In re Kmart Corporation

Upon filing Chapter 11, Kmart (plaintiff/debtor) sought and received a bankruptcy court order letting it pay 'critical vendor' prepetition claims in full, reasoning that unpaid vendors would stop supplying merchandise and jeopardize reorganization; the order, entered on scant evidence and without notice to noncritical vendors, gave Kmart unilateral discretion over which vendors to pay, and Kmart ultimately paid roughly $300 million to 2,330 vendors, funded partly by new financing, with its largest payment going to Fleming Companies under a long-term supply contract. Around 2,000 vendors deemed noncritical received only about 10 cents on the dollar, mostly in reorganized-company stock; vendor Capital Factors (defendant) appealed the critical-vendors order immediately, and about 14 months later, after the critical vendors had already been paid, the district court reversed the bankruptcy court, finding no statutory or doctrine-of-necessity basis for the order, and Kmart appealed.