February 14, 2020, New York –Earlier this month, Chapter 11 Debtors, Sears Holdings Corporation, et al (“Debtors”) filed more than 400 preference complaints to recover money from paid pre-petition creditors. The Debtors are continuing to file more and more adversary proceedings with each passing day. The filings of these clawback lawsuits were initiated last year in November 2019.
A preference is a payment made to a creditor by a debtor, within 90 days of the debtor’s bankruptcy filing. Bankruptcy Code section 547(b) allows a bankruptcy trustee or debtor-in-possession to avoid these payments if the transfers were to or for the benefit of a creditor on account of an antecedent debt while the debtor was insolvent.
By way of background, on October 15, 2018 (the “Petition Date”), the Debtors commenced a case by filing a voluntary petition for relief in the United States of Bankruptcy Court for the Southern District of New York under Chapter 11 of the Bankruptcy Code. The Debtors are continuing to operate their business and manage their properties as debtors in possession under sections 1107(a) and 1108 of the Bankruptcy Code. The Debtors’ Chapter 11 cases are being jointly administered for procedural purposes only according to Bankruptcy Rule 1015(b).
According to the court filings, the Debtors were an integrated retailer with significant physical and intangible assets, as well as virtual capabilities, which operated a national network of stores and websites. As of the Petition Date, the Debtors operated 687 retail stores in forty-nine (49) states, Guam, Puerto Rico, and the U.S. Virgin Islands under the Sears® and Kmart® brands and employed approximately 68,000 individuals, of whom about 32,000 were full-time employees, and nearly 36,000 were part-time employees
Usually, in a bankruptcy case, an adversary proceeding starts when a person who is suing (the plaintiff) files a complaint with the bankruptcy court. The complaint lists the facts relating to the lawsuit and requests the court to enter a judgment based on the facts and the law. Once the plaintiff files a complaint, the court issues the summons. The plaintiff serves the summons on the person being sued (the defendant) along with a copy of the complaint.
Once the defendant receives the complaint, he or she has about 30 days to respond, depending on the local rules of the bankruptcy court. To respond, the defendant must file an answer, which relates to the allegations in the complaint. If the defendant does not file a response on or before the deadline, the court enters a default, and the plaintiff can obtain a default judgment.
The cases are pending before the Honorable Judge Robert D. Drain in the United States Bankruptcy Court for the Southern District of New York. The Debtors’ cases are jointly administered under Case No. 18-23538.