Sears creditors seek court approval for $35 million litigation funding deal

A store closing sale sign is displayed next to a Sears logo in New Hyde Park, New York, U.S., October 10, 2018. REUTERS/Shannon Stapleton

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(Reuters) – Creditors of bankrupt Sears Holdings Corp have run out of money to continue filing billion-dollar lawsuits against former chairman Eddie Lampert and a host of other defendants they say have robbed the business of value brands and real estate assets as the retailer spun into insolvency.

Sears’ bankruptcy plan called for the estate to set aside $25 million to pursue claims, but that money disappeared, along with an additional $7.1 million owed to Akin Gump Strauss Hauer & Feld, lead attorney for the Sears Trust. liquidation.

Billions of claims and no money to litigate? That’s what litigation funding is for, according to an April 21 motion from Sears’ creditors’ committee.

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The motion asks U.S. Bankruptcy Court Judge Robert Drain of White Plains, New York, to approve an agreement between Sears, the creditors’ committee and financial backer Bench Walk Advisors LLC for financing of up to $35 million to pursue two adversarial suits, one against Lampert and his alleged allies, the other against 139 former Sears shareholders.

The agreement would put Bench Walk first in line to collect from any case recoveries, but limits the litigation funder’s initial entitlement to its principal plus 15% annualized interest. Bench Walk will only receive additional returns on its investment if the recovery is sufficient to repay administrative, priority and warranty claims against Sears’ estate.

The deal would reportedly be one of the largest litigation funding deals ever in a Chapter 11 bankruptcy. In a presentation last October to the National Conference of Bankruptcy Judges, litigation financier Omni Bridgeway (USA) LLC has identified a handful of other cases in which lenders have been allowed to invest in bankruptcy litigation through various mechanisms, including purchasing the debtor’s right to seek insurance payments and the partial purchase of a judgment obtained by a debtor.

The biggest deal cited in the Omni Bridgeway report was a $40 million investment in adversarial proceedings by litigation trust Paragon Offshore Plc against Paragon’s former parent company Noble Corp, though it’s hard to say. from Paragon’s proposal how much money came from an unidentified third-party litigation funder and how much was contributed by members of the existing litigation trust.

The Sears motion, on the other hand, stands out for its transparency. According to the filing, the litigation against Lambert and the case against former Sears shareholders were incredibly difficult. The creditors had to defend more than a dozen requests for the dismissal of the two adversarial proceedings. Their attorneys have issued nearly 200 subpoenas, received millions of discovery pages, and hired expert witnesses. The judge, Drain, has yet to rule on the defense motions to dismiss, but he appointed mediators last month to try to resolve the Lambert case. (Lambert’s attorney, Philip Anker of Wilmer Cutler Pickering Hale and Dorr, did not respond to my email inquiry regarding the litigation. The defendants have previously told Reuters that the creditors’ claims are “misleading or otherwise simply false” and that all disputed transactions conducted in good faith for the benefit of shareholders.)

The creditors’ filing shows the winding-up trust is down to its last $300,000, of the $25 million originally set aside for litigation. Defendants, according to the filing, explained much more: Former directors and officers of Sears have already spent nearly $27 million on D&O insurance for their legal defense, and that’s not counting the legal fees of defendants who are not covered by these Strategies insurance.

The committee said it recognized that in order to continue corresponding with these “well-heeled defendants” it needed a new source of funding. He drafted a litigation budget, then contacted 10 potential investors, including “both traditional litigation funders and investment managers.”

Eight potential backers signed nondisclosure agreements to learn more about the potential investment. (The winding-up trust argues, according to a statement from one of the five investment professionals appointed to oversee the litigation, that its claims total approximately $2 billion, plus interest.) Three backers ended up making presentations. Creditors rejected a lender’s offer because it offered unfavorable terms. He asked for the best final offers from Bench Walk and the other anonymous backer.

Even after receiving those offers, according to the creditors’ filing, the committee considered additional offers from four other institutions, then engaged in renegotiations with Bench Walk to ensure major creditors would be paid before the lessor of funds does not reap the windfall of litigation. Bench Walk also agreed, according to the filing, that it has no control over litigation or settlement decisions, which remain in the hands of the investment professionals named in Sears’ confirmation plan.

Creditors asked the judge, Drain, to approve the financing agreement as a good exercise in judgment, arguing that Bench Walk’s non-recourse loan requires only a minor modification to the distribution scheme in the bankruptcy plan already. confirmed. “The litigation funding arrangement resolves significant funding issues for jointly asserted causes of action, fulfills the purpose of the plan, and benefits all parties involved,” the filing states.

Neither Bench Walk nor Akin Gump’s lead creditors’ committee attorney Ira Dizengoff responded to my email questions.

The creditors’ file includes the Bench Walk agreement itself as an attachment, so no one can complain about the opaque terms. If Drain approves the deal, the funding agreement could serve as a template for future litigation funding agreements in Chapter 11 bankruptcies.

That Omni Bridgeway report that I mentioned noted that Burford Capital LLC had publicly stated that it had committed nearly $100 million in financing in insolvency and bankruptcy cases in 2020. Sears Creditors’ File suggests that even $100 million might look like a floor, not a ceiling.

Read more:

Sears is suing Lampert, claiming he looted assets and drove him out of business

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Alison Frankel

Thomson Reuters

Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A graduate of Dartmouth University, she worked as a journalist in New York covering the legal industry and law for more than three decades. Before joining Reuters, she was an editor and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.

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