Sears Canada retirees ask court for rest of retailer’s cash to help fund $260 million pension shortfall

Debts to secured creditors have already been repaid

Sears Canada's last remaining stores closed their doors for the final time on Jan. 14 this year.Canadian
Press

The Canadian Press

July 23, 2018

Sears Canada retirees ask court for rest of retailer’s cash to help fund $260 million pension shortfall
Retirees of Sears Canada Inc. have asked an Ontario court to award them the remainder of the former
department store chain’s cash to help fund their pension shortfall.

A motion filed in the Ontario Superior Court of Justice on Friday claims about 18,000 Sears retirees will
receive smaller pension benefits than they earned due to a roughly $260 million shortfall in the plan.

The motion says the former employees should be entitled to the money ahead of the retailer’s other
remaining creditors. Debts to secured creditors have already been repaid.

The motion says the retirees are claiming nearly $730 million in total, including money for health, life
insurance and other benefits for retirees.

A recent report by the court appointed monitor for the retailer’s insolvency FTI Consulting Canada Inc.
shows Sears Canada’s estate has about $135 million in cash.

The department store chain’s last remaining stores closed their doors for the final time on Jan. 14 this
year.
 ©

The hard truth is that Sears pensioners don’t deserve special treatment in bankruptcy

While some large creditors may be better positioned to absorb the hit of the bankruptcy of a company
that owes them money, many smaller creditors are just as vulnerable as pensioners

Disgruntled Sears employees gather at the Ontario Superior Court in Toronto on July 13. Sears laid off
2,900 employees without severance in June.Frank Gunn/The Canadian Press

Special to Financial Post

John Finley

November 21, 2017

I am sure that Terence Corcoran’s heart was in the right place when he suggested that Sears pensioners,
among others, should be paid in full when the company they used to work for goes bankrupt
(“Pensioners are not lenders,” Nov. 4). But, sadly, that would mean that equally deserving creditors,
many of them owners of small- to medium-sized businesses, would be left with nothing. And that’s not
fair.

The argument that pensioners are more vulnerable than other creditors and therefore deserve
heightened protections has some emotional and ostensibly moral appeal. And while it is true that some
large creditors, such as the chartered banks, may be better positioned to absorb the hit of the
bankruptcy of a company that owes them money, many smaller creditors are just as vulnerable and just
as impacted by a corporate bankruptcy as a Sears pensioner.

The bankruptcy of Target Canada is a case in point. The 45-page list of creditors that existed when that
firm crashed and burned includes a large number of small- and medium-sized businesses. Among them
is a numbered company that lists a home in St. Catharines, Ont. as its business address. It was owed
over $11,000 by Target Canada. I have absolutely no idea what this business does or did, nor what it
supplied to Target Canada, but I suspect strongly that $11,000 is a substantial sum of money to the
family that owns the company.

I find it illogical and unfair to advocate that this family should get less than its fair share of the pie
because it isn’t as “deserving” as a pensioner. What if that pensioner happens to be a former Sears
executive with an annual pension north of $200,000? Does that change the morality calculation?
Perhaps we should further divide pensioners by having everyone submit personal financial statements
and a panel of government experts could categorize them as being “deserving” and “less deserving”?

Smaller creditors are just as impacted by bankruptcy as a Sears pensioner

Many small-business owners work their entire lives earning very low profits and the businesses they
build are essentially their retirement nest eggs. Many are disappointed to find they can’t sell their
businesses for as much as they had hoped because they ascribed a value to their businesses based upon
how hard they worked rather than how much profit the business actually earned. The concept of writing
off tens of thousands of dollars or perhaps even hundreds of thousands of dollars when the Targets of
the world go bankrupt means writing off money from their income and indirectly from their retirement
fund. So, in a sense, they too are “pensioners” who have been wronged and left in the lurch. I would
argue there is no moral distinction between them and a Sears pensioner.

Of course, it would be political suicidal for politicians not to side with aggrieved pensioners. Prime
Minister Justin Trudeau issued a statement assuring us that “his heart goes out to the workers affected.”
Unfortunately, our elected officials offer nary a comforting word to those home businesses that also find
themselves shortchanged, sometimes catastrophically.

Bankruptcy is intended to treat creditors equally. It is a basic principle of fairness and equity. Yes, former
U.S. president Barack Obama moved to protect pensioners when General Motors went bankrupt, but
that was because he favoured union members over other creditors for obvious political reasons. That
certainly doesn’t make it right.
The Sears case highlights the critical need for employees to have more certainty with respect to their
retirement monies. This can only come by transitioning away from the illusion of guaranteed monthly
checks (defined benefit plans) and into individual pension accounts (defined contribution plans).
Markets and circumstances are too volatile. What was once affordable quickly becomes unaffordable,
often through no fault of the employer (the TSX fell 35 per cent in 2008; imagine the pension chaos that
caused). There is simply too much risk on employers to make such commitments and too much risk on
employees to assume such commitments will be honored.

As for what to do today, there are no winners in a bankruptcy. All we can do is abide by the principle
that everybody loses proportionately and equally. As tragic as that is, it’s the least bad choice.

John Finley is a former lawyer who now teaches business law at Niagara College in St. Catharines, Ont