On occasion a vendor may be a key supplier to a customer that files Chapter 11. Given this key supplier relationship, the creditor often holds a sizeable unsecured claim upon the Chapter 11 filing. The creditor, selling invoice by invoice (as opposed to a long term supply contract), may elect not to continue to sell the debtor postpetition. However, the creditor’s product or service may be viewed by the debtor as essential to its continued operations, such as when the debtor cannot locate a substitute vendor. Without the product or service, the debtor may be forced to close, which, contrary to the principle of bankruptcy, may further harm the non-critical vendors. In this situation the debtor may request that the bankruptcy court authorize it to immediately pay a critical creditor’s prepetition claim, in exchange for that critical vendor selling to the debtor post-bankruptcy on credit.
More and more bankruptcy courts throughout the country have been considering a debtor’s request to treat certain vendors as critical, and have their pre-bankruptcy claims paid in exchange for postpetition trade credit. However, as a result of the Kmart ruling, the support of bankruptcy courts for critical vendor requests may change.
In the Kmart case, the Seventh Circuit Court of Appeals affirmed the district court’s reversal of the bankruptcy court’s authorization for critical vendor payments. The Supreme Court declined to hear the appeal from the Seventh Circuit. This raises the questions:
² What is the impact of the Kmart ruling on the critical vendor doctrine
² Does the critical vendor doctrine survive
² If so, with which courts; and what is the standard the debtor and critical vendor must establish