Sears Canada Inc. creditors are targeting Eddie Lampert, its former controlling shareholder and the chief executive of its U.S. namesake Sears Holdings Corp. , over payments he received before the Canadian business collapsed last year.
A group of unhappy pensioners served court papers Friday in Ontario’s Superior Court of Justice asking for the appointment of a trustee in Sears Canada’s bankruptcy proceeding for the purpose of digging up additional funds for creditors. The proposed trustee would scrutinize nearly $3 billion in shareholder dividends paid out since 2005, of which Mr. Lampert and his hedge fund ESL Investments Inc. were “major beneficiaries,” according to the papers.
Installing a trustee is a popular tool for creditors to try to claw back prebankruptcy payments through lawsuits or settlements. Lou Brezezinski, a lawyer representing former Sears Canada showroom dealers, said the trustee would target Mr. Lampert specifically, in particular his share of a $509 million distribution in December 2013.
“We’re going after him,” Mr. Brezezinski said in an interview.
Mr. Lampert responded to questions about Sears Canada, the dividends and the retailer’s pensions in a blog post Sunday entitled “Just the Facts—Sears Canada,” where he expressed regret over the company’s failure and blamed its demise, in part, on Sears Canada’s board, which pursued an “unwise” cash-consuming strategy to drive sales growth in the face of a rapidly changing retail environment.
Sears Canada filed for protection from creditors in June under the Companies’ Creditors Arrangement Act, Canada’s equivalent of chapter 11 bankruptcy, after operating at a loss since 2014. The board of directors chose to liquidate the company instead of accepting a private-equity-backed bid by its chairman Brandon Stranzl that was designed to preserve some stores and keep thousands of workers employed.
Creditors don’t yet know how much cash was generated from those liquidation sales to split among competing groups, Mr. Brzezinski said. But he said the proceeds likely won’t come close to covering the company’s debts, including a C$267 million pension funding gap and payments owed to employees and landlords. Retirees were told by an Ontario regulator in December they would recover 81 cents on the dollar on their pension claims, unless more money was made available for the underfunded plan.
The bankruptcy became engulfed in controversy when Sears Canada paid out court-approved bonuses while withholding severance payments to laid-off employees. Mr. Lampert considered—but then abandoned—a potential joint bid with the retailer’s next-largest shareholder, Bruce Berkowitz, a rare retreat for the two hedge-fund managers from the Sears brand name.
Mr. Stranzl pitched his proposal, backed by Blackstone Group LP, as a way to save thousands of jobs and shrink the size and number of Sears Canada stores. But the company’s board said that retaining those employees would have cut into recoveries for other creditors. Lenders also favored liquidation as the surest way to stop a massive cash burn and settle Sears Canada’s top-ranking debts.
—Pat Fitzgerald contributed to this article.
Write to Andrew Scurria at Andrew.Scurria@wsj.com