Here's why the Sears saga could last for months

According to experts, the many roles held by Sears Holding Corp. chief Eddie Lampert at this iconic retailer could lead to legal action now that he has gone bankrupt.

Under Chapter 11, Lampert has resigned as CEO but will continue as president. The hedge fund manager is also a major shareholder, lender and lessor of certain real estate assets of the company, as reported by MarketWatch.

In appearance, it is not surprising that the CEO of a company is also involved in the company, said Marc Hamroff, managing partner of the law firm Moritt Hock & Hamroff. However, it is unusual for this to be the case in a large publicly traded company such as Sears.

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"It's unique in a company of this size and can certainly foster some conflicts of interest," Hamroff told MarketWatch. "Do you protect your interests as a creditor or as a CEO? What hat are you wearing?

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Lampert took control of Sears in 2005 when he merged with Kmart. Since then, the company has lost billions and closed hundreds of stores. The market value of the company fell to $ 33.8 million, according to FactSet, and its shares closed Monday at 31 cents.

Lampert has taken steps to position itself to take the necessary steps to keep the company in business for years of decline, while protecting itself from any potential inconvenience. For example, real estate investment firm Seritage, which was formed in 2015 by a group of Sears shareholders and Lampert's hedge fund, ESL, acquired 266 Sears properties and leased a large portion to the retailer.

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Eric Snyder, a bankruptcy attorney at Wilk Auslander, said that Lampert was open to the risk of lawsuits for conflict of interest.

"Loan fees and dividends, as well as rental costs for stores sold, can be examined during bankruptcy as potential fraudulent transfers," he said. A fraudulent assignment occurs when it is found that the buyer is not paying a reasonable value for an asset that is part of a bankruptcy.

"Lampert, via ESL, controls most of this entity (Seritage) and should benefit from it, as these properties generate higher rents, while receiving dividends, loan fees and interest payments", Snyder said.

In June, Lampert proposed to buy the Kenmore brand at a cost of $ 400 million and pleaded for a restructuring plan providing for the sale of assets, including real estate and Kenmore, in order to avoid bankruptcy.

See: Sears would be a brand that has "no value" if it lapses.

Now that the file has arrived, Lampert still has the upper hand.

"I believe that the only person or entity likely to derive positive results from the Sears bankruptcy will be Eddie Lampert and the entities with which he is affiliated that have provided mortgages and other financing to Sears," said Chuck Tatelbaum, director of the law firm Tripp Scott.

"Now that Sears will close most, if not all, of its outlets, the entity will no longer be able to pay mortgages in favor of the Lampert entities in order to free up cash for persistent haemorrhage." and persistent of its customers. Sears. "

In the days leading up to the filing of the bankruptcy, the lenders, including Bank of America Corp.

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Wells Fargo & Co.

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and Citigroup Inc.

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were pushed to liquidation, according to a report of the Wall Street Journal.

Tatelbaum said that there could be lawsuits to find out whether the board had acted in a sufficiently independent manner from Lampert.

"The published reports indicate that many members of the board of directors are other hedge fund executives, and I understand that the current Treasury Secretary (Steven Mnuchin) was also a member of the board of directors. Administration, "said Tatelbaum. Lampert and Mnuchin were roommates at Yale University.

"They are wealthy people, and I suppose Sears and its parent company have significant insurance for their directors and officers. I think that a litigation is perhaps on the horizon, "Tatelbaum said.

Experts blame Lampert and the management team for the slow disappearance of a company that at one point was pretty much like Amazon.com Inc.

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before Amazon was one thing.

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"In our view, a multitude of factors have contributed to the demise of Sears, but the most important among them is the inability of management to understand the retail business and to move Sears forward. a way that would have given the chain a good chance of survival, "said Neil Saunders, managing director of GlobalData Retail, which acknowledges the existence of missteps before Lampert's arrival.

"Chapter 11 means that Sears will continue to operate, at least in the foreseeable future, as it tries to find a solution to its financial problems and tries to gain a foothold in the retail market. In our opinion, Sears is too rotten to make it a viable business, "Saunders said.

Sears shares lost about 95% of their value over the past year, while the S & P 500 Index

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gained about 8%, the SPDR S & P Retail ETF

XRT + 0.17%

about 20% and the Amplify Online Retail ETF

J & # 39; BUY, + 1.54%

gained about 22%.