Sears Holdings – Court Confirms Liquidation Plan, Sets Aside $25mn to Fund Litigation Against ESL and Others

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October 15, 2019 – The Court hearing the Sears Holdings Corporation cases has confirmed the Debtors' Modified Second Amended Joint Chapter 11 Plan of liquidation [Docket No. 5370]. 

Although the confirmation order marks the completion of an important phase of the Debtors' long, resource-draining bankruptcy process, the Court's order makes clear that there remains a further, undoubtedly lengthy, litigation phase before creditors can expect to see anything significant distributed by the Debtors' estates. Significantly, the Court's order sets aside $25.0mn of the Debtors' limited cash ($50.0mn) to fund that litigation. For creditors wondering why the Court would deplete estate resources and further protract the agony, the answer is that it is a $25.0mn investment that could significantly enhance creditor recoveries and without which the Debtors' estates have next to nothing to distribute. By the Debtors' own admission they are $36.5mn to $104.5mn short on their ability to pay out administrative and priority claims without proceeds from litigation; that is how deep creditor pain goes in this bankruptcy. On the upside, the Debtors believe that litigation can unlock several potentially important pockets of cash, namely (i) an estimated $100.0mn in preference actions, (ii) proceeds from a $2.0bn lawsuit against Edward Lampert and ESL and (iii) $150.0mn they argue is owed under D&O policies. See pages 144-145 of the attached pdf for the Debtors' assumptions on these recoveries.

In addition to the cash, the Court has established a committee of "Litigation Designees" that will commence work NOW managing the Debtors' litigation; this committee will have all of the powers of the "Liquidating Trust Board" into which it will evolve after the Plan's effective date. The Litigation Designees include Alan J. Carr and William L. Transier who have already spent months investigating potential causes of action as part of their work on independent committees established by the Debtors' Board.

The order reads in relevant part: "…effective upon the entry of this Confirmation Order the Creditors’ Committee shall be granted joint standing with the Debtors and is hereby authorized to investigate, commence, prosecute, settle and otherwise dispose of (i) the Specified Causes of Actions, (ii) other Preserved Causes of Action against the ESL Parties, (iii) all Claims and Causes of Action asserted in the pending Adversary Proceeding captioned Sears Holdings Corp. v. Lampert, Adv. Proc. No. 19-08250 (RDD) (Bankr. S.D.N.Y.) (the ‘Adversary Proceeding’) and/or any other Claims or Causes of Action ancillary thereto, including, inter alia, additional Claims or Causes of Action related to the subject matter of the Adversary Proceeding (including Claims or Causes of Action asserted in an amended complaint and Claims and Causes of Action asserted in one or more separate proceedings), and (iv) Claims or Causes of Action against insurance carriers related to coverage for claims asserted in the Adversary Proceeding or a related proceeding (all of the Claims and Causes of Action addressed in this paragraph, collectively, the ‘Jointly Asserted Causes of Action’) jointly with the Debtors for the benefit of the Debtors’ Estates and creditors in accordance with the terms of the Plan with the full rights and privileges attendant thereto.

The investigation, prosecution and/or settlement or other disposal of the Jointly Asserted Causes of Action shall be subject to the oversight of designees selected by the Debtors and the Creditors’ Committee (the ‘Litigation Designees’). Specifically, the Litigation Designees shall comprise (a) Patrick J. Bartels, (b) Eugene I. Davis, and (c) Raphael T. Wallander, as the Creditors’ Committee’s designees, and (x) Alan J. Carr and (y) William L. Transier, as the Debtors’ designees, which designees shall become the initial members of the Liquidating Trust Board upon the Effective Date pursuant to Section 10.6(a) of the Plan."

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