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Campo v. Sears Holdings Corp.

July 21, 2009


The opinion of the court was delivered by: Lewis A. Kaplan, District Judge.


Lead plaintiffs, former shareholders of Kmart Holding Corporation ("Kmart"), bring this purported class action against Sears Holdings Corporation ("Sears"), Edward S. Lampert, and Julian Day. They claim that defendants knowingly made statements that substantially undervalued Kmart's real estate assets during and in the immediate wake of its reorganization in order artificially to suppress the price of the company's stock. The matter is before the Court on defendants' motion to dismiss the Consolidated Class Action Complaint (the "Complaint") on the ground that it fails to state a legally sufficient claim. For the reasons set forth below, the motion is granted.


The Parties

Kmart, the well known "big box" retailer, filed for Chapter 11 protection on January 22, 2002,*fn1 and emerged on May 6, 2003.*fn2 Under the plan of reorganization (the "Plan"), all of the outstanding shares of its common stock were cancelled, and new shares in the reorganized company were issued to various creditors of the bankrupt estate.*fn3

Plaintiffs claim to represent a class of persons who sold Kmart shares in the period May 6, 2003, through September 29, 2004 (the "Class Period"). All class members therefore necessarily came to own their Kmart shares either through its distribution to them as creditors of the bankrupt estate pursuant to the Plan or by some post-reorganization transaction.

The defendants in this case are (1) Sears, which in 2005 allegedly succeeded to Kmart's liabilities in consequence of a transaction in which Kmart acquired Sears, Roebuck & Co. ("Sears, Roebuck"), (2) Mr. Lampert, who served as chairman of the board of Kmart from the date of its emergence from Chapter 11 on May 6, 2003, until March 2005,*fn4 and (3) Mr. Day, who was Kmart's president and chief operating officer from March 2002 until January 2003 when he became its chief executive officer, serving in that capacity until October 2004.*fn5

Factual Allegations

Before turning to the allegedly false and misleading statements, it is useful to outline plaintiffs' claim. The following factual allegations, which are assumed true for the purpose of this motion, are drawn from the Complaint and other documents properly before the Court on the motion.*fn6

Kmart's Leases

By the 1980s, it became increasingly attractive to many commercial entities to rent rather than buy real estate.*fn7 Kmart in particular began selling and then leasing back its property, structuring the lease terms to its own advantage.*fn8 In many instances, its leases established very low, fixed rents for terms that often exceeded seventy-five years.*fn9 By 2002, these leased store locations were "extraordinarily valuable."*fn10 While the lease terms generally were not publicly available, they were accessible to senior management and members of Kmart's board through reports generated by Kmart's real estate market strategy ("REMS") department.*fn11

The Bankruptcy

As noted, Kmart and thirty-seven of its United States subsidiaries filed for Chapter 11 bankruptcy protection in early 2002.*fn12 While in bankruptcy, Kmart retained Rockwood Gemini Advisors ("RGA") to assist the company in analyzing and evaluating its real estate properties and Abacus Advisory & Consulting Corp., LLC ("Abacus") to assist with the liquidation of the inventory at a number of its stores.*fn13 With the assistance of its real estate advisors, Kmart sought to auction approximately six hundred leases, of which it succeeded in selling sixty-seven outright and "designation rights" to fifty-six others for up to $138 million.*fn14

Investments of Messrs. Lampert and Day

Shortly after Kmart filed for bankruptcy, Mr. Lampert, a former chairman of Kmart who no longer was affiliated with the company at the time, and the hedge fund that he managed, ESL Investments, LLC ("ESL"), began acquiring Kmart debt at distressed prices, ultimately buying about $1.8 billion in unsecured claims for an undisclosed amount.*fn15 By August 2002, ESL had acquired sufficient debt to seek a place on one or more of the committees involved with Kmart's bankruptcy proceeding. In September 2002, ESL was appointed to the Financial Institutions Committee ("FIC"), which acted in the bankruptcy proceeding on behalf of institutions with holdings in Kmart at that time.*fn16

On January 24, 2003, Kmart filed the Plan, the disclosure statement for which contained a liquidation analysis that reported that RGA estimated that Kmart's leases could be sold for $293.2 to $461.5 million.*fn17 The disclosure statement further indicated that, upon Kmart's emergence from bankruptcy, its financial statements would employ fresh start accounting.*fn18 Under this method, it explained, the company's "assets and liabilities [would] be stated at their reorganization value, which approximates fair value at the date of emergence from Chapter 11," and that the value of its non-current assets would be reduced on its balance sheet to account for "negative goodwill," or the difference between the fair market value of Kmart's net assets and the value ascribed to the reorganized company.*fn19

At the same time, Kmart entered into a so-called investment agreement pursuant to which it (a) undertook, upon approval of the Plan and the company's emergence from Chapter 11, to issue 14 million new shares of common stock to affiliates of ESL and Third Avenue Partners ("TAP") at $10 per share,*fn20 and (b) granted ESL a two-year option to purchase 6.6 million new shares of common stock at $13 per share.*fn21

The bankruptcy court confirmed the Plan on April 23, 2003.*fn22 Kmart emerged from bankruptcy days later, and Mr. Lampert became its chairman.*fn23 Upon the closing of the investment agreement transactions, Mr. Lampert, through ESL, owned approximately 51.4 percent of Kmart's stock.*fn24

On September 10, 2003, Mr. Day acquired options to purchase approximately 1.5 million new Kmart common shares at $10 to $20 per share.*fn25 In 2005, he exercised options to purchase approximately 980,000 shares after Kmart's merger with Sears*fn26 and then sold those shares for $145 million, or at approximately $147 per share.*fn27

The Complaint alleges that defendants undervalued Kmart's real estate assets after Kmart emerged from bankruptcy in order to conceal the fact that Mr. Lampert had obtained control of the company at a price far below fair market value and to allow Messrs. Lampert and Day to acquire additional shares of Kmart at bargain prices.*fn28

The Allegedly False and Misleading Statements

Plaintiffs allege that defendants made false and misleading statements during the Class Period in a number of documents filed with the Securities and Exchange Commission ("SEC") in an effort to conceal the true value of Kmart's real estate portfolio.*fn29 For example, in its June 16, 2003 Form 10-Q and subsequent filings, Kmart stated that its plant, property, and equipment ("PPE") was worth $4.623 billion and that it had reduced that value by $4.613 billion "to adjust assets and liabilities to fair market value ('FMV'), and reflect the write-off of Predecessor Company's equity and the application of negative goodwill to long-lived assets."*fn30

Thus, Kmart's balance sheet carried its adjusted net PPE at $10 million.*fn31 Plaintiffs argue this and like statements misrepresented the true value of Kmart's real estate assets, which, plaintiffs allege, actually was $9 to $18 billion.*fn32 They contend that this understatement resulted in the prices at which plaintiffs sold shares being lower than they would have been had the true value of Kmart's real estate assets been disclosed.*fn33

The 2004 Store Sales

On June 4, 2004, Kmart announced that it would sell up to twenty-four of its stores to The Home Depot, Inc. ("Home Depot") for up to $365 million. Several weeks later, it announced the sale of up to fifty-four additional stores to Sears, Roebuck for up to $621 million.*fn34 Ultimately, Kmart sold eighteen stores to Home Depot for $271 million and fifty stores to Sears, Roebuck for $575.9 million.*fn35 Plaintiffs allege that, as a result of these announcements, the price of Kmart common stock rose from its closing price of $54.86 per share on June 3, 2004, the day before the ...

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