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Seventh Circuit affirms lower court order rejecting preferred treatment for critical vendors.(Bankruptcy news: extra, extra!)
The United States Court of Appeals for the Seventh Circuit in the mart case affirmed the District Court's reversal of an order proving Kmart's payment of the pre-petition claims of "critical vendors". Kmart paid approximately $300 million to 2330 "critical vendors" in full payment of their pre-petition claims, in exchange for their agreement to extend "customary trade terms" to Kmart. That left another approximately 2,000 vendors and 43,000 additional unsecured creditors who did not obtain payment of their pre-petition claims and were left with a recovery of approximately 10% of their claims under Kmart's confirmed Chapter 11 plan.
The Seventh Circuit stated that no provision of the Bankruptcy Code, including Section 105(a), relied upon by many courts in approving critical vendor orders, permits a bankruptcy court to disregard the Code's rules on priority and distribution. The Seventh Circuit also rejected the continued viability of the "necessity of payment" doctrine relied upon by courts in approving critical vendor orders, as a basis for the preferred treatment of critical vendors' pre-petition claims. The Seventh Circuit stated that "a ...
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...petition unsecured claims of favored "critical vendors" whose goods and services the debtor...Rule" to a Debtor's Payment of Critical Vendors' Pre-Petition Unsecured Claims...rules by approving the payment of critical vendors' pre-petition unsecured claims...
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Introduction It is not an uncommon scenario. A vendor's key customer slowly evolves into a late payer. Invoices that must be paid in 30 days are paid late: first, in 45 days, then 60 days, then even later. The vendor terminates its relationship with this customer, but is afraid of losing the
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