Appellate court rules on valuation of inventory in Sears bankruptcy

BVWireIssue #242-3
November 16, 2022

collateral, discount, federal bankruptcy court, liquidation, retail, book value, burden of proof, inventory, liquidation method, replacement value

Sears (the Amazon of its day) recently emerged from bankruptcy after four years and thousands of court filings. One of the many issues involved in the bankruptcy was the valuation of inventory.

Wide disparity: Second-lien holders, entitled to payment only after the debts of first-lien holders have been discharged, argued that the value of the collateral that secured their claims, as measured on the petition date, vastly exceeded what they had been paid and that they were accordingly entitled to priority payment of the difference. At trial, all parties put on evidence as to the value of the assets at the petition date. The differences varied widely. “The differences among these values turned primarily on how the experts calculated the revenue Debtors could expect to earn from selling their inventory.”

The appeal dealt primarily with this inventory issue and how it should be valued. The Bankruptcy Court, affirmed by the district court, used a net orderly liquidation value (NOLV) to determine the value at the petition date. The appellate court affirmed the judgments of the two lower courts.

The case is ESL Invs., L.P. v. Sears Holdings Corp. Debtor-Appellee (In re Sears Holdings Corp.), 2022 U.S. App. LEXIS 28584, and a case analysis and full opinion can be found on the BVLaw platform.

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