The Daily Parker

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Sears sues Eddie Lampert

While waiting for the Mueller Report to download (spare a moment to pity the Justice Department's servers), an alert came in from Crain's:

The bankrupt estate of Sears Holdings Corp. sued Eddie 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.

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,” according to the complaint.

No kidding.

It's interesting to me how people who claim that the government has no right to interfere in private affairs seem to make that claim to avoid scrutiny of shady behavior. And Lampert seems to be one of the shadiest.

Sears lives to die another day

On Thursday, a court accepted Eddie Lampert's $5.2 bn bid to keep Sears running and himself as its head:

Lampert’s purchase, made through his hedge fund, ESL Investments, is intended to keep 425 Sears and Kmart stores open, preserving some 45,000 jobs. It was the only bid submitted in an auction that would have kept the once-mighty department store giant in business and avoid liquidation.

Lampert’s plan was opposed by a committee of unsecured creditors skeptical that Hoffman Estates-based Sears will be any more successful after exiting bankruptcy. The committee pushed for a liquidation, arguing that shutting down the company and selling its assets could recover more of what Sears owes.

Still unresolved is a dispute between Sears and ESL over which is responsible for paying $166 million for inventory received after Sears filed for Chapter 11 bankruptcy on Oct. 15. Although Drain did not have jurisdiction to decide the issue, he gave an advisory opinion in favor of Sears’ claim that ESL is responsible for those liabilities.

The judge’s decision saves Sears from liquidation, but still unanswered is whether Lampert can reinvigorate a retail chain that many consumers have fond memories of, but no current relationship with. Lampert has said he wants to invest in smaller stores and those that are profitable, with a focus on popular categories like appliances and repair services.

I'm not a bankruptcy attorney, so I don't know whether this is a good ruling. I, personally, would have preferred that Sears stay open and Lampert stay far away from it. But at least it's not dead yet.

Articles that annoyed me today

In descending order of pissed-off-making:

  • Senate Majority Leader Mitch McConnell called making Election Day a holiday "a power grab," because more people voting does in fact take power away from the Republican Party. (We used to call this sort of thing a gaffe.)
  • US Senator Elizabeth Warren (D-MA) criticized adolescent Sears Holdings CEO Eddie Lampert for exactly the things The Daily Parker has criticized him for all along. "It appears that you have enriched yourself while driving the company into bankruptcy," said Warren. No kidding. (She didn't annoy me; Lampert did.)
  • Restaurants have gotten so loud even restaurant critics have noticed: "Those beautiful, minimalist spaces that are so in vogue reflect sounds, making it hard to hear your dining companions."
  • The tolerant, thoughtful guys over at Immigration and Customs Enforcement set up a fake university to find and deport people committing immigration fraud through student visa abuse. (I'm not as much annoyed as concerned when law enforcement uses blatant deception to catch people, but I agree that policing student visas is appropriate.)
  • Lack of sleep has become a national health crisis. (I almost forgot to add that I've averaged 6½ hours for the first 30 nights of 2019, getting 7 hours only 9 times this year, according to my Fitbit.)

And with that last one, I may now go take a nap.

This shouldn't surprise anyone

The Pension Benefit Guaranty Corporation—read: the government—read: us, as we live in a frickin' REPUBLIC—has taken over the Sears Holdings pension fund because, basically, Eddie Lampert has driven it into the ground:

The agency covers individuals’ pensions, up to certain limits, if an insured pension plan shuts down without enough money to pay all benefits. It estimates Sears’ two pension plans are underfunded by about $1.4 billion. As a creditor, the agency could attempt to recover some of that money through the bankruptcy.

Ron Olbrysh, chairman of the National Association of Retired Sears Employees, said the guarantee means retirees aren’t worried about losing pensions, but they do have concerns about other benefits.

“The pensions are secure through Sears or through the Pension Benefit Guaranty Corp.,” he said. “The big impact if Sears does liquidate is that retirees will lose life insurance.”

The Daily Parker has followed the destruction of America's iconic retailer for years, watching the incompetence and self-dealing of Eddie Lampert the whole time. And here we are. Lampert will slide away from Sears with tens, or even hundreds, of millions of dollars, while the people who actually showed up every day to keep the stores open go bankrupt. Ironically, Lampert gets to do this by declaring bankruptcy. And the banks and investors he's stiffing have known this would happen for years. But they'll still show up in Federal court to argue that their claims to Sears' assets trump (no irony there) the employees'.

There seems to me a simple solution to the problem that Lampert's destruction of Sears epitomizes. Let's just change the law slightly to make officers of corporations liable in civil and criminal actions for the behavior of the corporations they represent. It's not a radical idea: corporations already have the right to act as people under the law. This is a simple balancing.

I don't think it's controversial to say that Eddie Lampert should experience all the consequences of his horrible management of Sears, including going down with the sinking ship. Especially because his management of the company was to drill a hole in the keel and then let his managers fight over how to keep the ship afloat.

When the revolution comes, I hope Lampert—and by extension, his adolescent worship of Ayn Rand—will be first against the wall.

The bell tolls

Over the weekend, Sears Holdings Corp. started making preparations for winding down the business, after chairman and company killer Eddie Lampert's bid fell apart:

The iconic retailer started laying the groundwork for a liquidation after meetings Friday in which its advisers weighed the merits of a $4.4 billion bid by Lampert’s hedge fund to buy Sears as a going concern, said the people, who asked not to be identified because the discussions are private. If the 125-year-old retailer does die in bankruptcy — like Toys “R” Us in 2018, and Borders Group Inc. in 2011 — it would mark the largest fatality yet in the retail apocalypse prompted by a shift to online shopping.

While Lampert’s ESL Investments has failed to convince the bankers of the viability of its bid, it could still make last-minute improvements before a status hearing on Tuesday. Lampert also has outlined a back-up plan in which ESL would pursue the purchase of some of Sears’s parts, including real estate and intellectual property, such as its brand.

Earlier in the bankruptcy, creditors questioned whether transactions involving Lampert had bilked them of $2.6 billion, setting the stage for conflict over deals with the very investor who is offering to salvage the company. Lampert’s ESL said its transactions were made in good faith and on fair terms to other stakeholders.

I think justice demands that Lampert himself suffer bankruptcy and irrelevance. But, as Robert Heinlein said decades ago, TANJ.

The good and bad in Chicago this morning

Two good stories and a bad one.

First, a good story: Chicago now has more breweries than any other city in the US:

The metro region has surged past several longtime stalwarts to become home to more breweries than any other city in the nation — 167 — according to statistics published this week by the Brewers Association.

Behind it are the metro areas that for years Chicago beer drinkers could only envy: Denver (158), Seattle (153) and San Diego (150).

In fifth and sixth places are two other large cities whose brewing scenes have surged in recent years: Los Angeles (146) and New York (141).

Seems like I have some work to do over the next few months.

Now the bad story: Eddie Lampert can't save Sears. But we knew that:

If you believe Edward Lampert has finally figured out how to revive Sears, then you probably still believe in Santa Claus. The hedge fund mogul who oversaw the 125-year-old retailer’s long slide into bankruptcy is dangling the prospect of an 11th-hour buyout, casting his proposal as an altruistic effort to save the remaining 50,000 jobs at Sears.

My advice to those workers: Don’t expect a Christmas miracle.

First of all, there’s less to Lampert’s offer than initial appearances suggest. It’s been touted as a $4.6 billion bid to buy Sears out of bankruptcy, where it landed in October after losing $11 billion since 2011. But $1.8 billion of the offer would take the form of debt forgiveness by Lampert-affiliated entities, Sears’ largest lenders with about $2.6 billion in company debt. About $950 million would be cash, provided Lampert can find a lender willing to front the money. (As has been the pattern in recent years, Lampert isn’t putting more of his own cash into Sears.) Another $1 billion or so represents Sears liabilities to be assumed by a new company Lampert would form to acquire company assets including 500 stores, inventories, and the Kenmore and DieHard brands.

Oh, and Lampert also wants releases from claims related to his pre-bankruptcy transactions with Sears. Other creditors have commissioned an investigation into whether Lampert, Sears’ controlling shareholder since 2005 and CEO from 2013 until October’s Chapter 11 filing, gave himself favorable treatment in such deals as the spinoff of Lands End and the sale of Sears real estate to a newly formed company where he has a controlling stake.

And finally, another good story: the CTA will start modernizing the stretch of the El that goes by my neighborhood this fall, completing it just in time for the renovation of the Uptown Theater. Should all of this come together, it means I bought my apartment at exactly the right time:

The Red and Purple Line project will rebuild stations, bridges and track along a century-old corridor between Lawrence and Bryn Mawr avenues on the Red Line, the agency’s busiest line, CTA officials said. The construction also will include a controversial bypass that will take Brown Line trains above Red and Purple Line trains north of the busy Belmont station, CTA officials said.

Construction is expected to start in the fall of 2019, with the entire project to be completed in 2025, CTA spokeswoman Tammy Chase said.

Chase said that by the end of 2019, the CTA expects to start advance work to prepare for later phases of the project. This work will include building temporary stations to replace the Lawrence, Argyle, Berwyn and Bryn Mawr stations, which will be rebuilt. The CTA also will do track work to prepare for further repairs. Exact timing for the work will depend on the contractor.

Chase said the bypass work will start in 2020. The agency will start building new stations from Lawrence to Bryn Mawr in about two or three years, she said.

That will make a huge difference in Uptown, where the 110-year-old El stations look like they're about to collapse on themselves.

What's he doing?

Eddie Lampert's hedge fund proposes to buy Sears for $4.6 bn:

The bid from Lampert’s ESL Investments includes about 500 Sears and Kmart stores, headquarters and distribution centers, and Sears brands and businesses including Kenmore, DieHard and Sears Home Services.

“ESL believes that a future for Sears as a going concern is the only way to preserve tens of thousands of jobs and bring continued economic benefits to the many communities across the United States that are touched by Sears and Kmart stores,” Lampert’s hedge fund said in the letter sent to Sears’ investment banker Wednesday and filed Thursday with the U.S. Securities and Exchange Commission.

The $4.6 billion offer includes up to $950 million in cash that would be funded by a new loan and a $1.8 billion credit bid, in which ESL would swap Sears debt it holds for ownership of a newly formed company. Other financing includes an estimated $1.1 billion from taking on Sears’ obligations to honor Sears Home Services protection agreements, gift cards, and loyalty program points.

ESL’s offer would also depend on its ability to secure financing and the Bankruptcy Court’s approval.

Others interested in acquiring Sears’ assets have until Dec. 28 to submit bids under the timeline approved by the Bankruptcy Court. If other bids come in, the auction would be held Jan. 14.

Why, though? He's just going to kill it anyway.

Dog bites man, Sears edition

The Chicago Tribune points out that Sears' $5 bn in losses could actually help the guy who killed it, Eddie Lampert:

As of the retailer's bankruptcy on Oct. 15, Sears estimated it had net operating losses it could use to offset $5 billion of future taxable income, and separate tax credits of around $900 million. These are the most valuable assets Sears has, and under U.S. tax law, they could disappear in bankruptcy if another company or investor takes the company over.

When a company has accumulated net operating losses, it can use them to offset future taxable income, which in turn cuts into its tax bills. The rule is meant to give struggling companies more breathing room. That means big benefits on the balance sheet. For example, Sears saved $1.7 billion in deferred taxes in 2017, according to its most recent quarterly filing.

While a sale in bankruptcy would often mean a change in control, meaning that such tax benefits are lost, Lampert's stock and debt stakes would help him avoid that. Lampert and his hedge fund ESL Investments Inc., together own about 49 percent of Sears shares, and are among Sears's biggest creditors, having extended it $2.66 billion in debt through various loans.

Creditors who have held debt for 18 months before the filing and whose debt rose in the ordinary course of Sears's business are "qualified creditors" who can thus avoid losing the tax assets even if there's a shift in control towards them.

He profits from destroying the company. Ain't America grand?

What to do while waiting for tonight's deployment

We have a deployment at work tonight at 5pm (because in financial firms, you always deploy at 5pm on Friday). Fortunately, we've already done a full test, so we're looking forward to a pretty boring deployment tonight.

Fortunately, we have the Internet, which has provided me with all of these things to read:

Back to planning for next week's post-deployment fixes.

Sears files for bankruptcy protection

As predicted, Eddie Lampert has succeeded in driving Sears into the ground:

In announcing the news, Sears said Edward Lampert stepped down as CEO effective immediately and remains chairman.

Sears and Kmart stores and online platforms will remain open, though the company also said it would close 142 unprofitable stores near yearend, with liquidation sales at those locations "expected to begin shortly."

The company said it has commitments for $300 million of debtor-in-possession financing from its senior secured asset-based revolving lenders and is negotiating a $300 million subordinated DIP financing with ESL Investments, where Lampert is chairman and CEO. The hedge fund held about $2.5 billion in Sears debt as of September, the result of multiple attempts to keep the chain afloat.

Negotiations over the fate of the fallen company continued over the past week, as it faced a critical $134 million of debt that is maturing today.

So, after killing the 132-year-old company, Lampert stands to make millions from its demise. And 68,000 people will soon be out of work.

UpdateCrain's has an obituary.