In Re: Sears Holdings Corporation

Background

Sears Holdings Corporation and its affiliates filed for Chapter 11 bankruptcy protection on October 15, 2018. They later agreed to sell substantially all of their assets to Transform Holdco LLC under an Asset Purchase Agreement. The sale closed on February 11, 2019.

The agreement generally excluded all bank accounts, cash, and cash equivalents from the assets sold. It also addressed assets held by Sears’s non-debtor Indian and Hong Kong subsidiaries. An amendment allowed Transform to elect to acquire the equity interests in those subsidiaries instead of acquiring their assets and assuming their liabilities through an asset sale. The amendment stated that the equity interests would be treated as acquired foreign assets.

In 2020, Sears discovered that the foreign subsidiaries held approximately $6.3 million in cash on the closing date. Sears demanded that Transform return the money, asserting that it was an excluded asset. Transform refused. The bankruptcy court ordered Transform to return the cash, and Transform appealed.

Contract interpretation

The district court applied Delaware law, as required by the agreement. Under Delaware law, an unambiguous contract is interpreted according to its plain meaning and read as a whole.

Transform argued that its election to purchase all of the foreign subsidiaries’ equity interests gave it the subsidiaries’ assets, including assets that the agreement otherwise excluded. The district court rejected that interpretation. It held that Section 2.13(a) allowed Transform to use a stock-sale structure instead of an asset-sale structure, but did not change which assets were included in the negotiated transaction.

The court emphasized that the agreement specifically identified the foreign subsidiaries’ equity interests as acquired foreign assets. It also noted that the agreement expressly addressed certain liabilities of an acquired foreign subsidiary but did not similarly add excluded assets to the acquired assets. The court concluded that the approximately $6.3 million in cash remained an excluded asset.

Because the agreement was unambiguous, the district court did not decide whether the bankruptcy court improperly considered evidence outside the written agreement. It stated that any such consideration would have been harmless.

Acquiescence

Transform also argued that Sears had acquiesced in Transform’s receipt of the cash. Acquiescence is an affirmative defense requiring the party asserting it to show, by a preponderance of the evidence, that the other party knew its rights and the material facts and then acted in a way that approved or accepted the challenged conduct.

The district court held that Transform did not meet that burden. The record supported the bankruptcy court’s finding that Sears did not know the true amount of cash held by the foreign subsidiaries until shortly before demanding its return. The court therefore found no clear error in the bankruptcy court’s conclusion that Sears had not acquiesced.

The district court also held that Transform had waived an argument challenging the use of one declaration because Transform had not properly raised that argument in the bankruptcy court. It further held that the bankruptcy court had discretion to decide the issue without an evidentiary hearing because the record contained enough evidence.

Disposition

The district court affirmed the bankruptcy court’s June 15, 2021, order. The clerk was instructed to terminate the appeal and close the case.