WASHINGTON — The U.S. Supreme Court declined to intervene on Monday in a lower court ruling that said Kmart Corp., after filing for bankruptcy in 2002, erred in paying debts owed to suppliers deemed crucial to keeping the discount chain open.
The high court left intact a February decision by the U.S. Seventh Circuit Court of Appeals, based in Chicago, which found that Kmart discriminated against vendors who weren’t on the retailer’s list of “critical vendors” owed immediate payment.
“This is important because most [federal] courts have been flexible to use critical vendor status to pay pre-bankruptcy petition obligations,” said New York bankruptcy attorney Alan Miller, who was not involved in the case.
The Seventh Circuit is the only federal appeals court to rule against the common practice of a company that has filed for bankruptcy to first pay suppliers it needs to stay in business. The court didn’t quash the practice entirely, setting up a rigorous three-part test against which a vendor could be deemed vital to business.
The test requires that a vendor be crucial to a company’s reorganization, and that the vendor would otherwise refuse delivery without having earlier debts paid. Other creditors also cannot be adversely affected by being excluded from the critical vendor list, the appeals court said. It concluded that Kmart was given too much leeway by a lower court to decide on its own which vendors were crucial.
The Supreme Court, as is its custom, did not comment on refusal to consider an appeal.
Kmart is required to request rebates from some 2,330 suppliers paid a total of $300 million. The remaining 2,000 secured creditors and some 43,000 unsecured creditors already have received about 10 cents on the dollar for their debts, mostly in stock for the reorganized Kmart. When filing bankruptcy, Kmart listed $10.3 billion in liabilities. Kmart emerged from bankruptcy in March 2003.
It is unclear how the rebates might take place or former debts owed noncritical vendors might be affected. A Kmart spokesman said company officials had no comment.