Court approves Sears liquidation plan

Sears Holdings Corp. won court approval Monday of a chapter 11 liquidation plan requiring suppliers that kept its shelves stocked in bankruptcy to wait for their money or take a discounted payoff.

Judge Robert Drain of the U.S. Bankruptcy Court in White Plains, N.Y., said he would sign off on a creditor repayment plan despite the company’s admission that it doesn’t have the cash to pay essential bills, including tens of millions of dollars owed to companies that supplied goods while Sears tried to stay afloat earlier this year.

The decision marks the "beginning of the end" of Sears’s bankruptcy case after nearly a year, said David Wander of Davidoff Hutcher & Citron LLP, a lawyer for a number of Sears vendors and creditors. The ruling is good news for all Sears creditors, which can finally look forward to repayment at some point in the future, Mr. Wander added.

Judge Drain said Monday that the Sears shell company left behind after former Chairman Edward Lampert bought out the best stores is projected to be short by $36.5 million to $104.5 million in covering the payment obligations it needs to meet before exiting bankruptcy. Under the liquidation plan, unsecured creditors will recover 2.5 cents on the dollar.

The plan will become effective once money starts to flow into the bankruptcy estate from potentially preferential payments that went out the door before Sears filed for bankruptcy, Judge Drain said. Sears’s bankruptcy estate could rake in about $50 million from those preference claims, Judge Drain said.

Cash is scarce in the bankruptcy case, with about $46 million available for unsecured creditors, according to testimony during the confirmation hearing that began earlier this week.

Acknowledging the company’s dire financial straits, official committees representing Sears creditors and retirees agreed to support the bankruptcy plan, as did the Pension Benefit Guaranty Corp., a quasigovernmental agency that absorbed unpaid pension obligations.

Some Sears suppliers balked, objecting to what they saw as favorable treatment for lawyers and advisers to the company who already earned $150 million as of Feb. 11, when a majority of Sears stores were sold off. The professionals have claimed another $50 million in fees since then, according to unhappy vendors. Judge Drain said the collection of that $50 million should be deferred.

Another source of recovery for Sears’s unsecured creditors is a lawsuit funded with $25 million against Mr. Lampert, his hedge fund ESL Investments Inc. and others for deals that allegedly drained billions of dollars of assets from Sears.

A group of foreign vendors that aren’t being paid under the plan are likely to continue litigating against the Sears bankruptcy estate.

"Right now the foreign vendors aren’t getting anything because [Sears is] objecting to their claims," Mr. Wander said.

Foreign vendors have been locked in a dispute with the company since last year over whether their claims for goods shipped within 20 days before Sears filed for bankruptcy should be treated as administrative expenses and given top payment priority.

The new company running hundreds of stores salvaged by Mr. Lampert is already closing locations and liquidating inventory, while it fights the bankruptcy estate over the terms of their agreement.

Most of Mr. Lampert’s acquisition came in the form of debt forgiveness after he spent years lending money to Sears.

Investment funds that bought Sears claims at discounted prices also agreed to support the plan, which allows them to get 75% of what they are owed quickly, as long as they sign away the rest.

Write to Soma Biswas at [email protected] and Peg Brickley at [email protected]

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