The Sears Bankruptcy
Sears, a well known chain of department stores, was founded in the early 1890’s. The retailer was a pioneer in the modern trend of retailers who sell such a wide range of products that people can quite possibly find anything they want. Today, we all know Amazon as one of these retailers. Amazon has unprecedented options. Well, Sears might well have been the very beginnings of this retail model and once thrived with brick and mortar stores and a catalouge. The company offered shares to the public in 1906 after its initial public offering. Interestingly, the business began as a mail order business and it wasn’t until 1925 before its first brick and mortar retail locations were started.
The Sears bankruptcy is a story that illustrates the reality of the modern retail environment and could be seen as a case study of the disruption of the internet. Through the 1980s, Sears was one of, if not the single largest retailer in the United States. This success was short lived. By the 1990s, Walmart and Kmart had eclipsed Sears in sales. This competition led to a steep decline in sales that continued for decades until Sears was not even in the top 20 of retailers by sales volume. Ultimately, and perhaps unexpectedly, Sears filed for bankruptcy on October 15th, 2018.
Some analysts note that the signs of financial trouble with Sears may have been predicted almost a decade earlier. KMart Holding Corp, Inc. and its Chairman, Edward Lampert, announced the purchase of Sears, Roebuck and Co in November of 2004. After the purchase, Mr. Lampert also becomes the CEO and Chairman of the Board of the new company, Sears Holding Corp. The sales price was a around $11 billion. The combination of Sears and KMart made sense at the time providing for synergies between the two companies. After the acquisition, the company’s performance was lackluster (even as far as some publications claiming the company’s performance had declined every single quarter). Ultimately, the company filed for bankruptcy. Here’s a timeline of the Sears Bankruptcy case.
The Sears Bankruptcy
In the Headlines
Sears was granted a new lifeline on Thursday as its sale to Chairman Eddie Lampert, through an affiliate of his hedge fund ESL Investments, was approved by Judge Robert Drain. Lampert’s $5.2 billion deal is expected to save 425 stores and roughly 45,000 jobs.
Sears, and its affiliated Debtors, file for Chapter 11 Bankruptcy Protection
Sears, and a robust group of affiliates, filed for bankruptcy protection on Monday, October 15th, 2018 in the Southern District of New York Bankruptcy Court. Since the company filed under Chapter 11 of the Bankruptcy Code, they also put forth a plan for how they might be able to restructure their business, emerge from bankruptcy, and still pay creditors. The main proposal of this plan? Close over 100 unprofitable locations in an attempt to create a lean and profitable retailer despite devastating competition from Walmart and Amazon. On the same day, CEO since 2005, Edward Lampert, stepped down as CEO (although he remained Chairman of the Board).
To illustrate the scope and size of the Sears bankruptcy, here’s a list of the debtors involved:
- Sears Holdings Corporation;
- Kmart Holding Corporation;
- Kmart Operations LLC;
- Sears Operations LLC;
- Sears, Roebuck and Co.;
- ServiceLive Inc.;
- A&E Factory Service, LLC;
- A&E Home Delivery, LLC;
- A&E Lawn & Garden, LLC;
- A&E Signature Service, LLC;
- FBA Holdings Inc.;
- Innovel Solutions, Inc.;
- Kmart Corporation;
- MaxServ, Inc.;
- Private Brands, Ltd.;
- Sears Development Co.;
- Sears Holdings Management Corporation;
- Sears Home & Business Franchises, Inc.;
- Sears Home Improvement Products, Inc.;
- Sears Insurance Services, L.L.C.;
- Sears Procurement Services, Inc.;
- Sears Protection Company;
- Sears Protection Company (PR) Inc.;
- Sears Roebuck Acceptance Corp.;
- Sears, Roebuck de Puerto Rico, Inc.;
- SYW Relay LLC;
- Wally Labs LLC;
- Big Beaver of Florida Development, LLC;
- California Builder Appliances, Inc.;
- Florida Builder Appliances, Inc.;
- KBL Holding Inc.;
- KLC, Inc.;
- Kmart of Michigan, Inc.;
- Kmart of Washington LLC;
- Kmart Stores of Illinois LLC;
- Kmart Stores of Texas LLC;
- MyGofer LLC;
- Sears Brands Business Unit Corporation;
- Sears Holdings Publishing Company, LLC
- Sears Protection Company (Florida), L.L.C.;
- SHC Desert Springs, LLC;
- SOE, Inc.;
- StarWest, LLC;
- STI Merchandising, Inc.;
- Troy Coolidge No. 13, LLC;
- BlueLight.com, Inc.;
- Sears Brands, L.L.C.;
- Sears Buying Services, Inc.;
- Kmart.com LLC; and
- Sears Brands Management Corporation
Southern District of New York Bankruptcy Court Imposes Early Court Orders
Setting a remarkable pace, the Southern District of New York Bankruptcy Court Judge in the Sears Bankruptcy case had processed voluminous amounts of information and approved Court orders which authorized the debtors to:
- Obtain Post-petition Financing;
- Grant Senior Secured Priming Liens and Superpriority Administrative Expense Claims;
- Utilize Cash Collateral;
- Grant Adequate Protection to the Pre-petition Secured Parties;
- Continue Inter-company Transactions;
- Pay Certin Pre-petition Wages and Reimbursable Employee Expenses;
- Pay and Honor Employee Medical and Other Benefits;
- Pay Pre-petition Claims of Shippers, Warehouseman, Other Claimants, Taxes, Fees and Certain Other Administrative Expenses;
- Pay and Honor Pre-petition Customer Rewards Promotions, Practices and Obligations;
- Continue, Maintain and Renew Insurance Policies and Workers’ Compensation Programs;
- Intiate Store Closing Sales and Promotions
Edward Lampert Offers a Lifeline
December 6, 2018 Lampert, through his company ESL Investments, offered to buy all of Sears for $4.6 billion dollars in cash and stock. The offer would be financed by $950 million in added debt, but no additional cash. Lampert’s bid was described as a way for Sears to avoid liquidation, emerge from Bankruptcy and potentially save tens of thousands of jobs.
Court Approves Sale to Edward Lampert
The Federal Bankruptcy Judge approves sale of Sears to Eddie Lampert.
October 4th, 2019
Some Retirees Are Paid Life Insurance Benefits After a Settlement is Reached
When Sears filed for bankruptcy, the company allegedly ended retired employees’ life insurance benefits. On October 4th, a committee of these retirees and Sears reached a settlement that $3 million would be paid to beneficiaries of retirees who passed away after March 15, when the company canceled life insurance benefits (so long as the beneficiaries would have been eligible for benefits to be paid). While at least some money was paid, it illustrates the harsh reality of insolvency in that this was probably a small amount compared to what would have been the full benefit.
Read more about the life insurance benefits settlement here.
Chris Sawan holds a JD, MBA and is a CPA with a background that yields itself to some of the most complex legal challenges facing businesses, families, and individuals.
Dennis E. Sawan is licensed to practice law in the States of Florida and Ohio. His experience as a transactional attorney makes him a tremendous ally to have for all types of transactions.
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