Second Circuit Says Orderly Liquidation Value Is Proper for a Retailer in Chapter 11
ABI, Rochelle’s Daily Wire.
When an orderly going-out-of-business sale is a “genuine possibility” for a retailer in chapter 11, the Second Circuit says that secured lenders’ collateral can be valued as of the filing date at the orderly liquidation value, less expenses, not at the higher book value or replacement cost.
The Second Circuit’s October 14 opinion is an extrapolation (or perhaps departure) from Rash, where the Supreme Court commanded in a chapter 13 case that the value of collateral retained by the debtor must be based on the “actual use” of the collateral. Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997). The Second Circuit worked from the proposition that the valuation must be made as of the filing date. At that time, the appeals court believed it was reasonable to expect a going-out-of-business sale rather than a going-concern sale.
The opinion by Circuit Judge Richard J. Sullivan was 13 months in the making. It involves the chapter 11 reorganization of Sears, the retailer that operated almost 700 stores when the filing took place in 2018.
Unable to reorganize on its own, the debtor sold the business as a going concern to its largest secured creditor for about $5.2 billion. The buyer paid for the assets largely with non-cash consideration, including a $433.5 million credit bid. Under an intercreditor agreement, second-lien lenders were obliged to participate in the credit bid.
As Judge Sullivan said, the credit bid “for practical purposes forgave debt that the Debtors owed to [the first- and second-lien lenders] in exchange for a dollar-for-dollar reduction in the purchase price.”
The second-lien lenders, however, contended that the $433.5 million credit bid fell “far short” of the value of the collateral on the petition date. Rather, they argued there had been a diminution in the value of their collateral, entitling them to a super-priority claim.
To resolve the controversy, Bankruptcy Judge Drain was called on to fix the filing-date value of the collateral and then subtract the obligations to the first-lien lenders as of the filing date. Judge Sullivan said that the second-lien holders would “have a viable section 507(b) super-priority claim only if this figure exceeds the $433.5 million credit bid [that the buyer] already recouped in the transaction.”
Still awake? LOL, read the full opinion at ESL Investments Inc. v. Sears Holding Corp. (In re Sears Holding Corp.), 20-3343 (2d Cir. Oct. 14, 2022).
