Magazine article Business Credit

Seventh Circuit Affirms Lower Court Order Rejecting Preferred Treatment for Critical Vendors

Magazine article Business Credit

Seventh Circuit Affirms Lower Court Order Rejecting Preferred Treatment for Critical Vendors

Article excerpt

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 'doctrine of necessity' is just a fancy name for a power to depart from the Code. …

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