UPDATE: January 28, 2019: The Unsecured Creditors Committee of Sears Holdings on Saturday filed an objection to ESL's $5.2 billion bid to buy Sears, according to court documents. See below to read the documents.

Dive Brief:

• A committee of unsecured Sears creditors are taking steps to file a lawsuit against ESL Investments and Sears Chairman Eddie Lampert. On Wednesday, the committee filed a motion calling for a hearing to air their grievances regarding Lampert and ESL's role in the demise of the 126-year-old retailer. In a series of documents laid out in five acts totaling 574 pages, the creditors assert the fall of the once iconic retailer mirrors a Shakespearean play.
• Last week, the creditors filed an initial document teeing up the process. Now, they're asking the court for approval to litigate their claims. A court hearing on the matter has not yet been set, according to the documents. The creditors are asking the court to recharacterize ESL's debt as equity and to allow them to recover funds and value lost from ESL's and Lampert's past dealings with Sears, including the spin-off of Land's End and the transfer of real estate to Seritage Growth Properties.
• A Sears Holdings spokesperson declined to comment to Retail Dive on the matter. In a statement emailed to Retail Dive, a spokesperson for ESL Investments called the creditors' claims "misleading or just flat wrong." "ESL has been a constant source of financing for Sears Holdings over the past several years, including through the extension of $2.4 billion in various secured financings to the company," the spokesperson said. "These financings and other transactions involving Sears’ assets were undertaken to facilitate the company’s continued operations and implement its transformation plan."

Dive Insight:

Many of the claims raised by the creditors in the recently filed documents as well as their objection to the sale argue against ESL's $5.2 billion bid to buy Sears. A court hearing to approve the bid is slated for Feb. 4 and objections to the sale must be filed by Saturday, according to other court documents.

This new litigation will run in parallel to Sears' bankruptcy proceedings regardless of whether the bid goes through. If it does, creditors could lose some of their leverage, Joshua Friedman, global head of restructuring data at Debtwire, told Retail Dive in an interview Thursday. In short, if the creditors want to upend the sale, they'll need to file an objection. They can simultaneously try to recover money through the proposed lawsuit, he said.

The creditors specifically oppose a portion of ESL's most recently proposed bid which includes a $1.3 billion credit bid, which would forgive ESL's loans to Sears. The creditors argue that the money being used for the credit bid shouldn't be considered as debt to be repaid, but rather as capital contributions because Sears was in such a dire financial situation when the loans were given. If a judge were to agree, the deal could not go through as proposed, Friedman said.  

If the deal does go through, the creditors would need to pivot to a different method of recovering the funds they feel they're owed. "As opposed to recharacterizing [the debt as equity] you'd have to unwind the transaction or force [ESL and Lampert] to pay money back to some degree," he added.

The move on the behalf of creditors shouldn't come as a surprise, according to Friedman. "For years people were talking about a Sears bankruptcy and what would happen and you knew these transactions were going to get challenged," he said. "But on the flip side, being this is a company largely controlled by one party, you know they're very aware of the potential for that being challenged."