On March 2, 2018, Justice Hainey of the Ontario Superior Court of Justice granted an order appointing Lax O’Sullivan Lisus Gottlieb LLP as litigation investigator in the Sears Canada CCAA proceedings, for the purpose of investigating rights and claims that Sears Canada entities and/or any creditors of the Sears Canada entities may have against any parties. The litigation investigator was made an officer of the court and its mandate explicitly contemplates the investigation of matters involving current and former directors, officers, and shareholders. The order authorizes the litigation investigator to report on these findings to the Creditors’ Committee and the Monitor. The order does not authorize the advancement of claims, but does not bar the litigation investigator from seeking such authorization from the court. Notably, the order specifically provides that the Monitor is to provide the liquidation investigator with a confidential briefing regarding “transactions of interest” as identified in the Monitor’s 11th report to the court, which include: (1) a $102-million dividend paid to certain Sears Canada shareholders on December 31, 2012; (2) a $509-million dividend paid to certain Sears Canada shareholders on December 6, 2013; and (3) the surrender, by Sears Canada, of its exclusive right to use the Craftsman trademark in Canada to Stanley Black & Decker in March of 2017.
Leading up to this order, the retirees of Sears Canada filed motion seeking the appointment of the Hon. Frank Newbould, Q.C., as litigation trustee. Spurring this motion was the state of the Sears Canada pension plan, which was underfunded by almost $270 million. The retirees noted that in 2005, Sears Canada came under the control of a U.S. hedge fund, ESL Investments Inc. run by Edward Lampert. The retirees alleged that, through ESL, Lampert had direct and indirect control of shareholdings of Sears Canada at the material times, and was the main beneficiary of dividend payments. Subsequently, Sears Canada’s retail business deteriorated, resulting in insolvency and liquidation taking place in 2017.
It was argued by the retirees that the actions taken prior to Sears Canada’s insolvency warranted the appointment of a litigation trustee to determine whether those actions were related to the insolvency, resulting in causes of action which may produce recovery for the creditors. Among the impugned actions were dividend payments to shareholders approved by the board of directors, beginning in 2005 with a dividend of over $1.5 billion, and reaching a cumulative total of just under $3 billion by the end of 2013.
The retirees argued that a court-appointed litigation trustee would be in a position to “review and consider the universe of potential litigation paths” relevant to the situation, obtaining input from the creditors and stakeholders, with the ability to develop a governance framework for consultation, and to make recommendations for proceeding.
Counsel for Sears Holdings Corporation and Sears Roebuck and Co. objected to the appointment of a litigation trustee as an officer of the court, and further objected to the proposed mandate of the trustee to investigate claims that do not belong to Sears Canada entities, but may only be asserted by individual creditors. Citing concerns regarding claims against third parties, including the equity holders, they sought minimum guarantees of substantive and procedural fairness in the context of any ensuing litigation. The equity holders Edward Lampert and ESL echoed many of these concerns. Sears Holdings Corporation and Sears Roebuck and Co. noted that the litigation trustee order would be unprecedented – and that there was no authority for such an order in CCAA proceedings to arm a partial advisor with the powers of a court officer to investigate, advise on, and potentially pursue creditor claims against the equity holders. In response to these objections, the retirees argued that Sears Holdings Corporation and ESL had no standing to oppose the motion as equity holders. They further argued that the motion was mischaracterized by those parties in raising their objections.
In an amended litigation investigator order dated April 26, 2018, following concerns raised about privileged documents, the Court ordered certain procedural protections for “potentially shared privileged documents.”
More recently, counsel for the employee representative filed a Notice of Motion for the removal of the remaining directors of Sears Canada. The grounds for the motion allege that the current directors will be in a conflict of interest as the directors owe a fiduciary duty to Sears Canada to operate in the company’s best interests; however, the directors may also be under investigation by the litigation investigator regarding the impugned transactions. Further, if the directors were to remain in place they may have access to key information about possible litigation against them.
Due to the novel nature of the litigation investigator’s appointment and mandate, creditors and their lawyers will be paying close attention to developments in this matter. However, only time will tell whether this appointment will be confined to the unique fact scenario at hand, or if it will become a useful tool in the unsecured creditor’s toolkit and/or result in any change in the behaviour of boards of directors where significant pension liabilities exist.
JJ Burnell is a partner and Richard Bars is an articled student at MLT Aikins, Winnipeg