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In re Kmart Corporation

United States Court of Appeals for the Seventh Circuit
359 F.3d 866 (2004)


Kmart Corporation (Kmart) (debtor) was a large retailer that filed for reorganization under chapter 11 of the Bankruptcy Code. On the first day of bankruptcy, Kmart sought permission from the bankruptcy court to pay pre-bankruptcy claims of those creditors that Kmart deemed critical vendors. Kmart argued that unless these pre-bankruptcy claims were paid, the critical vendors would stop doing business with Kmart. According to Kmart, the loss of this business would cause it to cease operations, thereby causing harm to all of Kmart’s creditors. The bankruptcy court granted an order allowing for preferential payments to these critical vendors. The court did not notify the other creditors outside of the critical vendor class or make a determination as to the accuracy of Kmart’s assertions of necessity. Kmart thereafter paid the pre-bankruptcy claims of 2,330 critical vendors, but did not pay the claims of the other 2,000 vendors not deemed critical. An unpaid vendor appealed the critical-vendor order, and the district court reversed. Kmart and a number of critical vendors appealed the district court ruling.

Rule of Law


Holding and Reasoning (Easterbrook, J.)

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