Retirees close in on dividend claw back

Billions paid out as company deteriorated

TORONTO — Sears Canada creditors could be a step closer in their attempt to recoup some of the $ 3 billion in controversial dividends paid out to the company’s shareholders — most notably, Sears Holdings Corp. chief executive Edward Lampert — years prior to the defunct retailer’s insolvency filing last June.

Lawyers acting for the former retailer’s pensioners will make a motion on Thursday to appoint a litigation trustee in Sears Canada’s bankruptcy process, who will look at ways to increase the pool of available funds for creditors.

At issue for the pensioners are about $ 2.9 billion in special dividends paid out to Sears Canada’s shareholders between 2005 and 2013, “despite the company’s continued financial deterioration” and while the company’s pension plan was underfunded, according to a court affidavit from former executive William Turner, head of the Sears Canada Retiree Group.

Court filings suggest the pension plan is underfunded by $ 267 million and retirees are also out an estimated $ 400 million in unpaid health and life insurance benefits.

Retirees, meanwhile, have been warned by the plan administrator to expect a future reduction in their monthly pension cheques.

Last month FTI Consulting, Sears Canada’s monitor in bankruptcy, raised the issue of investigating two particular special dividends paid to Sears Canada shareholders as “potential transactions of interest” that required further examination: A $ 102- million payment issued at the end of 2012 and a $ 509- million special dividend issued at the end of 2013. The company’s pension plan had been underfunded on a windup basis since 2008. Lawyers for the retirees had raised concerns about the special dividends and, in 2014, began asking Sears Canada and the Financial Services Commission of Ontario ( FSCO) to wind up the pension plan. A class action lawsuit filed in 2015 on behalf of Sears’ Hometown dealer stores also took issue with the special dividends, arguing Sears Canada’s board of directors had approved the half- billion 2013 payout despite knowing the Hometown dealers had filed a separate $ 100- million class action earlier in 2013.

“A litigation trustee appointed by the Court will be in a position to review and consider the universe of potential litigation paths that currently exist or may be brought,” says the motion to appoint a litigation trustee from law firm Koskie Minsky, which acts on behalf of Sears’ retirees.

But not all of the stakeholders in the insolvency proceedings agree that judge Frank Newbould, the trustee suggested and approved by pensioners, is the best candidate for the role.

“There is no consensus on the selection of a litigation inspector/ trustee and that lack of consensus has impeded discussion about the appropriate scope of the mandate and other procedural issues,” FTI said in a report this week.

The monitor said FSCO and pension plan administrator Morneau Shepell believe Newbould could present a conflict of interest as a trustee, because the former judge is a member of the law firm that represents a significant creditor, shopping mall owner and developer Oxford Properties.

Some creditors might have concerns about the role of the litigation trustee and how extensively they are required to co- operate “to the extent they may be defendants in future litigation pursued by the litigation inspector/ trustee,” the monitor added. Lampert, who had a 45 per cent stake in Sears Canada along with his hedge fund ESL when the department store chain filed for bankruptcy protection last June, weighed in on the issue in a blog post this Sunday.

He said Sears Canada was flush with cash when the 2012 and 2013 special dividends were issued; Sears Canada had recently sold valuable store leases back to landlords, paving the way for Nordstrom to enter Canada.

“With over $ 1 billion in cash as a result of these sales, and virtually no funded debt, the Sears Canada Board of Directors decided to make distributions to shareholders in the amount of approximately one- half of those sale proceeds,” Lampert wrote.

“These dividend payments did not deprive the company of the cash needed to fund operations or to pay pension obligations.”

The U. S.- based Sears Holdings CEO emphasized that he had never served as a director or officer of Sears Canada. “I don’t have firsthand knowledge of their internal deliberations and the alternatives considered.”

A statement from Sears Holdings, which divested the bulk of its controlling stake in Sears Canada in 2014, said in an emailed statement that as a shareholder it received dividends “that were duly 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 the final dividend payment was made in 2013.