What happens when you’re suing for billions in damages and go broke in the process? Well, simple. You turn to other people for help, in this case, litigation financiers. And that’s exactly what the creditors of bankrupt Sears Holdings Corp intend to do — once they get the approval of the Court, of course.
According to an April 21 motion filed in court by the Sears creditors, it seems the committee has run out of money to continue its court case against the former chairman Eddie Lampert and several other defendants. The billion-dollar suit is based on claims that the defendants gutted the company and got rid of valuable assets while the company rapidly became broke.
The suit, which has been in court since 2019, has already cost the creditors $25 million; which is the money set aside in the company’s bankruptcy plan to finance the claims.
The lawsuit has been insanely tricky, with creditors having to fight more than a dozen motions to dismiss the two adversary proceedings. Their lawyers have also issued nearly 200 subpoenas and have had to put expert witnesses on retainers.
And that’s not all.
The Sears Creditors Committee also owes their lead lawyers, Akin Gump Strauss Hauer & Feld, a whopping $7.1 million for their help in winding up the company. So, the committee is requesting that United States Bankruptcy Court Judge Robert Drain of White Plains, New York, endorse an arrangement reached by Sears, the creditors’ committee, and a litigation funder (Bench Walk Advisors LLC) for up to $35 million in funds to help continue prosecuting two actions — one against Lampert and his alleged allies, the other against 139 former Sears shareholders.
Origin of the Sears lawsuit.
The Sears lawsuit began in April 2019, when Sears Holdings Corp decided to sue its longtime former Chairman Eddie Lampert and his hedge fund, ESL Investments, projected to be valued at over $9 billion as of 2004. Other people who sued include the Treasury Secretary under the Trump administration, Steven Mnuchin. The suit claims they sneakily diverted billions in assets from the company before it went bankrupt
Lampert has been repeatedly blamed for the grand failure of the company, especially with him suddenly buying up $5.2billion worth of Sears assets after the retailer filed for bankruptcy. The purchased assets include the popular Sears brands like the Diehard and Kenmore lines of products.
The complaint asks that Lampert and other defendants pay back the “billions of dollars of value looted from Sears,” before and during the massive bankruptcy auction. The full citation of the case is Sears Holdings Corp et al v Lampert et al, U.S. Bankruptcy Court, Southern District of New York, No. 19-ap-08250.
Why Bench Walk LLC?
In general, “litigation financing” refers to a third-party paying for some or all of a plaintiff’s litigation costs. It usually involves a huge sum of money and is risky for the ones investing. Litigation finance agreements are non-recourse agreements, which means that the funder does not get paid until the lawsuit is won and claims are recognized by the court.
When the Creditors Committee found out that only $300,000 remained of the $25 million initially assigned for litigation, they began to source funding from various litigation funding companies. It created a budget and then contacted ten possible funders, including “both traditional litigation financers and investment managers.” Out of this number, eight signed non-disclosure agreements to grant them access to more information about the lawsuit and measure the likelihood of its success.
Of the eight, only three litigation funding companies submitted bids to sponsor the lawsuit. However, Sears Creditors declined one offer due to its difficult terms, leaving Bench Walk LLC and another funder as the last two litigation finance firms standing.
Or were they?
According to the motion filed by the creditors, the committee also considered four other bids from different firms. However, they eventually picked Bench Walk LLC.
The Bench Walk litigation funding agreement will ensure that major creditors would be paid before the funder once their case is successful. According to the document, Bench Walk also accepts that it has no authority over litigation or settlement choices, which remain in the hands of the investment experts selected under the Sears confirmation plan.
What happens when the Court approves the litigation funding agreement?
Once the motion and the attached agreement are endorsed by the court, Bench Walk would be first in line to obtain any money or assets from the two cases. Its fee would be equal to the original amount it provided, plus a 15% annual interest. Also, Bench Walk will not receive any other funds as profits — asides from its first fee — until the administrative, priority, and secured debts against the Sears estate are paid.
If approved, the Sears and Bench walk agreement might be one of the biggest lawsuit funding agreements ever seen in a Chapter 11 bankruptcy case.
A comparable number would be the Paragon proposal from the Paragon Offshore PLC bankruptcy proceedings. The agreement sported the sum of $40 million, which seems higher than the Bench Walk agreement. However, it’s hard to tell from the Paragon proposal how much money came from a third-party litigation funder like Bench Walk and how much was contributed by members of the litigation trust.
On the other hand, the Sears’s motion is quite clear on this matter.
While the Sears Creditors Committee struggles to find funding, former Sears directors and officers have not had a problem with financing their defense. Already, they have spent nearly $27 million in Director & Officers insurance which protects them from personal losses when sued in their capacity as directors/officers of a company. Then there are the enormous legal costs accrued by other defendants who don’t have or are not covered by those insurance policies.
It is obvious the defendants are financially better off than the committee, especially now that its funds are depleted. Hence, the importance of the Bench Walks litigation funding agreement.
The agreement, once approved by Drain, may also serve as a model for future litigation funding agreements in Chapter 11 bankruptcies.