The remnants of the once iconic Sears is suing former Chairman Eddie Lampert, his hedge fund ESL Investments and others like Treasury Secretary Steven Mnuchin, claiming they illegally siphoned billions of dollars of assets from the retailer before it declared bankrupt.
The lawsuit, made public on Thursday, followed the Lampert’s $5.2 billion purchase in February of most Sears assets, including private brands DieHard and Kenmore in a bankruptcy auction.
“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,” the complaint said.
According to the complaint, Lampert and other insiders had by 2011 hatched a plan to “strip” Sears of assets. Lampert ordered the creation of bogus financial plans projecting a Sears turnaround and used them to help transfer five assets totaling more than $2 billion, including Land’s End and Sears Hometown Outlet.
Beginning in 2016 and continuing through October 15, 2018, Sears staved off collapse only by selling core assets including its iconic private brand Craftsman.
According to the filing consulting firm 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 “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(Kenmore Craftsman Diehard) 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.
Thursday’s lawsuit seeks a declaration that the alleged looting constituted “fraudulent transfers” that should be undone or, more likely, justified damages.
Stanley Black & Decker and Lowe’s must be a little nervous today.
The complaint seeks the repayment of “billions of dollars of value looted from Sears,” including while it was in what Lampert would later call a “death spiral” where it sold core assets to meet daily expenses with no real plan for becoming profitable. Sears filed for Chapter 11 protection in October.