Sears Canada Pays Execs Bonuses While Laid-Off Workers Get No Severance

After filing for bankruptcy protection in an Ontario court last month, Sears Canada said Friday that it plans to dole out big bonuses to senior management while the retailer trudges through a painful restructuring, even as thousands of laid-off workers aren"t being paid promised severance.

According to court documents, Sears - which promised to close 59 stores and eliminate 2,900 jobs across the country as part of a court-supervised restructuring process - will pay up to $7.6 million in retention bonuses to 43 executives and senior managers at the company"s head office in Toronto – the same management team that lead the company as sales plummeted and it spiraled into insolvency. As CBC News reports, that works out to an average of $176,744 per employee, although it"s unlikely the money will be divided up so evenly.

Meanwhile, the company said it won"t be paying lower-level employees a severance, which could equate to a loss of tens of thousands of dollars per person. Predictably, the news isn"t going over well with the company"s laid-off workers.

"Why aren"t they able to pay us out the severance if they have this [bonus] money?" says Zobeida Maharaj, a laid-off senior operations manager who spent 28 years working for Sears in the Toronto area.

"They have no moral values, no compassion, nothing in their hearts."

Sears argues that the hefty paydays are necessary to keep the management team from jumping ship as the company restructures.

Sears Canada points out that the bonus payments — known as the Key Employee Retention Program (KERP) — have been approved by the Ontario Superior Court. Offering cash incentives during restructuring is common and often necessary to retain key employees, the company said.

"A lack of a KERP in this scenario would potentially result in a worse outcome and negatively impact a variety of stakeholders," spokesperson Joel Shaffer told CBC News.

In a revelatory twist, the managers who guided the company into bankruptcy stand to profit handsomely by doing so; many could reap enormous bonus payments beyond those mentioned above, including incentive-based payoffs, if they can bring the company through bankruptcy intact.

“The executives and senior managers tasked with guiding Sears through the restructuring will earn up to an additional 25 per cent to 100 per cent, on top of their base salary.

Most will get their bonuses in quarterly installments, receiving 75 per cent of their payments within six months. The final 25 per cent won"t be paid out until a successful restructuring is complete.

Sears also plans to pay retention bonuses of up to $1.6 million to 116 senior store employees who will oversee liquidation sales at locations that are closing. That amount works out to an average of $13,793 each and will be contingent on certain sales targets.”

But try explaining to recently unemployed Sears workers why the compay should be allowed to pay out these bonuses before the severence payments promised to them and thousands of their peers.

[Zobeida ] Maharaj says she can understand paying retention bonuses to store employees working on the front lines. But she argues the big payouts to higher-ups at head office are unfair when ex-workers like her have lost their severance.

"I"m shocked as to how they got this grant permitted to have these people — these headquarters [big-wigs] — fill their pockets even more on the suffering of Sears employees," says Maharaj. "We"re just the little ants at the bottom."

Rosa Dalessandro also wonders why there"s money to pay Sears executives when she"s losing severance that amounts to about a year"s salary.

"It"s very upsetting," says the former Toronto-based sales manager, who worked for the company for 20 years.

Dalessandro was laid off in March and Sears cut off her severance payments last month. This week, the retailer also cut her benefits and she got hit with an unexpected $400 dental bill.

"I"m opening all the bills right now and I"m like, "Wow, wow, wow," because you don"t have money coming in. It"s really affected me and my family," says Dalessandro.

"It"s almost like what they took from us, they"re giving to the executives downtown."

Sears management argues that the bonuses are necessary to ensure that important employees stick around to help rebuild the company as it struggles through bankruptcy.

While it may sound "cold and heartless" to some workers, putting money aside to keep key employees is considered a prudent move, says employment lawyer Adrian Ishak. "These KERPS are a necessary evil."

When a company is insolvent, Ishak explains, creditors line up to try to recoup their losses. While laid-off employees are considered low priority, retention bonuses for key staff — if approved by the court — often get top priority because those employees are needed to help restructure the company.

"Where you really need to incentivize are people at the top levels, those who are going to be responsible for elaborating the plan, as well as implementing it," says Ishak, a partner with Rubin Thomlinson LLP in Toronto.

If key staff manage to successfully restructure Sears, he adds, it will be the best-case scenario for the company"s creditors. "If it"s a continuing enterprise, there will be far fewer losers," he says.

But perhaps the most outrageous injustices can be found at the highest level of Sears senior management, where CEO Eddie Lambert has spent years laying claim to the company’s assets.

As we’ve reported, previously if Sears Canada were to go bankrupt, Lambert - also the company"s largest shareholder - loses his equity stake, but he remains the company’s principal creditor. Already, Lampert has effectively laid claim to enormous amounts of the company’s assets through loans he’s made. His hedge fund, ESL Investments, also owns large stakes in Lands’ End and a Real Estate Investment Trust that gained control of some of Sears’ best properties in a $2.8 billion deal back in 2015, then leased them back to the company.

As is the case in many bankruptcy filings, the owners and managers of the company protected themselves while the company floundered. Now, Sears employees will need to make do without thousands of dollars in wages they had been anticipating.
 

Would Congress Authorize Bankruptcy For Illinois And Other States? Yes, Inevitably

Authored by Mark Glennon via WirePoints.com,

All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident. -Arthur Schopenhauer.

For Illinois or another state to formally go bankrupt, the United States Congress would have to pass legislation.

Would they? I think so.

In fact, bipartisan support is reasonably foreseeable and, ultimately, that legislation is unavoidable, which will trump any debate.

The legal question whether Congress could extend bankruptcy to states was addressed in my earlier article so I won’t rehash that here, except to say I think David Skeel is right. He’s a law professor at the University of Pennsylvania who also serves on Puerto Rico’s oversight board in its bankruptcy-like proceeding authorized by Congress under PROMESA. He wrote wrote firmly that the “constitutionality of bankruptcy-for-states is beyond serious dispute.”

In Congress, reasons will vary for initial political hostility to bankruptcy-for-states.

Some conservatives view state bankruptcy as a form of bailout and will be particularly averse to helping Illinois, which they understandably think deserves its fate. Others may view it as federal intrusion on state sovereignty, which is also what the constitutional objection is about.

But bankruptcy is really the anti-bailout alternative, and turning Illinois around is important to the national economy. We are now a drag on the national economy despite assets that should make us a powerhouse of jobs and production. Illinois GDP has lagged the nation’s significantly for ten years. A federal bailout is happening automatically, at least in a small sense, in the form of food stamps, housing assistance, Medicaid and similar programs. A fresh start for Illinois would reduce its federal tab for those costs and grow Illinois’ tax base for federal revenue.

Respecting state sovereignty, remember Congress would only be offering states the option of using bankruptcy, just as it has already done for municipalities; nothing would be forced on states.

The left will fear the power of bankruptcy to reduce pension payments, but it’s essential to remember the Bankruptcy Code would not be expanded “as is” to states. Changes would be made on which all sides should find common ground.

One such change should allow for progressivity or means testing in some form for any pension cuts. That is, the fat cats should be reduced proportionately more than smaller pensioners who truly need their annuity. The Bankruptcy Code currently treats all unsecured creditors uniformly, including unfunded pension liabilities.

Another possible change that progressives might like is statutory recognition of the concept of “service insolvency.” That’s the idea that failing to provide basic services should count in the initial determination whether a government qualifies for bankruptcy.

The left wouldn’t like how collective bargaining agreements can be terminated along with all other contracts bankrupt parties don’t like. But remember that state policy on collective bargaining and other labor matters is not dictated by bankruptcy. A bankrupt government can opt to keep or renegotiate whatever labor contracts it has.

The municipal bond industry will object fiercely since unsecured debt could be reduced. They’ve already focused on the issue, having earlier sponsored a national ad campaign opposing PROMESA, fearing it would set a precedent for states.

But progressives and free marketeers alike should shed no tears for existing bondholders. They took the risk that bankruptcy law could be changed to impact them.

All will fear higher future borrowing costs. That’s legitimate but finite. Once a bankruptcy proceeding is underway, new lenders get special protection to assure normal operation and, assuming a successful bankruptcy, a clean balance sheet and better credit ratings result. The key will be to line up support for federal legislation as best as possible behind the scenes and move very quickly once it’s proposed.

Won’t all states suffer higher borrowing costs because of the additional risk? In the very long run they will be forced to borrow less to assure the markets of no risk of getting near bankruptcy. Is that such a bad result?

Stop here and assume everything I’ve said so far is wrong. Assume still further reasons why bankruptcy is a bad option — it will be fraught with unknowns and is inherently unfair to those to whom promises were made, which is true.

None of that will matter because it will become evident there’s no alternative. This isn’t about whether bankruptcy is a good option. It’s about whether it’s the only option.

Look no further than pensions to see why. The Illinois Supreme Court has made crystal clear that, under the Illinois Constitution, pension promises can’t be cut for services already rendered, which are Illinois’ $130 billion liability (using silly, official numbers). That leaves only two means to do that — bankruptcy or a state constitutional amendment deleting the pension protection clause. But the amendment might not work anyway because of issues under the United States Constitution, and it would take years to put through even if the General Assembly acted to put it to a public vote, which it has shown no interest in doing.

And the unfunded pension obligations are insurmountable in themselves. That’s why no serious proposal by anybody in the current budget debate has pretended to address those liabilities. They all propose continued annual contributions to the pensions that underfund them, growing the pension debt each year.

Meanwhile, despite that underfunding, Illinois’ death spiral worsens. The tax base shrinks, state revenue drops, people and employers flee and services are cut.

Bankruptcy for Puerto Rico was initially scorned, but PROMESA ended up with bipartisan support, passing 297-127 in the House and 68-30 in the Senate.

One part of their experience is worth particular note. Lawsuits by creditors were stayed — basically, put on hold — under PROMESA. That stay expired on May 1 and a torrent of lawsuits began on May 2, forcing Puerto Rico to file its bankruptcy-like proceeding the very next day. It’s difficult to see how Illinois can avoid a similar wave of lawsuits at some point, and only an organized insolvency proceeding — bankruptcy — can fairly manage and prioritize an overwhelming number of claims.

The sooner we pass through the stages of ridicule and violent opposition, as Schopenhauer called them in that quote above, the less painful this will be for everybody.

Bankruptcy Asset Hunters Confirm What Most Of Us Already Knew: Everyone Lies On Social Media

Earlier this year Curtis Jackson III (aka "50 Cent") raised some concerns with his bankruptcy judge, Ann Nevins, after he posted a couple of ill-advised pictures on Instragram of himself posing with $100,000s of dollars worth of cash.  Apparently Chapter 7 trustees frown upon omitting "buckets of cash" from your official bankruptcy disclosures and then subsequently posing with that cash on social media.  But, after being ordered to appear in court to explain the pictures, an embarrassed 50 Cent was forced to admit that the cash was fake.

As the Wall Street Journal points out, chapter 7 trustees all around the country are finding out that "fiddy" isn"t the bankrupt person "frontin" on social media. 

This October, when Ido Alexander saw photos a young man had posted on social media, he thought he had hit the bankruptcy jackpot.

Mr. Alexander, a Florida lawyer working for a court-appointed trustee, dispatched an appraiser to the man’s home to inspect the expensive-looking gold chains and other jewelry he had been posing in, which he hadn’t declared as assets in court filings.

The appraiser made another discovery that is becoming all too common in the age of social-media braggadocio. “At the end of the day, it was really costume jewelry,” Mr. Alexander says. “It was really disappointing.”

The industry’s detectives—lawyers and accountants who serve as chapter 7 bankruptcy trustees—are learning what most teenagers have already figured out, which is that you can’t always believe what you see on Facebook and Twitter. “Gotcha” moments in which they discover people in bankruptcy posing in glamorous-looking jewelry, piloting boats and ATVs and even displaying buckets full of cash have fallen flat as the items turn out to be fake, or not theirs at all.

Of course, some people are dumb enough to actually hide real assets from the bankruptcy court which rarely works out all that well.  Just ask Gregory Sipe of Virginia who decided to omit nearly $1 million worth of vintage guitars from his asset disclosures and earned himself five months of house arrest and nice little fine to boot.

Trustees say efforts to hide assets don’t happen often, but nevertheless have been going on for years. An Oklahoma man who filed for bankruptcy in 2005 failed to turn over profits from his ownership stake in a television show, the court ruled. The name of the show: “Cheaters.”

Tipped off by a creditor, North Carolina bankruptcy trustee John Bircher III, ran an online search on a Chesapeake, Va., businessman and found a newspaper article about his collection of 250 guitars. The man, Gregory Sipe, had only listed “several collectible guitars” worth $10,000 in his August 2010 bankruptcy filing.

When Mr. Bircher paid Mr. Sipe a visit, he recalls, he discovered a garage full of vintage guitars that later sold for almost $900,000. Lawyer Raymond Tarlton, who represented Mr. Sipe, said his client didn’t disclose the guitars because he thought he could fully pay his debts without selling them.

Mr. Sipe pleaded guilty, was sentenced to five months of house arrest and had to pay $5,900 for falsifying court records.

Who knew that people sensationalize their lives on social media?  We thought we were the last remaining miserable people on the planet...this is a good news day.