A legal dispute over the handling of insurance contracts on Sears Holdings Corp.’s debt is putting the effectiveness of such instruments in doubt and raising questions about fairness in the bankruptcy process, the Wall Street Journal reported. Holders of credit-default swaps which insured against Sears’s collapse contend a debt auction related to the swaps didn’t generate top dollar for Sears and its creditors as required in bankruptcy. Instead, these investors say in court filings, the auction rewarded a hedge fund that had sold credit insurance on the company: Cyrus Capital Partners, which is allied with Edward S. Lampert, who has run Sears for 13 years. The retailer’s debt auction is being challenged in bankruptcy court; a hearing on the dispute is scheduled for today in White Plains, N.Y.
