A fight is brewing over Sears' survival in bankruptcy

Dive Brief:

Creditors to Sears Holdings and the hedge fund run by the retailer's chairman, Eddie Lampert, are clashing in bankruptcy court over the future of the company.
On Friday, attorneys for a group of unsecured creditors filed a preliminary objection to Sears' plan to sell its remaining stores in Chapter 11, saying the process could rack up as much as $500 million so Sears can keep running during the sale. At the same time, they questioned whether Sears has a viable future as an operating retailer, describing the retailer's go-forward business plan as apparently "nothing more than wishful thinking."
Lampert's fund, ESL Investments, which owns a major stake in Sears, fired back in a response Tuesday. ESL attorneys said the creditor group took "the highly aggressive position that Sears should liquidate immediately" and that the unsecured creditors were "once again prejudging an outcome and unfairly targeting ESL."

Dive Insight:

The Sears bankruptcy is already taking on an adversarial climate, which is not unusual and not unexpected in the case of Sears. But the squabbles are not limited to how money gets moved around, as was the case with Claire's Stores, where warring parties each saw value in the retailer as a going concern. Rather, the fight between Sears' unsecured creditors and ESL is over the retailer's very existence, and the outcome could determine its fate.

Specifically, the creditor group pointed to Sears go-forward plan to cut out two-thirds of its administrative costs to return to profitability. The group described that as "a feat [Sears] could not accomplish in the six years leading up to" Chapter 11, adding that Sears has not provided the "basic qualitative data necessary" to evaluate the structure of a reorganized Sears or the sale process. "The Creditors' Committee doubts whether a successful business plan will (or can) ever be prepared," the group's attorneys said. "Fundamentally, the Debtors [i.e., Sears] are pursuing an unjustified and foolhardy gamble with other people's money."

Along with an uncertain outcome of a bankruptcy sale, the creditors railed against the costs, financing and details of the sale plan itself. To the latter point, they described the bidding procedures as "vague and uncertain," which they said favors the one publicly interested party so far: ESL.

ESL, for its part, questioned the creditors' positions, asking in court papers, "How can it be that liquidation is advocated so quickly by the [unsecured creditors committee], which has a fiduciary duty to all unsecured creditors, including retirees and the tens of thousands of Sears employees who would lose their jobs in a liquidation?"

ESL also pointed out that Simon Property Group and Brixmor Property Group sat on the creditor committee. The two real estate companies are "landlords of many Sears stores, both of which have a vested interest in seeing Sears liquidate without regard to the interests of Sears' other stakeholders," ESL said.

Expect more back-and-forth between the creditor group and ESL in the weeks and months to come. The creditors are also seeking to examine Sears' past transactions that involved Lampert and ESL, a process that could potentially lead to litigation.