Small Businesses Caught in Crosshairs of Sears Bankruptcy

The estate of Sears Holding Corp. is trying to take back payments it made to vendors – many of them small businesses – more than a year ago as it tries to shore up funds to wrap up its bankruptcy case.

The company is seeking bankruptcy court approval of streamlined procedures for the about 730 preferential transfer lawsuits it recently filed. The lawsuits, known as adversarial proceedings, were filed against creditors that received payments for services or products in the 90-day period immediately before the bankruptcy filing, called the preference period.

While the motion is standard procedure in a bankruptcy, the size and scope is unusual, said David Wander a partner at Davidoff Hutcher & Citron LLP.

“In Sears there are many more of them,” said Wander, who represents a number of Sears vendors and creditors.

In addition to the recent filings, the estate filed about 400 in November and is expected to file additional lawsuits that in total will impact as much as 2,000 vendors, according to court papers. The Sears estate will use the funds to pay administrative expenses related to the bankruptcy.

For the small businesses affected, it is a bit of a lose-lose situation, Wander said. While the vast majority will settle, many for a repayment far less than the bankrupt retailer originally asked for, the legal fees alone may be financially debilitating, he added.

“It’s just not cost effective for a small business sued for $40,000 to pay a retainer even if it’s only $5,000 or $10,000,” Wander said. “Small businesses who were vendors of Sears will be hurt.”

This is not the first time Sears estate has had issues with its vendors. In December, some companies that were owed money by the retailer, expressed concern that they would not receive payments.

“Remember, the vendors did nothing wrong,” Wander said. “They simply got paid what they were owed, but the payment came within the 90-days prior to the bankruptcy filing.”

The estate proposed two separate procedures based on the total transfer amount. Those that are less than or equal to $500,000 will be sent to non-binding mediation first, followed by discovery. Those over $500,000 will start with fact discovery, according to court papers. To encourage settlements, Sears estate proposed an extension to the creditor’s time to answer the complaint by up to 60 days after the initial time expires.

“The proposed procedures are designed to streamline litigation and promote settlement” in a manner that will minimize costs, the estate said in court papers.

The case is Sears Holdings Corp., 18-23538, U.S. Bankruptcy Court, Southern District of New York