Capital Markets

Sears to Appeal Bond-redemption Verdict

Retailer will take a $73.5 million pre-tax charge in the fourth quarter.
Stephen TaubFebruary 5, 2007

Sears Holdings announced that it will appeal Friday’s verdict in state court in Dallas, in which jurors found that the retailer acted improperly in redeeming certain bonds following the 2004 sale of its credit-card business.

Jurors awarded the plaintiffs, a group of institutional bondholders including J.P. Morgan Securities and subsidiaries of American International Group, $73.5 million. Sears also announced that it will take a pre-tax charge in that amount in the fourth quarter.

In February 2004, following the sale of its credit-card business several months earlier, Sears actually sued bondholders regarding its ability to redeem about $700 million in debt. Sears argued at the time that it was permitted to retire the debt before it maturity under certain circumstances, including a drop in customer receivables below a certain level, which Sears claimed was the case following the sale of the credit-card unit.

According to Sears, the Dallas judge issued a directed verdict in its favor on three of the four bondholder claims: that Sears made misrepresentations about the bonds in its public filings, that it was unjustly enriched by the redemption, and that it was estopped from redeeming them.

A fourth count, however — that Sears’ redemption of the bonds constituted a breach of contract — was permitted to go to the jury, which found in the bondholders’ favor.

“The company continues to believe that it was fully entitled to redeem the bonds pursuant to the terms of the bond indenture and that summary judgment or a directed verdict should have been granted on this fourth count as well,” Sears asserted on Monday.

Sears added that it will request the trial court to rule in its favor, notwithstanding the jury verdict, and that if necessary it will appeal the decision.