Kmart Bankruptcy: Lessons for Lessors and Secured Parties

A currently pending proceeding in the massive Kmart bankruptcy challenges those underpinnings of certainty through the imaginative invocation of the 'equitable powers' of the Bankruptcy Court by a debtor-in-possession who may succeed in bringing about a result which is, by any standard, unfair, unanticipated and 'inequitable' ' at least in any commercial meaning of the word. [Note, On January 22, 2002, Kmart and its affiliate debtors filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Illinois seeking relief under Chapter 11 of Title 11 of U.S.C., 11 U.S.C. '' 101, et seq as amended. On January 24, 2003 Kmart filed its Joint Plan of Reorganization. The Plan was confirmed and Kmart emerged from Bankruptcy on May 5, 2003. Even though Kmart has emerged from Chapter 11, the Plan of Reorganization provided that if a motion for assumption was pending at the time of confirmation, that the Plan would not control, and the motions would.]

By way of background, Kmart entered into a Master Lease Agreement with Varilease Technology Group, Inc. on October 5, 2000. Kmart, at different times thereafter, entered into 26 separate and distinct Equipment Schedules pursuant to the Master Lease. The pieces of equipment covered on each Schedule were various items of photo-lab processing equipment, manufactured by Kodak and Noritsu, for use in different Kmart stores. Each Schedule: (a) incorporated the terms and conditions of the Master Lease, (b) described the equipment covered by serial number, and (c) listed a location where each piece of equipment was located.