Sears pensioners seek ex-judge as ‘litigation trustee’

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Pensioners of Sears Canada Inc. will ask a court on Thursday to approve the appointment of a retired judge to co-ordinate efforts to claw back dividends paid over several years – much of it to entities controlled by American hedge-fund manager Edward Lampert.

The pensioners argue that Sears Canada put its operations in jeopardy by paying billions in dividends to shareholders over a period of nearly a decade. Mr. Lampert's hedge fund, which was effectively the controlling shareholder of the now-failed retailer, was a key beneficiary of the special payments.

Sears Canada collapsed in court protection last June and has now shut all its stores. Its retirees are owed about $270-million as a result of their underfunded pension and an estimated $400-million in unpaid health and life-insurance benefits, according to court documents to be filed on Monday.

The pensioners are asking the court to name Frank Newbould, a retired Ontario Superior Court judge, as a "litigation trustee" to co-ordinate various actions and investigations.

The request comes as some creditors look for recoveries in the Sears Canada insolvency case and fear there will be little money left after the big payouts to lenders that were secured creditors.

In documents sent late Friday to lawyers involved in the Sears insolvency, pensioners say the retailer's board of directors approved paying almost $3-billion in dividends in the eight years after Mr. Lampert's ESL Investments Inc. took control of Sears in 2005. Mr. Lampert is chairman and chief executive officer of U.S.-based Sears Holdings Corp., which was a major shareholder of Sears Canada.

"In the years prior to applying for [court] protection in June, 2017, Sears Canada sold off significant assets, declared substantial dividends paid to shareholders – in particular ESL and Mr. Lampert – and drastically reduced its investment and commitment to the retail business of the company," William Turner, a former Sears Canada executive who heads its retiree group, says in a statement to be sworn on Monday.

"The actions taken or not taken by various parties in the years prior to the insolvency and commencement of these insolvency proceedings warrant a detailed review by a litigation trustee to determine if such actions or inactions caused, contributed to or precipitated the insolvency and the losses suffered by creditors."

Sears Holdings spokesman Chris Brathwaite said in an e-mailed statement Sunday that the dividends it received were "authorized by Sears Canada's board of directors during a time when Sears Canada was clearly solvent, with minimal debt and $514-million in cash on its balance sheet after giving effect to the final dividend payment in 2013. We believe any attempt to reclaim those dividends would be unfounded."

It said the board, in declaring the dividends, was at all times acting consistently with its duties to Sears Canada.

In a blog posted on Sunday, Mr. Lampert says he never served as a director or officer of Sears Canada, "so I don't have firsthand knowledge of their internal deliberations and the alternatives considered."

Mr. Lampert says the dividends paid in 2012 and 2013 following the sale of prime store leases represented about 50 per cent of the more than $1-billion of proceeds Sears Canada received; the retailer retained more than $500-million and had almost no long-term "funded" debt, he said.

"This substantial amount of cash was available to be used in the company's operations going forward," Mr. Lampert says.

"While this knowledge cannot change the impact that the failure of Sears Canada has had on many people, particularly its employees, I believe these facts should be at least be properly understood," he says.

He says the pension plan's $270-million deficit figure is misleading because it also includes the health, dental and life insurance benefits which have been unfunded since 2008. He says the retirement plan alone recorded a $110-million deficit as of 2016. And that was calculated on outdated, low interest rates.

"Assuming a reasonable rate of return on its $1-billion in assets and accounting for the increase in interest rates, Sears Canada should be able to meet its pension obligations," he says.

"I too very much regret the failure of Sears Canada," he says. "Like other stakeholders, ESL has suffered significant losses from the bankruptcy of this storied company – shareholders collectively lost over $1-billion since 2012, even taking into account the dividends received.

"It is only by ignoring the entirety of the facts that one can conclude that the failure of the company was precipitated by a lack of financial resources rather than an unsuccessful attempt to turn the company around in the face of a rapidly changing retail environment."

Andrew Hatnay, lawyer at Koskie Minsky LLP who represents the retirees and former employees, plans to file the documents in Ontario Superior Court on Monday but declined to comment.

The retirees and former employees are using a similar argument as the one made by Sears Canada's former Hometown operators in their class-action lawsuit against the company. The legal action was started several years ago and received court sanction in 2014 to proceed, although it was suspended during the Sears Canada insolvency proceedings.

The Hometown dealers challenged the Sears board of directors for declaring an extraordinary $509-million dividend in 2013 after the struggling retailer sold lucrative assets, such as its Toronto Eaton Centre store lease, alleging the move would eventually lead to a formal insolvency of Sears to the detriment of creditors.

Last month, FTI Consulting – the monitor overseeing Sears's insolvency – said it is reviewing the $509-million dividend paid along with a $102-million dividend a year earlier.

But the monitor's investigations do not look at all potential Sears Canada claims, the pensioners' documents say.