SHLDQ Sears Holdings Corporation (CE)

By Soma Biswas 

Suppliers that stocked the shelves during Sears Holdings Corp.'s bankruptcy are being forced to swallow losses and some employees won't get severance they are owed, even as law firms are guaranteed full payment for their work on the retailer's chapter 11 case.

A year after the storied retailer sold its best stores and assets to ESL Investments Inc., the investment firm owned by former Sears Chief Executive Edward Lampert, the shell left behind in bankruptcy is struggling to pay its debts after racking up more than $200 million in bills from lawyers and advisers.

White-shoe law firms Akin Gump Strauss Hauer & Feld LLP, which represents unsecured creditors, and Paul, Weiss, Rifkind, Wharton & Garrison LLP, which represents the independent committee of Sears's board, have earned more than $50 million. Akin Gump has access to another $25 million set aside to cover the cost of pursuing a speculative lawsuit against Mr. Lampert, which is billed as a way to return more money to Sears creditors.

U.S. Bankruptcy Judge Robert Drain, who approved Sears's liquidation plan last year, pushed vendors to settle for a maximum of 33 cents on the dollar, with the potential to recoup more if a potential lawsuit against Mr. Lampert yields more money.

"That created a tug of war between professionals on the one hand and vendors on the other," said Kenneth Rosen of Lowenstein Sandler LLP, a bankruptcy lawyer who represented some Sears vendors.

Big fees and low recoveries for creditors are common in chapter 11. But Sears is an extreme example of disparity between what was paid to lawyers and advisers, who by law are required to be paid in full, and what creditors got, bankruptcy lawyers and others say.

Large chapter 11 cases are big business for law firms and financial advisers, and it isn't unusual for them to make millions on big cases. California utility PG&E Corp., which filed for bankruptcy a year ago facing billions of dollars in payments to victims of wildfires, had spent $191 million in legal and professional fees through September, according to the company's latest earnings report. Toys 'R' Us Inc. paid about $220 million to lawyers and advisers through the course of its bankruptcy and liquidation, court records show.

Sears filed for bankruptcy in October 2018 after more than a century in business. Mr. Lampert bought the retailer's best assets for $5.2 billion last winter, leaving the remains of the business behind in bankruptcy. By the summer, the shell of the old Sears was running low on cash as it faced unpaid bills from vendors and suppliers that piled up during its chapter 11 case.

Meanwhile, the army of lawyers, advisers and investment bankers continued to bill the estate.

Of the more than $200 million in fees and expenses already billed by restructuring professionals, Weil, Gotshal & Manges LLP, Sears's main bankruptcy law firm where top partners charge $1,695 an hour, billed the estate more than $65 million through October. Paul Weiss, where top restructuring lawyers charge $1,560 an hour, billed Sears more than $20 million through October.

Lawyers at Akin Gump and Paul Weiss didn't return calls. A lawyer at Weil Gotshal, a spokesman for ESL and Judge Drain declined to comment.

Since companies are required to pay certain parties in full before closing a bankruptcy case -- such as vendors that supply a retailer through a bankruptcy -- Judge Drain, in an unusual move, has kept Sears's bankruptcy open indefinitely, even after he signed off on a restructuring plan that blocks further creditor challenges in bankruptcy court.

Sears needs to secure additional funds to pay top-ranking creditors before the bankruptcy case can be closed. Akin Gump, the creditors' law firm, has sued ESL alleging that Mr. Lampert's hedge fund cheated Sears out of billions of dollars in a series of deals, including the spinoff of real estate to Seritage Growth Properties and of Lands' End and Sears Canada to ESL.

ESL and Mr. Lampert have denied any allegations that they looted Sears.

If they succeed in securing the additional funds, it would go toward paying vendors and others who are supposed to get full payment at the end of a case and lower-ranking unsecured creditors.

That lawsuit could take two to four years, Judge Drain said in court in October.

In October, half of the $50 million left in the Sears estate for creditors was earmarked to cover Akin Gump's fees and other costs as it pursued the ESL lawsuit. Vendors and creditors got a total of $21 million from that pot in December.

"How you define success [in a bankruptcy case] is different for different people...But the question in Sears is whether a case where there's a very small or minuscule return for creditors and there's no real ongoing entity can be perceived as a failure," said Jay Indyke, a bankruptcy lawyer at Cooley LLC, who wasn't involved in the Sears case.

ESL has closed most of the Sears stores it bought last year. If Sears had been liquidated instead of selling more than 400 stores and key brands to the hedge fund, some creditors' lawyers say much of the lawyer and adviser fees would have been avoided as a government-appointed trustee would have taken over the job of divvying up Sears's assets.

Write to Soma Biswas at soma.biswas@wsj.com

(END) Dow Jones Newswires

January 16, 2020 05:44 ET (10:44 GMT)

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