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Weil Wins Unanimous, Multi-Hundred Million Dollar Second Circuit Victory Affirming Inventory Valuation in Sears Bankruptcy

On October 14, 2022, Weil secured a unanimous decision of the U.S. Court of Appeals for the Second Circuit, on an issue of first impression, completely affirming a bankruptcy court’s collateral valuation that meant the Sears estate – one of the largest filed in 2018 – had to pay second lien lenders $0 instead of the $718 million they demanded. The decision follows Weil securing an affirmance in the district court of our initial victory before the bankruptcy court, a trifecta that extends a long line of favorable restructuring, litigation and appellate outcomes we have obtained in the retail sector.

The case arises out of the bankruptcy court’s valuation of the Sears inventory that served as collateral for the second lien lenders. The second lien lenders were provided adequate protection to preserve the value of their liens and would have been entitled to a super-priority administrative claim to the extent the value of the inventory decreased from the date of the petition by more than their $433 million credit bid to buy the company. The second lien lenders argued that the bankruptcy court ignored U.S. Supreme Court precedent that required it to use a replacement value because Sears would retain and use the inventory.

But Weil successfully argued, in all three courts, that Supreme Court precedent actually required the court to consider the value of selling the inventory because that was the proposed disposition of the collateral. With the proper valuation guidepost set, the Second Circuit concluded that the bankruptcy court reasonably used a net orderly liquidation value (or NOLV) that valued the collateral somewhere between a going-concern sale or forced liquidation, which were the most likely scenarios on the petition date. The Second Circuit also agreed with Weil that the second lien lenders failed to carry their burden to establish the value of the so-called non-borrowing base inventory (certain types of inventory that creditors are not willing to lend against), as well as the likelihood that letters of credit would be drawn down. The decision is significant and broadly applicable in retail industry bankruptcies, where much of a debtor’s collateral is its inventory.

The Weil team was led by Greg Silbert, Co-Head of Weil’s national Complex Commercial Litigation practice and Co-Head of the Firm’s Appeals and Strategic Counseling practice, who argued the appeal. The team also included David Lender, Co-Chair of Weil’s global Litigation Department, and Complex Commercial Litigation associates Robert Niles-Weed and Jake Rutherford