Florida’s Pension Fund Sues Sears Management in Bankrupt Debtors Case
Sears, Roebuck & Co.’s management has been sued for $3.5 billion by Florida’s pension fund, which said the retailer’s executives failed to stop the company’s controversial handling of bankrupt debtors.
The suit names Chairman and Chief Executive Arthur Martinez, other top Sears executives and the company’s board. Florida wants them to pay $320 million in compensatory damages, equal to a charge the company took in the second quarter, plus 10 times that amount in punitive damages.
The complaint, filed last week in Cook County Superior Court in Illinois, represents another example of increased legal action among public pension funds to protect their investments. The Florida fund, which owns 2.86 million Sears shares, wants Sears’ management and board to pay for decisions that resulted in the charge, which covers the cost of a $273-million settlement with bankrupt debtors.
“The people that are home-free are the directors and the CEO, who caused Sears that loss,” said Horace Schow II, the Florida fund’s general counsel. “They ought to cough up something.”
The $80-billion Florida State Board of Administration, the nation’s fourth-largest public pension fund, alleges in the complaint that Sears’ top management should have known about the mistreatment of the debtors. Management breached its fiduciary duty to shareholders by failing to prevent the situation, according to the document. The resulting settlement is said by plaintiffs’ lawyers to be the largest agreement of its kind.
Sears itself was also named as a defendant in the so-called derivative lawsuit. Yet it is executives and their insurance carriers that tend to pay any judgment reached in such cases, attorneys said.
Sears spokeswoman Jan Drummond declined to comment. Shares of Hoffman Estates, Ill.-based Sears, the nation’s second-largest retailer, fell 6 cents to close at $42 on the New York Stock Exchange.
As a shareholder, Florida wants the company’s managers and directors to dip into their pockets to compensate Sears investors. Shares of Sears have fallen 11% since the company admitted in April that it used “flawed legal judgment” in its pursuit of bankrupt debtors.
Sears persuaded some customers to continue paying bills that were eligible to be discharged in Bankruptcy Court. Sears achieved this by getting debtors to sign “affirmation agreements,” which the company failed to file in court. While the agreements are legal, failure to file them is a violation of federal law.
Florida doesn’t have a clear shot just yet at Sears management. Sears has proposed an $8.25-million settlement of other so-called derivative lawsuits, in which individual investors sued management in New York on behalf of the company. A judge there issued an order Nov. 25 barring other potential similar suits pending his review.
Yet New York State Supreme Court Judge Ira Gammerman did allow in his order for Sears shareholders to seek modification of, or exception from, the proposed settlement. I. Walton Bader, a lawyer for the Florida fund, said he will file an appeal of that order today.
