Sears DB members facing bleak payout prospects as company reduced to ‘shell of itself’

Sears Canada Inc. pension plan members are facing bleak prospects for getting their full pension payouts, according to a Toronto bankruptcy lawyer.

“They won’t be made whole, regardless of how we look at this,” says Lou Brzezinski, a partner at Blaney McMurty LLP.

The comments follow the filing of a recent affidavit by Philip Mohtadi, general counsel and corporate secretary at Sears Canada, that noted the limited money expected to be available to fulfil a large pool of claims against the company as the restructuring process under the Companies’ Creditors Arrangement Act continues. “The monitor has reported that recoveries are projected to be between zero cents and 10 cents on the dollar for Sears Canada creditors,” wrote Mohtadi on May 2. The affidavit was part of a motion by Sears Canada seeking mediation of outstanding issues in the CCAA proceedings.

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“Given the disparity between the projected range of recoveries and the size of the anticipated claims pool, the Sears Canada entities and the monitor wish to ensure that the estate’s efforts are focused on the tasks necessary to facilitate a distribution in the most efficient manner possible,” wrote Mohtadi.

The bleak prospects didn’t come as a surprise to Sears retirees, whose defined benefit pension plan has a reported shortfall of $267 million. “It’s not a big surprise to us,” says Ken Eady, vice-president of the Store & Catalogue Retiree Group.

“It’s a sad situation that the retirees find themselves in. But the company was stolen out from underneath Canadians, in a way. And what’s left is a shell of itself.”

Nevertheless, the amount of available funds could still grow, according to Brzezinski. First, the company has yet to sell several real estate properties, the proceeds of which will contribute to the funds available, he notes. Second, the pensioners are considering legal action to try to recover funds from shareholders such as Ed Lampert, the chief executive officer of U.S. hedge fund ESL Investments Inc., who acquired a controlling share in Sears in 2005 and received part of the $3 billion in dividends paid out in recent years. In March, the Ontario Superior Court ordered a review of those payments.

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“That will also bring in funds into the estate,” he says. “Maybe not now — I don’t think Ed Lampert will write a cheque the minute he sees a statement of claim — but that’s also another pot that will increase the amount available to all the creditors.”

With regard to the shareholder dividends, Eady says the association is working with a litigation investigator to determine whether it might have a case and against whom. “It’s a group of creditors who are working with the litigation investigator, and they’re looking at who could we sue?”

Mediation proceedings planned for June 12 and 13 will address whether the pension fund will get any priority in the liquidation proceedings, according to Brzezinski. He points to a recent case that could have some bearing on the decision. In the Bloom Lake and Wabush Mines restructuring proceedings under the Companies’ Creditors Arrangement Act, the Quebec Superior Court decided distribution priorities throughout the liquidation process should be the same as under the Bankruptcy and Insolvency Act. The upshot was the pensioners had no special priority over other creditors, other than backdated normal cost contributions to the pension fund that remained outstanding.

“That case has gone to the Quebec Court of Appeal, so that’s up in the air as well,” says Brzezinski. (Recently, however, Wabush Mines pensioners got some good news that the company, through mediation, has agreed to inject a significant amount of funds into the pension plan, CBC News reported on Friday.)

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As Brzezinski points out, Sears Canada could simply file for bankruptcy, thus eliminating any possibility of priority for pension plan members. Regardless, there’s no chance of them getting what they had anticipated from the plan, he says. “Whether we look at this pot or that pot, or are they priority or not, there is simply not enough money out there to pay the entire pension deficit.”

Eady notes Ontario is the only province with a pension benefits guarantee fund to help mitigate some of the economic peril for pension plan members. While he suggests other provinces should look into the idea, such a fund is only a start to the solution.

“All of those provinces, going forward, need to find ways to prevent the catastrophe, not to mitigate it after it happens,” he says. “In the United States, the Pension Benefit [Guaranty] Corporation is in the federal jurisdiction and they, in fact, do take action when they see companies in trouble and require the companies to pledge properties or value to pension plans so they don’t end up in the kind of shape that we’re in.”

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