In October of this year, Sears Holdings Corp and affiliated Debtors filed a Chapter 11 case in the U.S. Bankruptcy Court for the Southern District of New York in a case pending before Judge Drain. Since that time, the company has been reducing its debt and its physical footprint by closing stores.  After the bankruptcy was filed, Sears unsecured creditors began to claim that the Debtors’ former CEO & Chairman siphoned value away from Sears in a multitude of insider transactions.

store closingLast week, the Debtors brought suit against its former CEO, his hedge fund and other investors claiming that when Sears was declining, its controlling shareholder (who also served as its CEO & Chairman) transferred billions of dollars for “grossly inadequate consideration or no consideration at all.”

The Complaint brings claims for a variety of fraudulent transfers including actual and constructive fraudulent transfers under Section 548 of the Bankruptcy Code as well as fraudulent transfers under the New York Debtor and Creditor Law in addition to claims to recover illegal dividends and for breaches of fiduciary duties.  The Debtors claim that had these transfers not occurred, they would have had billions more available to pay claims of creditors and that jobs could have been saved.

For example, during the last several years, Sears engaged in a variety of asset transfers wherein it spun off some of its brands.  The Debtors claim that these asset transfers were part of a strategy put in place to strip out Sears’ most valuable assets for the benefit of the Defendants.

This case is reflective of common themes in bankruptcy cases and resulting bankruptcy litigation and will be interesting to follow.  A copy of the Complaint can be found here, and Law360 also provided a detailed summary of the case.