By: Jenna Russell
Sears Holdings, one of America’s oldest department stores, filed for Chapter Eleven bankruptcy last October after years of steady economic decline.[1] However, a glimmer of hope offers to spare the former titan from complete liquidation.[2] On December 28, 2018, the bankruptcy auction for the retailer’s remaining assets closed, with Sears’ own Chairman and former CEO, Edward Lampert, submitting the largest bid.[3] Valued at $5.2 billion, Lampert made the offer through his hedge fund, ESL Investments, with the promise of keeping 400 stores open nationwide as well as retaining 45,000 jobs.[4] ESL appears confident that the move can bring Sears out of bankruptcy.[5] The proposal will be heard by US Bankruptcy Judge Robert Drain on February 4, 2018 for the Southern District of New York.[6] However, not everyone is applauding the deal.[7]
Interest groups ranging from worker’s rights organizations to bankruptcy experts are calling foul because if the deal is approved by Judge Drain, the move would allow Sears to shed its pension obligations to vested employee plans with impunity.[8] Further drawing rebuke is a provision in the deal that releases Chairman Lampert from future lawsuits related to his conduct before the bankruptcy filing.[9] In recent years, this strategy has become commonplace when large retailers go bankrupt.[10] Sears has been struggling for years to fund its pension plans while its sales simultaneously plummeted.[11] After assuming the CEO position in 2005, Lampert froze Sears’ pension plans in an effort to stabilize the company’s finances.[12] After the freeze, employees were unable to accrue their additional benefits as promised.[13] Chairman Lampert has publicly blamed Sears’ pension committments for exacerbating the retailer’s precarious financial state, complaining that not having a similar financial obligation gives companies like Amazon and Walmart a competitive edge.[14]
Sears and other large retailers that have dodged their pension duties in bankruptcy have pointed to insurance as the safety value that its employees should rely on to meet their retirement expectations.[15] The Pension Benefit Guaranty Corporation (hereinafter “PBGC”) is a federally chartered agency created under the Employee Retirement Income Security Act of 1974 in response to situations like the Sears bankruptcy.[16] It requires employers that opt into a defined benefit plan for their employees to pay insurance premiums every month to cover unexpected termination of plans, such as bankruptcies.[17] The PBGC has been involved in Sears financial decisions since it started freezing pension plans to balance its own checkbooks in an effort to compel funding and remains its largest unsecured creditor.[18]
On January 26, 2019, the PBGC filed an objection to the sale in the Southern District of New York, pointing out a $1.4 billion pension funding gap that the sale to ESL ignores.[19] In its court filing, PBGC reiterates that Sears had pledged shares from its Kenmore and DieHard brand royalties to fund the pensions.[20] If Judge Drain approves this sale, it will allow Sears to avoid paying owed royalties into the pension funds, as well as avoid future lawsuits for prior actions, passing the burden of funding to the government and its employees.[21] Additionally, the sale would “intentionally undermine PBGC’s statutory and contracture pension plan protections,” according to the filing.[22] To prevent this, on February 1, 2019, the PBGC filed a complaint in a Chicago federal court to terminate and takeover two underfunded Sears Holding Corp pension plans.[23]
[1] Elizabeth Bauer, Sears’ Bankruptcy, The PBGC’s Debt and Your Retirement, Forbes (Oct. 15, 2018, 12:35 PM), https://www.forbes.com/sites/ebauer/2018/10/15/sears-bankruptcy-the-pbgcs-debt-and-your-retirement/#73a9c25d2fb3.
[2] Soma Biswas and Lillian Rizzo, Sears Chairman Edward Lampert Makes Last-Minute Bid to Save Chain, The Wall Street J. (Dec. 28, 2018, 9:49 PM), https://www.wsj.com/articles/sears-chairman-edward-lampert-makes-last-minute-bid-to-save-chain-11546051785?ns=prod/accounts-wsj.
[3] Id.
[4] Rachel Siegel, CEO’s Latest Bid to Save Sears Would Leave Pensioners High and Dry, Government Says, The Wash. Post (Jan. 28 2019), https://www.washingtonpost.com/business/2019/01/28/ceos-latest-bid-save-sears-would-leave-pensioners-high-dry-government-says/?utm_term=.371cd0dcdf18.
[5] Biswas, supra note 2.
[6] Nathan Bomey, Is Eddie Lampert Set to ‘Steal’ Kenmore Brand? Courtroom Clash Will Decide Fate of Sears, USA Today (Jan. 31, 2019 9:39 AM), https://www.usatoday.com/story/money/2019/01/31/sears-holdings-eddie-lampert-bankruptcy-pensions-pbgc-esl/2708768002/.
[7] Siegel, supra note 4.
[8] Id.
[9] Biswas, supra note 2.
[10] Siegel, supra note 4.
[11] Chris Isidore, Pension Watchdog Objects to Plan to Save Sears, CNN Bus. (Jan. 29, 2019, 3:26 PM), https://www.cnn.com/2019/01/29/business/pbgc-sears-sale/index.html.
[12] Hazel Bradford, PBGC, Other Creditors Object to Sears Sale to ESL Investments, Pension and Investments (Jan. 28 2019, 4:36 PM), https://www.pionline.com/article/20190128/ONLINE/190129878/pbgc-other-creditors-object-to-sears-sale-to-esl-investments.
[13] Isidore, supra note 11.
[14] Id.
[15] Siegel, supra note 4.
[16] Employee Retirement Income Security Act, General Information, U.S. Department of Labor, https://www.dol.gov/general/topic/retirement/erisa.
[17] Isidore, supra note 11.
[18] Id.
[19] Id.
[20] Bomey, supra note 6.
[21] Id.
[22] Jonathan Stempel, U.S. Agency Seeks Approval to Take Over Sears Pensions, Reuters (Feb. 2, 2019, 4:42 PM) https://www.reuters.com/article/us-sears-pensions/u-s-agency-seeks-approval-to-take-over-sears-pensions-idUSKCN1PQ5US.
[23] Id.
