High Court Declines to Step Into Kmart Bankruptcy Dispute

The Supreme Court declined Monday to consider whether retailer Kmart Corp. should have been allowed to pay more than $300 million to key suppliers immediately after filing for bankruptcy protection. Justices let stand a 7th Circuit ruling that declared Kmart had no authority to pay certain suppliers because it had not proven that the suppliers were so critical to Kmart's operations to justify payments to them over others. The high court's move left lower courts split on the issue.

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The Supreme Court on Monday declined to consider whether retailer Kmart Corp. should have been allowed to pay more than $300 million to key suppliers immediately after filing for bankruptcy protection. Justices let stand a lower ruling that declared Kmart had no authority to pay suppliers such as newspaper chain Knight-Ridder Inc. The court said Kmart had not proven that the suppliers were so critical to Kmart’s operations to justify payments to them over others. The case stemmed from Kmart’s Jan. 22, 2002, filing for bankruptcy protection. In a typical Chapter 11 bankruptcy case, companies are given a temporary legal reprieve from paying off debts and obligations until they can improve their operations. Kmart, however, obtained approval from a bankruptcy judge to pay off debts immediately to its “critical vendors” — about 2,330 suppliers, including 1,070 newspapers — that it deemed necessary to maintain goodwill. This is not unusual — key vendors may refuse to do business with a financially troubled company without some assurances of payment, according to bankruptcy lawyers. The Chicago-based 7th U.S. Circuit Court of Appeals disagreed, ruling that Kmart had not shown that business from suppliers such as Knight-Ridder — which distributes the retailer’s weekly advertising circulars — were any more necessary than other companies, such as Capital Factors Inc., which were excluded. The Supreme Court’s move Monday leaves the lower courts split as to whether companies filing for Chapter 11 bankruptcy protection should be allowed to pay key suppliers first. The trio of cases justices declined to hear involved a handful of key suppliers who are fighting back after Kmart demanded they return the money. They argue that the bankruptcy code doesn’t give federal courts authority to tamper with reorganization plans after a bankruptcy judge has approved it. The suppliers also claimed they weren’t given proper notice or allowed to present their side when U.S. District Judge John Grady in Chicago ruled in April 2003 that the payments weren’t proper. Kmart’s bankruptcy led to the closing of about 600 stores, termination of 57,000 Kmart employees and cancellation of company stock. The retailer emerged from bankruptcy in May 2003 and in March posted its first profitable quarter in three years. The cases are Irving Pulp & Paper v. Capital Factors, 04-181, Knight-Ridder v. Capital Factors, 03-1581, and Handleman Co. v. Capital Factors et al, 03-1583. Copyright 2004 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.

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