfers;

c.

a judgment against the Seritage Defendants finding and declaring that the
Seritage Real Estate Transfers constitute actual and constructive
fraudulent transfers;

d.

avoidance of the fraudulent transfers;

e.

recovery of the property fraudulently transferred, or compensatory
damages in an amount to be determined at trial for the value thereof, from
the direct and indirect transferees;

f.

a judgment against the Directors, Lampert, the ESL Defendants,
Fairholme, and Tisch finding and declaring that the Lands’ End Dividend
and the Seritage Dividend were illegal dividends;

107

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 109 of 110

Main Document

g.

compensatory damages in an amount to be determined at trial from the
Directors for the full amount of the illegal dividends approved under their
tenure as directors;

h.

compensatory damages in an amount to be determined at trial from
Lampert, the ESL Defendants, Fairholme, and Tisch for the amounts of
the Lands’ End Dividend and Seritage Dividend that each received;

i.

a judgment against Lampert, the ESL Defendants, Fairholme, and the
Recent Related-Party Loan Directors finding and declaring that Lampert,
the ESL Defendants, Fairholme, and the Recent Related-Party Loan
Directors breached their fiduciary duties and/or aided and abetted the same
with respect to the Recent Related-Party Loans;

j.

compensatory damages in an amount to be determined at trial from
Lampert, the ESL Defendants, Fairholme, and the Recent Related-Party
Loan Directors for their breaches of their fiduciary duties and/or aided and
abetted the same with respect to the Recent Related-Party Loans;

k.

disgorgement from Lampert, the ESL Defendants, Fairholme, and the
Directors of their ill-gotten gains from their breaches of their fiduciary
duties, including Lampert’s compensation as CEO and the fees and
interest received by the ESL Defendants and Fairholme;

l.

prejudgment interest;

m.

reasonable attorneys’ fees, costs, and expenses incurred in this action; and

n.

any other and further relief as the Court deems just, proper, or equitable
under the circumstances.
Jury Trial Demand

Plaintiffs demand a jury trial on all issues so triable.

108

 19-08250-rdd

Doc 1

Filed 04/17/19 Entered 04/18/19 00:28:55
Pg 110 of 110

Main Document

Dated: April 17, 2019
New York, New York
_/s/ Lewis R. Clayton___________
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
1285 Avenue of the Americas
New York, New York 10019
Tel: 212-373-3000
Fax: 212-757-3990
Paul M. Basta
Kelley A. Cornish
Lewis R. Clayton
Susanna M. Buergel
Robert A. Britton
Counsel to Plaintiffs Acting at the Direction
of the Restructuring Sub-Committee
(as to all Defendants except Thomas J. Tisch)
/s/ Pauline K. Morgan
YOUNG CONAWAY STARGATT & TAYLOR, LLP
1270 Avenue of the Americas, Suite 2201
New York, New York 10020
Tel: (212) 332-8840
Fax: (212) 332-8855
Pauline K. Morgan
Ryan M. Bartley
Michael S. Neiburg
Travis Buchanan
Counsel to Plaintiffs Acting at the Direction
of the Restructuring Sub-Committee
(as to Defendant Thomas J. Tisch)

109