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Critical Vendor Motions
Chapter 11 debtors often file motions, usually at the outset of a case, that seek to pay prepetition unsecured amounts owed to 'critical' vendors that supply debtors with essential goods and services. Debtors argue that, unless such motions are granted, vendors will cease supplying them, and thus jeopardize the their ability to reorganize. Court orders that grant critical vendor motions require vendors to continue supplying debtors on specified business terms in return for payment of the prepetition amounts owed.
Some courts grant critical vendor motions, while others do not. Courts that grant the motions typically cite Bankruptcy Code Sec. 105(a) and principals of equity in support of their decisions. Courts that deny the motions often conclude that 1) the Bankruptcy Code does not authorize payment of vendors' prepetition claims prior to confirmation of a Chapter 11 plan, and 2) the payment of such claims ignores the priority scheme set up by Congress in the Bankruptcy Code.
In April, a district judge in the Kmart Corporation bankruptcy case reversed a bankruptcy court's decision that let Kmart pay millions of dollars to critical vendors. Capital Factors, Inc. v. Kmart Corp., 291 B.R. 818 (N.D. Ill. 2003). At press time, Kmart was appealing the decision to the Seventh Circuit Court of Appeals. If the decision stands, Kmart will likely need to seek the return of the monies already paid to thousands of vendors.
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