Sears Holdings Corporation – Debtors and Creditors’ Committee Seek Approval of Comprehensive Settlement Agreement Nearly Three Years after Plan Confirmation; $175mn of Settlement Payments to Debtors’ Estates to Include $126mn from D&O Insurers

August 9, 2022 – The Debtors and the Debtors' Official Committee of Unsecured Creditors (the “Creditors’ Committee” and, together with the Debtors, the “Movants”) filed a motion requesting Court approval of a global settlement that will see @$175.0mn* injected into the Debtors' coffers and otherwise resolve outstanding disputes** which have drained the Debtors resources (@$25.0mn spent on the Consolidated Adversary Proceeding) since their Plan was confirmed three years ago. [Docket No. 10566]. The Settlement Agreement, dated August 9, 2022, is filed separately at Docket No. 10579.

* The Sears insurers shall pay $125,625,000 on behalf of the Sears D&O Defendants (ie, Cesar L. Alvarez, Bruce Berkowitz, Paul G. DePodesta, Scott Huckins, Kunal S. Kamlani, William C. Kunkler, Joseph Jordan, Edward S. Lampert, Lawrence Meerschaert, Steven Mnuchin, Leena Munjal, Ann N. Reese, Robert Riecker, Dave Rodney, Robert Schriesheim, and Thomas J. Tisch); the Original Action Defendants (see p.1 of Settlement agreement for lengthy list) shall pay $41,875,000 on claims not covered by the Sears Policies; and the Participating Public Shareholder Defendants (see Exhibit 1 to settlement agreement for list  and individual contributions) shall pay $7,500,000, subject to Section 3(d) of the Settlement Agreement.

** Including: (i) the Consolidated Adversary Proceeding, (ii) longstanding disputes with Transform, such as the Second Circuit 507(b) Appeals, the Transform Foreign Cash Appeal, and other issues arising under the Asset Purchase Agreement, (iii) the Seritage Disputes, and (iv) the 507(b) Claim asserted by Wilmington Trust, as Indenture Trustee and Collateral Agent of the Second Lien Notes.

 The Settlement Motion

The motion [Docket No. 10566] states, “The Settlement Agreement represents a monumental achievement by bringing closer to a successful conclusion these historic Chapter 11 Cases and the related Consolidated Adversary Proceeding. Nearly three years after confirmation of the Plan in October 2019, and following years of litigation on numerous fronts and, more recently, months of hard-fought mediation and good faith, arm’s-length negotiations, the Effective Date is now within reach.

Since confirmation, the Debtors, the Creditors’ Committee and their respective professionals endeavored to bring sufficient additional value into the Estates and to reduce asserted liabilities to take the Plan effective. Since confirmation, the Debtors satisfied more than $64 million in additional administrative expenses incurred prior to confirmation. With the approval of the Settlement Agreement, the Debtors will be poised to consummate the Plan, complete final distributions to secured, administrative expense and priority creditors and, ultimately, wind-up the Estates. The Settlement Agreement largely resolves the Consolidated Adversary Proceeding, ends the Transform Foreign Cash Appeal, significantly de-risks the 507(b) Appeal (particularly when combined with the Second Lien Notes Settlement) and will significantly narrow the remaining open issues in the Chapter 11 Cases.

The Settlement Agreement will provide an immediate cash influx of more than $180 million into the Estates no later than 16 days after entry of a final order in respect of this Motion. Additionally, the Settlement Agreement will eliminate the substantial financial burdens, risks and uncertainty associated with litigation of the underlying disputes and will minimize the ongoing expenses of administering the Chapter 11 Cases. With this cash influx, in addition to the Debtors’ current assets, the Debtors believe they will have sufficient funds to complete distributions to holders of Administrative Expense Claims and other claims that must be paid prior to the Effective Date.

Like any compromise, the Settlement Agreement is neither poison nor panacea. The Litigation Designees—the parties vested under the Confirmation Order with the exclusive right to prosecute and settle the claims asserted in the Consolidated Adversary Proceeding— believe that, in isolation, the asserted claims and causes of actions were worth more than the cash that will be obtained through the Settlement Agreement. But potential value cannot be evaluated in a vacuum. The Defendants have made clear that they believe that they have substantial defenses to the claims. As with any litigation, the ultimate outcome if the case were litigated to judgment is uncertain. Moreover, the Plaintiffs do not have the luxury of infinite time or resources, and the Debtors’ secured, administrative expense and priority creditors have needs of their own. The reality is that the circumstances of the Chapter 11 Cases necessitate material compromise, not intransigence, and the benefits of the Settlement Agreement—the prompt resolution not just of the Consolidated Adversary Proceeding, but other ancillary, costly and potentially value-destructive disputes—will give certainty to creditors and provide a viable path for the Debtors to emerge from bankruptcy. These benefits cannot be understated.”

The motion adds, “The circumstances of these Chapter 11 Cases, however, have shifted since confirmation of the Plan. Indeed, the Debtors, the Creditors’ Committee, the Admin Representative and numerous other parties in interest have now reached consensus regarding a path forward that should enable the Debtors to consummate the Plan, complete long-awaited distributions to stakeholders and, ultimately, wind-up the Estates. With the Settlement Agreement in hand, the Debtors have a viable path to exit chapter 11. To effectuate an efficient and speedy process toward consummation of the Plan and administration of post-Effective Date matters, the Debtors and the Creditors’ Committee have determined that a nonmaterial modification of the Confirmation Order and the Plan is necessary and appropriate. Accordingly, the Debtors and the Creditors’ Committee have agreed as follows, which will be reflected in redlines to the Plan and Liquidating Trust Agreement to be filed in advance of the hearing on this Motion (collectively, the “Plan Modifications”):

• Upon the effectiveness of the Settlement Agreement, the Litigation Designees will be relieved of any further duties and obligations, the role of the Litigation Designees will be eliminated and no further compensation will be paid by the Debtors to the Litigation Designees from and after the effective date of the Settlement Agreement.
• All references to the Liquidating Trust Board in the Confirmation Order and Plan (including the Liquidating Trust Agreement) will be removed, and no Liquidating Trust Board will be appointed upon the Effective Date.
• In lieu of the Liquidating Trust Board, upon the establishment of the Liquidating Trust on or after the Effective Date, the Liquidating Trust will be overseen solely by the Liquidating Trustee, who will have all the same powers, rights and obligations as the Liquidating Trust Board. The Liquidating Trustee will be selected by the Litigation Designees. For the avoidance of doubt, nothing in the Settlement Agreement, the Plan Modifications, or the relief sought in this Motion is intended to change the fact that the Liquidating Trust is to be established and effective only upon the Effective Date and not at any time prior. The Liquidating Trustee shall have no powers, rights, or authority prior to the Effective Date.
• The notice and reporting provisions in the Liquidating Trust Agreement will be revised in a manner consistent with the available distributions from the Settlement Agreement and to minimize extraneous administrative costs and burdens.”

Key terms of the Settlement Agreement:

• Parties: 
  • Debtors
  • Creditors’ Committee
  • Litigation Designees
  • Restructuring Subcommittee
  • Original Action Defendants
  • Participating Public Shareholder Defendants
  • Administrative Expense Claims Representative; and
  • Transform
• Settlement Amount: The Settlement Payment Parties/Entities will collectively pay or cause to be paid $175 million to the Debtors. The Settlement Amount will be paid no later than the first business day that is 16 calendar days after the Final Approval Date. The Settlement Amount is apportioned as follows:
  • The Sears Insurers shall pay $125,625,000 on behalf of the Sears D&O Defendants.
  • The Original Action Defendants shall pay $41,875,000 on claims not covered by the Sears Policies.
  • The Participating Public Shareholder Defendants shall pay $7,500,000, subject to Section 3(d) of the Settlement Agreement.

In a declaration in support of the settlement [Docket No. 10568], the Debtors' financial advisor M-III Partners, LLC provides: "The final terms of the Settlement Agreements resolve without the need of further litigation (i) the Consolidated Adversary Proceeding, (ii) longstanding disputes with Transform, such as the Second Circuit 507(b) Appeals, the Transform Foreign Cash Appeal, and other issues arising under the Asset Purchase Agreement, (iii) the Seritage Disputes, and (iv) the 507(b) Claim asserted by Wilmington Trust, as Indenture Trustee and Collateral Agent of the Second Lien Notes. 

The Settlement Agreements and the resolution of other disputes described herein and in the Motion are a result of months of good faith, arm’s-length negotiation among the parties, and the culmination of which achieves a compromise in the best interest of the Debtors’ Estates and which will facilitate meaningful recoveries to creditors. In addition, the modifications to the Plan and the Liquidating Trust Agreement, as described in the Motion, will not have any negative effect on any party in interest and will enhance the efficiency of the wind down of the Debtors’ Estates.

1. The Claims between the Debtors and Seritage. The Motion accurately describes the terms of the Settlement Agreement with respect to the Seritage Disputes. The resolution of the Seritage Disputes will yield a $500,000 recovery to the Debtors by the Seritage Defendants. I believe that the $500,000 payment to the Debtors is a reasonable settlement of the claims asserted by the Debtors against the Seritage Defendants and by the Seritage Defendants against the Debtors. Further disputes or litigation of each of the separate issues would be prolonged and expensive, reserves for disputed claims could need to be maintained pending outcome of the disputes, and the outcome of any litigation is uncertain. I believe the proposed resolution of the Seritage Disputes is well within the range of reasonableness.
2. Second Lien Notes Settlement.  The Motion and Proposed Order include the resolution of the Second Circuit 507(b) Appeal as it relates to Wilmington Trust. While the Debtors are hopeful for an advantageous ruling in the Second Circuit 507(b) Appeals, the outcome is uncertain, as is the case with most litigation. The Second Lien Notes Settlement, together with the corresponding resolution of the Second Circuit 507(b) Appeals with respect to the ESL Defendants (as defined in the Settlement Agreement), substantially reduces the potential liability of the Debtors and provides finality with four (4) of the five (5) parties to the Second Circuit 507(b) Appeals. Therefore, I believe the Wilmington Trust Settlement is reasonable and should be approved. 
3. Settlement with Transform. As part of the Settlement Agreement, the Debtors and Transform have also agreed to resolve the Remaining APA Issues—a wide range of issues that have been disputed between the parties for significant periods of time and at great expense. The Motion accurately describes the resolution of the Remaining APA Issues. Importantly, pursuant to the Settlement Agreement, over $5 million will be released to the Debtors months or years before appellate litigation would otherwise conclude.

A hearing on the motion is scheduled for August 31, 2022, with objections due by August 23, 2022.

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