Matter of Kmart Corporation
United States Court of Appeals for the Seventh Circuit
359 F.3d 866 (2004)
Immediately upon filing for reorganization under Chapter 11, Kmart Corporation (plaintiff) requested permission to pay the prepetition claims of “critical vendors” in full. Kmart reasoned that such vendors, if unpaid, would cease providing merchandise to Kmart and thereby jeopardize the reorganization. Upon scant evidence and without notifying any “noncritical” vendors, the bankruptcy court entered a critical-vendors order as proposed by Kmart. The order gave Kmart unilateral discretion to select which vendors to pay. The court’s decision was not accompanied by any factual support or legal reasoning, except for a reference to 11 U.S.C. § 105(a). Pursuant to the order, Kmart paid approximately $300 million in prepetition debts to 2,330 suppliers. Kmart was able to make such payments after having received $2 billion in new credit financing. Its largest payment went to Fleming Companies, which held a long-term contract with Kmart under which it sold $70 million to $100 million in goods to Kmart weekly. Approximately 2,000 vendors were not deemed “critical” and therefore not paid. Those vendors eventually received about 10 cents on the dollar for their claims, principally in the form of stock in the reorganized Kmart. One such vendor, Capital Factors, Inc. (defendant), appealed the critical-vendors order as soon as it was entered. Approximately 14 months later, after the critical vendors had been paid, the district court reversed the bankruptcy court’s order on the grounds that it was not supported by § 105(a) or a “doctrine of necessity.” Kmart appealed.
Rule of Law
Holding and Reasoning (Easterbrook, J.)
What to do next…
Unlock this case brief with a free (no-commitment) trial membership of Quimbee.
You’ll be in good company: Quimbee is one of the most widely used and trusted sites for law students, serving more than 97,000 law students since 2011. Some law schools—such as Yale, Vanderbilt, Berkeley, and the University of Illinois—even subscribe directly to Quimbee for all their law students. Read our student testimonials.
Learn more about Quimbee’s unique (and proven) approach to achieving great grades at law school.
Quimbee is a company hell-bent on one thing: helping you get an “A” in every course you take in law school, so you can graduate at the top of your class and get a high-paying law job. We’re not just a study aid for law students; we’re the study aid for law students. Read more about Quimbee.
Here's why 175,000 law students have relied on our case briefs:
- Written by law professors and practitioners, not other law students. 14,000 briefs, keyed to 188 casebooks. Top-notch customer support.
- The right amount of information, includes the facts, issues, rule of law, holding and reasoning, and any concurrences and dissents.
- Access in your classes, works on your mobile and tablet. Massive library of related video lessons and high quality multiple-choice questions.
- Easy to use, uniform format for every case brief. Written in plain English, not in legalese. Our briefs summarize and simplify; they don’t just repeat the court’s language.