Pictured: Matthew F. Furlong and Christopher L. Carter 

A recent decision from the US Bankruptcy Court for the Western District of Wisconsin calls into question a fundamental tenet of Retail Finance transactions: that the proper valuation of a retail borrower’s inventory should be determined based on the value of the proceeds that would be expected to be obtained from the inventory in a retail liquidation process.  In In re JMG Ventures, LLC, 2026 WL 656757 (Bankr. W.D. Wis. Mar. 5, 2026), the court applied a “replacement value” standard at plan confirmation and equated a retailer’s replacement value with wholesale cost—the price the debtor would pay to obtain like inventory for the same use—rather than retail, or any other, value.  The application of this standard of valuation can convert portions of claims otherwise fully secured by inventory into under-secured status, increasing cramdown risk and reducing entitlement to post-petition interest, attorneys’ fees, and adequate protection.  Because retail lenders often lend against the value derived from expected retail proceeds, the secured portion of their claims may be significantly lower if a court utilizes wholesale cost for valuation at plan confirmation or otherwise for purposes of claim allowance.

Retail Finance:  “Retail Finance” is a term commonly used to describe the business of lending to businesses engaged in the sale or lease of inventory to third parties.  Retail Finance transactions are frequently provided under an asset-based structure where the amount of credit made available to the retail borrower is measured by reference to a “Borrowing Base.”  The Borrowing Base is generally composed of a variety of elements (inventory, receivables, cash, fixed assets, intellectual property, etc.)—each of which will be ascribed a value aggregated to determine the borrowing base and, ultimately, availability under the credit facility.  Inventory is typically the predominant asset comprising the borrowing base. 

The value of retail inventory for the borrowing base is typically provided by a recognized appraisal firm in the form of an estimated “Net Orderly Liquidation Value” or “NOLV” for the inventory.  The NOLV is frequently provided on a blended basis for all of, or for certain components of, the retailer’s inventory and estimates the net proceeds that would be expected to be obtained in a hypothetical liquidation of the retailer’s inventory if it were sold in a liquidation or store-closing process conducted in a Chapter 11 bankruptcy case.  The NOLV is determined by calculating the anticipated proceeds to be received at retail value minus the costs anticipated to be incurred in connection with the liquidation, including ordinary course expenses (such as rent and payroll) and the extraordinary expenses associated with a liquidation (such as the liquidator’s fee). 

The resulting “sales proceeds” are then expressed as a percentage of the “Cost Value” of the inventory, which is the retail borrower’s recorded cost to acquire the inventory.  Although expressed as a percentage of cost, it is clear that the NOLV itself is derived from a calculation of anticipated proceeds at retail value.  With higher margin inventory, it is likely that the NOLV far exceeds the cost value of such inventory.

A lender to the retailer will typically advance a percentage of the NOLV, which frequently may range from 80%–90% for “first-out” senior lenders to above 100% for “second-out” (or more junior lenders).  (A lender may tolerate lending above 100% of NOLV for a variety of reasons, including competitive dynamics, the applicability of reserves or a block in the borrowing base that brings the effective rate below 100%, or the presence of “boot” collateral not included in the borrowing base that may be available to the lender.)  Thus, it is not uncommon that some inventory lenders are advancing credit to their borrowers in an amount that exceeds the borrower’s cost of that inventory.

Lenders draw comfort in lending “above cost” because they are lending within the NOLV or borrowing base value of the inventory and thus should obtain a 100% recovery for their claim even in a liquidation scenario.  And because their credit extensions are below the anticipated recovery value of their collateral, a lender typically takes comfort that its claim is “fully secured” within the meaning of Section 506 of the United States Bankruptcy Code.

Once a borrower enters bankruptcy, a lender’s status as “fully secured” is critical for a number of reasons—including the ability to accrue post-petition interest, to incur legal and other enforcement expenses for the account of the borrower, and to protect the lender against cramdown risk in a bankruptcy plan of reorganization.  Because a Chapter 11 plan must either be accepted by secured creditors or provide the “indubitable equivalent” of their secured claims, the status of the claim (and value of the underlying collateral) is significant in reorganization efforts.

JMG Decision:  In In re JMG Ventures, LLC, a recent decision from the US Bankruptcy Court for the Western District of Wisconsin, the court held that the appropriate basis on which to value the retail debtor’s inventory for plan confirmation was the “wholesale cost” of such inventory—meaning the price that the debtor would pay to its vendors to acquire the inventory.

In JMG, the debtor proposed a Chapter 11 plan that pays the claims of “secured” creditors in full, but only pays a portion of the claims of “unsecured” (or under-secured) creditors.  Kapitus, an objecting “secured” creditor, was an inventory lender who, although purporting to be fully secured, had a claim that was subordinate to other secured creditors whose claims fully exhausted the debtor’s ascribed value of the collateral.  The critical issue for the court was whether the value of the debtor’s assets should be calculated based on the retail value of the inventory (in which case Kapitus’s claim would be fully secured) or the cost value of the inventory (in which case Kapitus’s claim would be wholly unsecured). 

The controlling legal precedent for this issue was supplied by the United States Supreme Court in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997).  Rash involved a bankruptcy Chapter 13 debtor who proposed to retain a truck (collateral for a loan) for use in its business.  The Rash debtor argued that the value of the truck for cramdown purposes was the foreclosure value, while the secured creditor argued that the appropriate value of the truck was instead the “replacement value.”  In Rash, the Supreme Court looked to the “debtor’s use of the property” and determined that the value was to be determined based on the value to the debtor—namely the “replacement value”—or what it would cost the debtor to obtain another truck.  The Rash court did not proscribe how that “replacement value” was to be obtained—retail value, wholesale value, or some other standard.

In JMG, Kapitus argued that since retail inventory is by definition intended by the debtor to be sold at retail value, the value of the collateral should be determined based on such “use”—i.e., the value in the intended retail sale.  While agreeing that the disposition of inventory was properly a “use” by the debtor, the JMG court was unmoved that this meant that the valuation for such use should be determined by the anticipated retail proceeds.  The court found that Rash stood for the idea that “value from a debtor’s perspective” meant “what the debtor would have to pay for comparable property.”  2026 WL 656757, at *6.  The JMG court pointed to another case, In re Nuts & Boltzs, LLC, 2010 WL 5128961 (Bankr. D.S.C. July 2, 2021), to support the finding that the debtor’s “retail inventory collateral should be valued at wholesale cost for purposes of determining [the creditor’s] secured claim under [the debtor’s] plan of reorganization.”  JMG, 2026 WL 656757, at *8.

It is clear that Rash stands for the proposition that value should be determined based on the value of collateral as used by the debtor. Rash provided multiple potential valuation methods depending on such use, ultimately landing on replacement value in that instance where the collateral (equipment) was used to operate the debtor’s business (i.e., the collateral was not expected to be sold in the ordinary course of business).  It may be argued that the JMG court improperly applied this concept to the different factual circumstances of JMG, where the collateral was intended to be sold in the ordinary course of business.  In essence, the JMG court may not have appropriately distinguished the different uses for valuation purposes.  Further, while pointing to In re Sears Holdings Corp., 51 F.4th 53, 67 (2d Cir. 2022), for support of the “use” determination, the JMG court did not address the fact that the Second Circuit in Sears affirmed a bankruptcy court’s valuation of the underlying retail inventory using NOLV rather than wholesale (or retail) value because of how the debtor intended to use the collateral.

Plan confirmation in JMG has been scheduled for June 2026, at which time this recent decision will be implemented—it is unclear as to whether or not an appeal will follow.  In any event, given the JMG decision, retail inventory lenders should use caution in estimating the amount of their secured claims and the value of the collateral securing their credit extensions.