The 'Doctrine of Necessity': Missing Authority

A bankruptcy court lacks “either the statutory or equitable power to authorize” the debtor's payment of pre-bankruptcy nonpriority unsecured claims. So held United States District Judge John F. Grady on April 18, 2003 in Capital Factors, Inc. v. Kmart Corp. (In re Kmart Corp.), 291 B.R. 818, 823 (N.D. Ill. Apr. 8, 2003); see also Capital Factors, Inc. v. Kmart Corp. (In re Kmart Corp.), 2003 U.S. Dist. LEXIS 17437 (N.D. Ill. Sept. 29, 2003). The Seventh Circuit affirmed on Feb. 24, 2004, with a blistering attack on the bankruptcy court's failure to explain its reasoning and to analyze the law (” … this order was unsound no matter how one reads” the Bankruptcy Code (the Code)). In re Kmart Corp., 2004 U.S. App. LEXIS 3397, *16 (7th Cir. 2004). The clear, no-nonsense opinions of the district court and the Court of Appeals reversed four bankruptcy court orders, which were based on findings that the payments were “necessary,” “integral,” and had a “good business justification.” 291 B.R. at 822, n.4. The bankruptcy court had authorized the Chapter 11 debtor-in-possession, Kmart, to pay certain prebankruptcy vendors the debtor deemed critical — grocery, egg and dairy suppliers. Id. at 820. A few weeks later, issuers of pre-petition letters of credit and liquor vendors were added to the debtor's list of “critical” creditors who could be paid with court approval. Id.

Why is the Seventh Circuit's Kmart decision noteworthy? The Kmart case is large and visible, while the payments reportedly totaled in excess of $300 million. More importantly, the appellate courts in Kmart were correct. As we explain below, the bankruptcy court's orders lacked a basis in the Code. Similar orders in other cases, typically confined to certain districts, have led to mischief, abuse of the bankruptcy process (eg, the debtor's favoring friendly creditors), and a general distrust of judicial administration in bankruptcy cases (eg, “what do we have to do to be considered a 'critical vendor'?”). We thus reject the view of one practitioner, articulated immediately after the district court's decision in April, 2003:

The … opinion is a tremendous blow to the efforts of the Chicago bench and bar to fashion their bankruptcy court system in the mold of Delaware and New York.

Reuters, “Chicago's Bankruptcy Boom Short-Lived?” April 27, 2003.

Introduction

The “Doctrine of Necessity” (the Doctrine) is a current justification used by some bankruptcy courts to permit the post-petition payment of certain assertedly “essential” pre-petition claims in Chapter 11 reorganized cases. The creditors holding these claims are typically characterized by the debtor as essential to continued operations, and necessary to preserving the eventual reorganization and survival of the debtor. Courts accepting the Doctrine have approved such payments to present and past employees, vendors of goods and services to the debtor, and even key customers.

Supporters of the Doctrine have marshaled forceful arguments. Stabilizing the business and rehabilitation of the debtor are the principal goals in a Chapter 11 reorganization, in contrast to a Chapter 7 liquidation, which focuses on maximizing liquidation proceeds and recovery to creditors. Flexibility, especially early in the case when the Chapter 11 debtor may be most vulnerable to disabling interruptions of goods and services, is thought necessary to permit payments for pre-petition employee claims and those of essential vendors and customers.

Congress never codified the Doctrine. In an attempt to find some statutory justification, practitioners typically urge Chapter 11 courts to use their equitable power under ' 105(a) to authorize payment to pre-petition creditors. That provision allows the court to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions of [the Code],” 11 U.S.C. ' 105(a) (2003), and is cited by some practitioners to effect a panoply of actions affecting the relationship between debtors and creditors. All of this is done despite the Supreme Court's warning in Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988), that any equitable powers retained by bankruptcy courts must be used only in implementing provisions of the Code, not in creating rights not already in the Code. Other appellate courts have reiterated the Supreme Court's admonition regarding some bankruptcy courts' misuse of equitable powers. See, e.g., United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986) ( “[' 105(a)] does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law, or constitute a roving commission to do equity.”)

Supporters of the Doctrine also cite Code ' 365(b), which requires curing of pre-petition defects for all assumed executory contracts and leases, and ' 363, which enables use and disposition of estate assets under court supervision. As we show below, however, the Seventh Circuit's Kmart ruling virtually demolishes this reasoning.

The Doctrine not only lacks explicit Code authorization, but also collides with fundamental bankruptcy principles. The Code mandates the same treatment for all unsecured creditors, and prevents the debtor from preferring some creditors over others. See, e.g., Code ' 1123(a)(4) (plan must “provide … same treatment for each claim … of a particular class…”). Pre-petition creditors are to be paid pursuant to an approved plan of reorganization, but not beforehand. See, e.g., A.H. Robins, Co., 832 F.2d 299 (4th Cir. 1987). Creditors' claim must be classified in the same class under ' 1122 when they are “substantially similar.” Section 507(a) of the Code also sets forth a strict hierarchy of priority claims. In contrast, the Doctrine allows immediate payment of certain unspecified pre-petition claims on a case-by-case, court-by-court basis. Given the clash of Code priority and classification provisions with the exigencies of everyday practice, it is not surprising that courts and commentators have been split regarding the validity of the Doctrine. The Seventh Circuit's Kmart ruling, however, is the first clear court of appeals ruling on the issue:

Nothing … in the Code covers payments to pre-existing, unsecured creditors, whether or not the debtor calls them 'critical.' Judges do not invent missing language.

2004 U.S. App. LEXIS 3397 at *5.

Qualified Claims

It is helpful to review the contexts in which courts have applied the Doctrine. The common thread in these cases is a finding that maintaining a creditor's cooperation is vital to the debtor's ongoing business.

Employee Benefits

Payments to employees have been most appealing. Eastern Air Lines was authorized to pay pre-petition wages, salaries, reimbursable business expenses and health benefits for its active employees, while denying the same claims for striking employees. In re Ionosphere Clubs, Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989). Allis-Chalmers Corporation, Continental Airlines, and Revere Copper & Brass, Inc. were also permitted to pay wages, salaries, commissions, insurance benefits, workers' compensation and health benefits accrued prior to bankruptcy.

Important Suppliers, Customers

Courts have authorized payment of pre-petition claims of important outside suppliers of goods and services as well as important customers of the debtor. In addition to the Eastern Air Lines ticket holder relief program, Allis Chalmers honored pre-petition warranties. Crompton Company paid American Express for its pre-petition use of a credit line.

Foreign Creditors

Finally, courts have authorized payments to foreign creditors in order to protect the debtor's assets abroad, reasoning that they lacked the power to enforce the automatic stay of Code ' 362(a) outside the United States. This is particularly true when creditors threaten to seize an airplane or ship (eg, when the vessel is owned by an airline or a shipping company undergoing a reorganization).

Historical Origins of the Doctrine

The Doctrine is descended from two earlier common law doctrines, the “Six-Month Rule” and the “Necessity of Payment” doctrine. Both of these judicial remedies originated in 19th-century railroad receivership and bankruptcy cases. They were grounded on the then special status of railroads as the arterial blood supply of transportation of people and goods, and as a quasi-public industry with considerable government involvement. The “Six-Month Rule” was later codified in Code ' 1171(b), and made applicable only to railroad debtors. Although the “Necessity of Payment” doctrine was never codified, it has survived in some courts. The two rules share a common industry, but are substantively different.

The 'Six-Month Rule'

The “Six-Month Rule” is a priority rule articulated by the Supreme Court in Fosdick v. Schall, 99 U.S. 235 (1878). It gives administrative priority status to claims for goods and services incurred by a railroad within 6 months of bankruptcy. The creditor must have expected to be paid from current operating revenues, and a fund to pay current debts, derived from current or surplus earnings during the same 6-month period, must be the sole source of the payments. The Rule recognizes that most railroad transactions are done on credit, that current revenues are often diverted to pay bondholders, and that current ordinary course trade creditors must be given a superior equitable interest in those revenues.

Courts generally did not apply this rule outside of railroad cases. Prior to its codification in 1978, however, the Second Circuit held that it applied in a hotel reorganization if all of the essential factors were met on remand. Dudley v. Mealey, 147 F.2d 268, 271-72 (2d Cir. 1945). Analogizing to the public interests in the railroad cases, Judge Hand reasoned that secured creditors would be protected by maintaining the good will and market value of the hotel through the payment of pre-petition necessities. Id. The Ninth Circuit, however, later refused to apply the Six-Month Rule in a trucking company case. In re B&W Enterprises, Inc., 713 F.2d 534, 537 (9th Cir. 1983) (held, Trustee may avoid post-petition payments made by debtor-in-possession on certain pre-petition claims; by incorporating ' 1171(b) into the Code, Congress showed its intention to limit the rule to railroads).

Necessity of Payment Doctrine

The “Necessity of Payment” doctrine, in contrast, is a rule of payment established by the Supreme Court in Miltenberger v. Logansport Railway Co., 106 U.S. 286 (1882). The Court affirmed the allowance and payment of pre-petition claims for materials, repairs, tickets and freight balances to interconnecting railways so as to forestall impending interruption of service. It reasoned that the interconnecting lines were indispensable to the continued functioning of the debtor, and that only by honoring these pre-petition claims could the railroad hope to continue operating. One court later described the Doctrine as “a judicial power to authorize trustees in reorganization to pay claims where such payment is exacted as the price of providing goods or services indispensably necessary to continuing the rail service … ” In re Boston & Maine Corp., 634 F.2d 1359, 1382 (1st Cir. 1980), cert. denied, 450 U.S. 982 (1981). The public interest in transportation thus drove the result.

But the Seventh Circuit, in Kmart, put all these pre-Code cases in the proper perspective:

A 'doctrine of necessity' is just a fancy name for a power to depart from the Code. Although courts in the days before bankruptcy law was codified wielded power to reorder priorities and pay particular creditors in the name of 'necessity' — see Miltenberger v. Logansport Ry., 106 U.S. 286 (1882); Fosdick v. Schall, 99 U.S. 235 (1878) — today it is the Code rather than the norms of 19th-century railroad reorganizations that must prevail. Miltenberger and Fosdick predate the first general effort of codification, the Bankruptcy Act of 1898. Today, the Bankruptcy Code of 1978 supplies the rules. Congress did not in terms scuttle old common-law doctrines, because it did not need to; the Act curtailed, and then the Code replaced, the entire apparatus. Answers to contemporary issues must be found within the Code (or legislative halls). Older doctrines may survive as glosses on ambiguous language enacted in 1978 or later, but not as freestanding entities to trump the text. See, e.g., Lamie v. United States Trustee, 157 L.Ed.2d 1024, 124 S. Ct. 1023, 1031 (U.S. 2004), slip op. 6-7; United States v Ron Pair Enterprises, Inc., 489 U.S. 235, 242-46, 103 L. Ed. 2d 290, 109 S. Ct. 1026 (1989); Bethea v. Robert J. Adams & Associates, 352 F.3d 1125, 1128-29 (7th Cir. 2003). See also [United States v. Noland, 517 U.S. 535, 134 L. Ed. 2d 748, 116 S. Ct. 1524 (1996)] (courts lack authority to subordinate creditors that judges, as opposed to legislators, believe should be lower in the hierarchy). 2004 U.S. App. LEXIS 3397 at *11-*12. In other words, Congress has already made a considered decision not to provide for so-called “critical” vendors.

Facts Considered By the Courts

There is no consensus among the lower courts regarding the applicable criteria for invoking the Doctrine. Courts often ask whether any party has objected. If there are no objections and if the relief requested does not contravene a specific Code provision, the relief will usually be granted. In Kmart, however, the Seventh Circuit stressed the lack of notice to “disfavored creditors” (about 2000 other vendors and “43,000 additional unsecured creditors”). See 2004 U.S. App. LEXIS 3397 at *2 -*3.

Another key fact is the location of the debtor's assets and key employees. If they are outside of the United States, and if seizure of assets or abandonment of personnel is likely, then a court may permit payment of pre-petition claims. Employee concerns and the need to retain trained personnel are frequently decisive. Courts are responsive to compelling employee fact patterns (eg, inability to pay rent, medical expenses).

In next month's conclusion of this article, we discuss Principal Judicial Precedents, Decisions Favorable to the Doctrine, Cases Rejecting the Doctrine, and The Rebirth of the “Doctrine of Necessity.”

“'But the Emperor has nothing on at all!' cried a little child.” Hans Christian Andersen, Danish Fairy Legends and Tales (1846), “The Emperor's New Clothes.”

Nothing … in the Code covers payments made to pre-existing, unsecured creditors, whether or not the debtor calls them 'critical.' Judges do not invent missing language … A 'doctrine of necessity' is just a fancy name for a power to depart from the Code.

In re Kmart Corp., 2004 U.S. App. LEXIS 3397, *5, *11 (7th Cir. Feb. 24, 2004) (Easterbrook, J.)

A bankruptcy court lacks “either the statutory or equitable power to authorize” the debtor's payment of pre-bankruptcy nonpriority unsecured claims. So held United States District Judge John F. Grady on April 18, 2003 in Capital Factors, Inc. v. Kmart Corp. (In re Kmart Corp.), 291 B.R. 818, 823 (N.D. Ill. Apr. 8, 2003); see also Capital Factors, Inc. v. Kmart Corp. (In re Kmart Corp.), 2003 U.S. Dist. LEXIS 17437 (N.D. Ill. Sept. 29, 2003). The Seventh Circuit affirmed on Feb. 24, 2004, with a blistering attack on the bankruptcy court's failure to explain its reasoning and to analyze the law (” … this order was unsound no matter how one reads” the Bankruptcy Code (the Code)). In re Kmart Corp., 2004 U.S. App. LEXIS 3397, *16 (7th Cir. 2004). The clear, no-nonsense opinions of the district court and the Court of Appeals reversed four bankruptcy court orders, which were based on findings that the payments were “necessary,” “integral,” and had a “good business justification.” 291 B.R. at 822, n.4. The bankruptcy court had authorized the Chapter 11 debtor-in-possession, Kmart, to pay certain prebankruptcy vendors the debtor deemed critical — grocery, egg and dairy suppliers. Id. at 820. A few weeks later, issuers of pre-petition letters of credit and liquor vendors were added to the debtor's list of “critical” creditors who could be paid with court approval. Id.

Why is the Seventh Circuit's Kmart decision noteworthy? The Kmart case is large and visible, while the payments reportedly totaled in excess of $300 million. More importantly, the appellate courts in Kmart were correct. As we explain below, the bankruptcy court's orders lacked a basis in the Code. Similar orders in other cases, typically confined to certain districts, have led to mischief, abuse of the bankruptcy process (eg, the debtor's favoring friendly creditors), and a general distrust of judicial administration in bankruptcy cases (eg, “what do we have to do to be considered a 'critical vendor'?”). We thus reject the view of one practitioner, articulated immediately after the district court's decision in April, 2003:

The … opinion is a tremendous blow to the efforts of the Chicago bench and bar to fashion their bankruptcy court system in the mold of Delaware and New York.

Reuters, “Chicago's Bankruptcy Boom Short-Lived?” April 27, 2003.

Introduction

The “Doctrine of Necessity” (the Doctrine) is a current justification used by some bankruptcy courts to permit the post-petition payment of certain assertedly “essential” pre-petition claims in Chapter 11 reorganized cases. The creditors holding these claims are typically characterized by the debtor as essential to continued operations, and necessary to preserving the eventual reorganization and survival of the debtor. Courts accepting the Doctrine have approved such payments to present and past employees, vendors of goods and services to the debtor, and even key customers.

Supporters of the Doctrine have marshaled forceful arguments. Stabilizing the business and rehabilitation of the debtor are the principal goals in a Chapter 11 reorganization, in contrast to a Chapter 7 liquidation, which focuses on maximizing liquidation proceeds and recovery to creditors. Flexibility, especially early in the case when the Chapter 11 debtor may be most vulnerable to disabling interruptions of goods and services, is thought necessary to permit payments for pre-petition employee claims and those of essential vendors and customers.

Congress never codified the Doctrine. In an attempt to find some statutory justification, practitioners typically urge Chapter 11 courts to use their equitable power under ' 105(a) to authorize payment to pre-petition creditors. That provision allows the court to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions of [the Code],” 11 U.S.C. ' 105(a) (2003), and is cited by some practitioners to effect a panoply of actions affecting the relationship between debtors and creditors. All of this is done despite the Supreme Court's warning in Norwest Bank Worthington v. Ahlers , 485 U.S. 197 (1988), that any equitable powers retained by bankruptcy courts must be used only in implementing provisions of the Code, not in creating rights not already in the Code. Other appellate courts have reiterated the Supreme Court's admonition regarding some bankruptcy courts' misuse of equitable powers. See, e.g., United States v. Sutton , 786 F.2d 1305, 1308 (5th Cir. 1986) ( “[ ' 105(a)] does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law, or constitute a roving commission to do equity.”)

Supporters of the Doctrine also cite Code ' 365(b), which requires curing of pre-petition defects for all assumed executory contracts and leases, and ' 363, which enables use and disposition of estate assets under court supervision. As we show below, however, the Seventh Circuit's Kmart ruling virtually demolishes this reasoning.

The Doctrine not only lacks explicit Code authorization, but also collides with fundamental bankruptcy principles. The Code mandates the same treatment for all unsecured creditors, and prevents the debtor from preferring some creditors over others. See, e.g., Code ' 1123(a)(4) (plan must “provide … same treatment for each claim … of a particular class…”). Pre-petition creditors are to be paid pursuant to an approved plan of reorganization, but not beforehand. See, e.g., A.H. Robins, Co., 832 F.2d 299 (4th Cir. 1987). Creditors' claim must be classified in the same class under ' 1122 when they are “substantially similar.” Section 507(a) of the Code also sets forth a strict hierarchy of priority claims. In contrast, the Doctrine allows immediate payment of certain unspecified pre-petition claims on a case-by-case, court-by-court basis. Given the clash of Code priority and classification provisions with the exigencies of everyday practice, it is not surprising that courts and commentators have been split regarding the validity of the Doctrine. The Seventh Circuit's Kmart ruling, however, is the first clear court of appeals ruling on the issue:

Nothing … in the Code covers payments to pre-existing, unsecured creditors, whether or not the debtor calls them 'critical.' Judges do not invent missing language.

2004 U.S. App. LEXIS 3397 at *5.

Qualified Claims

It is helpful to review the contexts in which courts have applied the Doctrine. The common thread in these cases is a finding that maintaining a creditor's cooperation is vital to the debtor's ongoing business.

Employee Benefits

Payments to employees have been most appealing. Eastern Air Lines was authorized to pay pre-petition wages, salaries, reimbursable business expenses and health benefits for its active employees, while denying the same claims for striking employees. In re Ionosphere Clubs, Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989). Allis-Chalmers Corporation, Continental Airlines, and Revere Copper & Brass, Inc. were also permitted to pay wages, salaries, commissions, insurance benefits, workers' compensation and health benefits accrued prior to bankruptcy.

Important Suppliers, Customers

Courts have authorized payment of pre-petition claims of important outside suppliers of goods and services as well as important customers of the debtor. In addition to the Eastern Air Lines ticket holder relief program, Allis Chalmers honored pre-petition warranties. Crompton Company paid American Express for its pre-petition use of a credit line.

Foreign Creditors

Finally, courts have authorized payments to foreign creditors in order to protect the debtor's assets abroad, reasoning that they lacked the power to enforce the automatic stay of Code ' 362(a) outside the United States. This is particularly true when creditors threaten to seize an airplane or ship (eg, when the vessel is owned by an airline or a shipping company undergoing a reorganization).

Historical Origins of the Doctrine

The Doctrine is descended from two earlier common law doctrines, the “Six-Month Rule” and the “Necessity of Payment” doctrine. Both of these judicial remedies originated in 19th-century railroad receivership and bankruptcy cases. They were grounded on the then special status of railroads as the arterial blood supply of transportation of people and goods, and as a quasi-public industry with considerable government involvement. The “Six-Month Rule” was later codified in Code ' 1171(b), and made applicable only to railroad debtors. Although the “Necessity of Payment” doctrine was never codified, it has survived in some courts. The two rules share a common industry, but are substantively different.

The 'Six-Month Rule'

The “Six-Month Rule” is a priority rule articulated by the Supreme Court in Fosdick v. Schall , 99 U.S. 235 (1878). It gives administrative priority status to claims for goods and services incurred by a railroad within 6 months of bankruptcy. The creditor must have expected to be paid from current operating revenues, and a fund to pay current debts, derived from current or surplus earnings during the same 6-month period, must be the sole source of the payments. The Rule recognizes that most railroad transactions are done on credit, that current revenues are often diverted to pay bondholders, and that current ordinary course trade creditors must be given a superior equitable interest in those revenues.

Courts generally did not apply this rule outside of railroad cases. Prior to its codification in 1978, however, the Second Circuit held that it applied in a hotel reorganization if all of the essential factors were met on remand. Dudley v. Mealey , 147 F.2d 268, 271-72 (2d Cir. 1945). Analogizing to the public interests in the railroad cases, Judge Hand reasoned that secured creditors would be protected by maintaining the good will and market value of the hotel through the payment of pre-petition necessities. Id. The Ninth Circuit, however, later refused to apply the Six-Month Rule in a trucking company case. In re B&W Enterprises, Inc., 713 F.2d 534, 537 (9th Cir. 1983) (held, Trustee may avoid post-petition payments made by debtor-in-possession on certain pre-petition claims; by incorporating ' 1171(b) into the Code, Congress showed its intention to limit the rule to railroads).

Necessity of Payment Doctrine

The “Necessity of Payment” doctrine, in contrast, is a rule of payment established by the Supreme Court in Miltenberger v. Logansport Railway Co. , 106 U.S. 286 (1882). The Court affirmed the allowance and payment of pre-petition claims for materials, repairs, tickets and freight balances to interconnecting railways so as to forestall impending interruption of service. It reasoned that the interconnecting lines were indispensable to the continued functioning of the debtor, and that only by honoring these pre-petition claims could the railroad hope to continue operating. One court later described the Doctrine as “a judicial power to authorize trustees in reorganization to pay claims where such payment is exacted as the price of providing goods or services indispensably necessary to continuing the rail service … ” In re Boston & Maine Corp., 634 F.2d 1359, 1382 (1st Cir. 1980), cert. denied, 450 U.S. 982 (1981). The public interest in transportation thus drove the result.

But the Seventh Circuit, in Kmart, put all these pre-Code cases in the proper perspective:

A 'doctrine of necessity' is just a fancy name for a power to depart from the Code. Although courts in the days before bankruptcy law was codified wielded power to reorder priorities and pay particular creditors in the name of 'necessity' — see Miltenberger v. Logansport Ry. , 106 U.S. 286 (1882); Fosdick v. Schall , 99 U.S. 235 (1878) — today it is the Code rather than the norms of 19th-century railroad reorganizations that must prevail. Miltenberger and Fosdick predate the first general effort of codification, the Bankruptcy Act of 1898. Today, the Bankruptcy Code of 1978 supplies the rules. Congress did not in terms scuttle old common-law doctrines, because it did not need to; the Act curtailed, and then the Code replaced, the entire apparatus. Answers to contemporary issues must be found within the Code (or legislative halls). Older doctrines may survive as glosses on ambiguous language enacted in 1978 or later, but not as freestanding entities to trump the text. See, e.g., Lamie v. United States Trustee , 157 L.Ed.2d 1024, 124 S. Ct. 1023, 1031 (U.S. 2004), slip op . 6-7; United States v Ron Pair Enterprises, Inc., 489 U.S. 235, 242-46, 103 L. Ed. 2d 290, 109 S. Ct. 1026 (1989); Bethea v. Robert J. Adams & Associates , 352 F.3d 1125, 1128-29 (7th Cir. 2003). See also [ United States v. Noland , 517 U.S. 535, 134 L. Ed. 2d 748, 116 S. Ct. 1524 (1996)] (courts lack authority to subordinate creditors that judges, as opposed to legislators, believe should be lower in the hierarchy). 2004 U.S. App. LEXIS 3397 at *11-*12. In other words, Congress has already made a considered decision not to provide for so-called “critical” vendors.

Facts Considered By the Courts

There is no consensus among the lower courts regarding the applicable criteria for invoking the Doctrine. Courts often ask whether any party has objected. If there are no objections and if the relief requested does not contravene a specific Code provision, the relief will usually be granted. In Kmart, however, the Seventh Circuit stressed the lack of notice to “disfavored creditors” (about 2000 other vendors and “43,000 additional unsecured creditors”). See 2004 U.S. App. LEXIS 3397 at *2 -*3.

Another key fact is the location of the debtor's assets and key employees. If they are outside of the United States, and if seizure of assets or abandonment of personnel is likely, then a court may permit payment of pre-petition claims. Employee concerns and the need to retain trained personnel are frequently decisive. Courts are responsive to compelling employee fact patterns (eg, inability to pay rent, medical expenses).

In next month's conclusion of this article, we discuss Principal Judicial Precedents, Decisions Favorable to the Doctrine, Cases Rejecting the Doctrine, and The Rebirth of the “Doctrine of Necessity.”