Following the Sears Holdings bankruptcy, we have been named as a defendant in
litigation that could adversely affect our business and financial condition, divert managements attention from our business, subject us to significant liabilities, including remedies that may be imposed as a result of a finding of fraudulent
conveyance, and/or reduce or delay the payment of shareholder distributions.
Claims under the Sears Holdings bankruptcy, as well
as any other similar claims, would need to be resolved prior to completion of the plan of sale, and any damages paid by the Company thereunder would reduce the shareholder distributions payable to our common shareholders. Any of these claims, if
resolved unfavorably for the Company, could have a material adverse impact on the timing or amount of any shareholder distributions, or could prevent the Company from making any such shareholder distributions altogether.
On April 18, 2019, at the direction of the Restructuring Sub-Committee of the Restructuring
Committee of the Board of Directors of Sears Holdings, plaintiffs Sears Holdings, Sears, Roebuck & Co., Sears Development Co., Kmart Corporation, and Kmart of Washington, LLC filed a lawsuit (the Litigation) in the United States
Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) against, among others, Edward S. Lampert, ESL Investments, Inc. and certain of its affiliates and investors, Fairholme Capital Management, L.L.C., certain
members of the Sears Holdings board of directors, and the Company, the Operating Partners, and certain of our affiliates and subsidiaries (the Company, the Operating Partnership, and certain of our affiliates and subsidiaries, collectively, the
Seritage Defendants). The Litigation is dual captioned as In re: Sears Holdings Corporation, et al., Case No. 18-23538 (RDD) and Sears Holdings Corporation et al., v. Lampert et al., Case No. 19-08250 (RDD). The initial complaint has been superseded by the Amended Complaint, as described below.
On October 15, 2019, the Bankruptcy Court entered an order (the Confirmation Order) confirming the Modified Second Amended
Joint Chapter 11 Plan of Sears Holdings and its affiliated debtors (the Chapter 11 Plan). Pursuant to the terms of the Confirmation Order, upon the effective date of the Chapter 11Plan, a liquidating trust will be formed, and the
Litigation will vest in the liquidating trust. The Confirmation Order further provides that, prior to the effective date of the Chapter 11 Plan and the formation of the liquidating trust, the Litigation will be controlled by five litigation
designees selected by Sears Holdings and the Official Committee of Unsecured Creditors (the Creditors Committee). For further information, refer to the Chapter 11 Plan, Confirmation Order and liquidating trust agreement,
each of which has been publicly filed with the Bankruptcy Court.
On November 25, 2019, the Creditors Committee filed a first
amended complaint (the Amended Complaint) in the Bankruptcy Court. The Amended Complaint alleges, among other things, that certain transactions undertaken by Sears Holdings since 2011 (including the July 2015 transactions giving rise to
Seritage, the execution of the Master Lease with Sears Holdings (the Original Master Lease), and the acquisition of real estate from Sears Holdings) constituted actual and/or constructive fraudulent transfers and/or illegal dividends by
Sears Holdings and that the real estate acquired by Seritage from Sears Holdings in July 2015 was worth hundreds of millions of dollars more than the purchase price paid. (The Company notes the original complaint filed in the Litigation alleged,
among other things, that the that the real estate acquired by Seritage from Sears Holdings in July 2015 was worth at least $649 to $749 million more than the purchase price paid.) The Amended Complaint further alleges that certain releases
provided to Seritage and certain other defendants in connection with the Sears Holdings derivative litigation in the Delaware Court of Chancery in 2017 should be avoided and/or declared null and void as an actual and/or constructive fraudulent
conveyance. The Litigation seeks as relief, among other things, declaratory relief, avoidance of the allegedly actual and/or constructive fraudulent transfers and either (i) rescission of the transfers of real estate from Sears Holdings to
Seritage in 2015 and return of the proceeds of the transactions between Sears Holdings and Seritage, or, in the alternative, (ii) payment by Seritage to Sears Holdings of damages at least equal to the value of the transferred property.
On February 21, 2020, the Seritage Defendants filed a partial motion to dismiss seeking dismissal of the claims in the Amended Complaint
relating to the release received in the Sears Holdings derivative litigation unjust enrichment and equitable subordination. Briefing and oral argument on the motions were completed in August 2020, and the parties are awaiting a decision.
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