Sears estate sues Edward Lampert, claiming he stripped $2 billion in assets

The bankrupt estate of Sears Holdings Corp. has sued Edward Lampert and his hedge fund, ESL Investments Inc., claiming they wrongly transferred $2 billion of company assets beyond the reach of creditors in the years leading up to the retailer’s bankruptcy.

“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,” lawyers for the estate said in a court filing.

The complaint, filed as part of the retailer’s ongoing bankruptcy case, asks that the transactions be ruled fraudulent transfers and says creditors should be compensated.

Other defendants who allegedly benefited from the transfers include Fairholme Capital Management, Seritage Growth Properties Inc. and Treasury Secretary Steven T. Mnuchin, whom the complaint says was an investor and former vice chairman at ESL.

An ESL representative said in an emailed statement the suit repeats baseless claims. “All transactions were done in good faith, on fair terms, beneficial to all Sears stakeholders and approved by the Sears Board of Directors,” ESL said. Representatives for the other defendants couldn’t immediately be reached for comment.

The complaint opens another chapter in the contentious battle over Sears, which collapsed into bankruptcy in October when Lampert was chief executive and then came within hours of liquidation. Lampert emerged in control of Sears with a last-minute rescue offer, but the squabbling over assets between ESL and the estate continued even after the deal was sealed.

As part of the bankruptcy agreement, the “new Sears” was protected from lawsuits, making it unlikely the revived operating company will directly face any of the claims made in the complaint.

“It’s obviously a liability for Eddie himself,” said Noel Hebert, a credit analyst who covers Sears for Bloomberg Intelligence. “He’s going to be stuck in litigation. … The risk is he’s going to have to settle or be doing this for a long time.”

The complaint highlights five transactions that it says unfairly benefited Lampert and the defendants that involved Orchard Supply Hardware Stores Corp., Sears Hometown and Outlet Stores Inc., Sears Canada Inc., Lands’ End Inc. and Seritage.

Lawyers for the estate also allege that ESL stripped Sears of the real estate under 266 of the retailer’s most profitable stores, undervaluing the land by at least $649 million. “Moreover, the culpable insiders arranged for Sears to lease the properties back under blatantly unfair terms,” the complaint says.

Sears has been insolvent since at least 2014, which means Lampert and the other defendants had a duty to protect creditors, not just themselves and other equity holders, the estate asserted.