Source: https://casetext.com/case/in-re-kmart-corp-3
Timestamp: 2020-07-04 15:24:59
Document Index: 610152134

Matched Legal Cases: ['§ 105', '§ 105', '§ 105', '§ 105', '§ 507', '§ 363', '§ 363', '§ 363', '§ 363', '§ 363', '§ 363', '§ 363', '§ 363', '§ 1322', '§ 362', '§ 363', '§ 105']

In re Kmart Corp., 359 F.3d 866 | Casetext Search + Citator
The Court held, inter alia, that § 105 does not provide authority to make full payment of only certain of the…
In re GVM, Inc.
Finally, the UST has filed a limited objection asserting that the Debtors have failed to identify the…
Full title:In the Matter of: KMART CORPORATION, Debtor-Appellant Page 867 Additional…
359 F.3d 866 (7th Cir. 2004)
holding that creditor receiving payment under "critical vendor" order was not a "party" to that order for appeal purposes
Summary of this case from In re Dornier Aviation (North America), Inc.
Nos. 03-1956, 03-1999, 03-2000, 03-2001, 03-2035, 03-2262, 03-2346, 03-2347, 03-2348.
Steven B. Towbin (argued), Peter J. Roberts, Shaw, Gussis, Fishman, Glantz, Wolfson Towbin, Chicago, IL, for appellee.
Richard C. Godfrey (argued), Kirkland Ellis, Chicago, IL, for intervenor-appellant.
Andrew N. Goldman, Wilmer, Cutler Pickering, New York, NY, William J. Barrett, Barack, Ferrazzano, Kirschbaum, Perlman Nagelberg, Chicago, IL, for debtor-appellant.
George Eric Brunstad, Jr., Bingham McCutchen, Hartford, CT, for appellant Irving Pulp Paper, Limited.
Joseph D. Frank (argued), Neal, Gerber Eisenberg, Chicago, IL, for appellant Knight-Ridder, Inc.
Kmart used its authority to pay in full the pre-petition debts to 2,330 suppliers, which collectively received about $300 million. This came from the $2 billion in new credit (debtor-in-possession or DIP financing) that the bankruptcy judge authorized, granting the lenders super-priority in post-petition assets and revenues. See In re Qualitech Steel Corp., 276 F.3d 245 (7th Cir. 2001). Another 2,000 or so vendors were not deemed "critical" and were not paid. They and 43,000 additional unsecured creditors eventually received about 10¢ on the dollar, mostly in stock of the reorganized Kmart. Capital Factors, Inc., appealed the critical-vendors order immediately after its entry on January 25, 2002. A little more than 14 months later, after all of the critical vendors had been paid and as Kmart's plan of reorganization was on the verge of approval, District Judge Grady reversed the order authorizing payment. 291 B.R. 818 (N.D.Ill. 2003). He concluded that neither § 105(a) nor a "doctrine of necessity" supports the orders.
Notices of appeal in bankruptcy must name "all parties to the judgment, order, or decree appealed from". Fed.R.Bankr.P. 8001(a)(2). Handleman was not a "party" to the critical-vendors order; Kmart was the sole party at the time. Kmart filed an ex parte application that did not specify any particular creditor. It had notified only 65 creditors of its impending request, and none of these was among the 2,000 vendors to be left high and dry. The bankruptcy judge's order likewise did not identify any creditor that acquired rights, for no creditor acquired rights. All the order did was authorize Kmart to pay any vendor that Kmart in its discretion deemed "critical." The party that Capital Factors had to name thus was Kmart itself, and this it did. If the lack of personal notice about the proceedings before the district judge deprived Handleman of due process, then Kmart's application to the bankruptcy judge deprived about 47,000 unsecured creditors of due process! That would render the critical-vendors order void, and Handleman would be worse off — for then it would have to repay the money even if the order's entry otherwise would have been lawful. But there is no constitutional obligation to make every creditor a party to every contested matter in the bankruptcy. As a rule, a trustee or debtor in possession represents the interests of many stakeholders. Kmart vigorously represented the interests of Handleman and the other vendors Kmart deemed "critical".
Thus we arrive at the merits. Section 105(a) allows a bankruptcy court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of" the Code. This does not create discretion to set aside the Code's rules about priority and distribution; the power conferred by § 105(a) is one to implement rather than override. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988); In re Fesco Plastics Corp., 996 F.2d 152, 154 (7th Cir. 1993). Cf. United States v. Noland, 517 U.S. 535, 542, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996). Every circuit that has considered the question has held that this statute does not allow a bankruptcy judge to authorize full payment of any unsecured debt, unless all unsecured creditors in the class are paid in full. See In re Oxford Management Inc., 4 F.3d 1329 (5th Cir. 1993); Official Committee of Equity Security Holders v. Mabey, 832 F.2d 299 (4th Cir. 1987); In re B W Enterprises, Inc., 713 F.2d 534 (9th Cir. 1983). We agree with this view of § 105. "The fact that a [bankruptcy] proceeding is equitable does not give the judge a free-floating discretion to redistribute rights in accordance with his personal views of justice and fairness, however enlightened those views may be." In re Chicago, Milwaukee, St. Paul Pacific R.R., 791 F.2d 524, 528 (7th Cir. 1986).
A "doctrine of necessity" is just a fancy name for a power to depart from the Code. Although courts in the days before bankruptcy law was codified wielded power to reorder priorities and pay particular creditors in the name of "necessity" — see Miltenberger v. Logansport Ry., 106 U.S. 286, 1 S.Ct. 140, 27 L.Ed. 117 (1882); Fosdick v. Schall, 99 U.S. 235, 25 L.Ed. 339 (1878) — today it is the Code rather than the norms of nineteenth century railroad reorganizations that must prevail. Miltenberger and Fosdick predate the first general effort at codification, the Bankruptcy Act of 1898. Today the Bankruptcy Code of 1978 supplies the rules. Congress did not in terms scuttle old common-law doctrines, because it did not need to; the Act curtailed, and then the Code replaced, the entire apparatus. Answers to contemporary issues must be found within the Code (or legislative halls). Older doctrines may survive as glosses on ambiguous language enacted in 1978 or later, but not as freestanding entitlements to trump the text. See, e.g., Lamie v. United States Trustee, ___ U.S. ___, 124 S.Ct. 1023, 1029-31, 157 L.Ed.2d 1024 (2004), United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242-46, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989); Bethea v. Robert J. Adams Associates, 352 F.3d 1125, 1128-29 (7th Cir. 2003). See also Noland (courts lack authority to subordinate creditors that judges, as opposed to legislators, believe should be lower in the hierarchy).
So does the Code contain any grant of authority for debtors to prefer some vendors over others? Many sections require equal treatment or specify the details of priority when assets are insufficient to satisfy all claims. E.g., 11 U.S.C. §§ 507, 1122(a), 1123(a)(4). Appellants rely on 11 U.S.C. §§ 363(b), 364(b), and 503 as sources of authority for unequal treatment. Section 364(b) reads: "The court, after notice and a hearing, may authorize the trustee to obtain unsecured credit or to incur unsecured debt other than under subsection (a) of this section, allowable under section 503(b)(1) of this title as an administrative expense." This authorizes the debtor to obtain credit (as Kmart did) but has nothing to say about how the money will be disbursed or about priorities among creditors. To the extent that In re Payless Cashways, Inc., 268 B.R. 543 (Bankr.W.D.Mo. 2001), and similar decisions, hold otherwise, they are unpersuasive. Section 503, which deals with administrative expenses, likewise is irrelevant. Pre-filing debts are not administrative expenses; they are the antithesis of administrative expenses. Filing a petition for bankruptcy effectively creates two firms: the debts of the pre-filing entity may be written down so that the post-filing entity may reorganize and continue in business if it has a positive cash flow. See Boston Maine Corp. v. Chicago Pacific Corp., 785 F.2d 562 (7th Cir. 1986). Treating pre-filing debts as "administrative" claims against the post-filing entity would impair the ability of bankruptcy law to prevent old debts from sinking a viable firm.
That leaves § 363(b)(1): "The trustee [or debtor in possession], after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." This is more promising, for satisfaction of a pre-petition debt in order to keep "critical" supplies flowing is a use of property other than in the ordinary course of administering an estate in bankruptcy. Capital Factors insists that § 363(b)(1) should be limited to the commencement of capital projects, such as building a new plant, rather than payment of old debts — as paying vendors would be "in the ordinary course" but for the intervening bankruptcy petition. To read § 363(b)(1) broadly, Capital Factors observes, would be to allow a judge to rearrange priorities among creditors (which is what a critical-vendors order effectively does), even though the Supreme Court has cautioned against such a step. See United States v. Reorganized CF I Fabricators of Utah, Inc., 518 U.S. 213, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996); Noland, supra. Yet what these decisions principally say is that priorities do not change unless a statute supports that step; and if § 363(b)(1) is such a statute, then there is no insuperable problem. If the language is too open-ended, that is a problem for the legislature. Nonetheless, it is prudent to read, and use, § 363(b)(1) to do the least damage possible to priorities established by contract and by other parts of the Bankruptcy Code. We need not decide whether § 363(b)(1) could support payment of some pre-petition debts, because this order was unsound no matter how one reads § 363(b)(1).
Yet the bankruptcy court did not explore the possibility of using a letter of credit to assure vendors of payment. The court did not find that any firm would have ceased doing business with Kmart if not paid for pre-petition deliveries, and the scant record would not have supported such a finding had one been made. The court did not find that discrimination among unsecured creditors was the only way to facilitate a reorganization. It did not find that the disfavored creditors were at least as well off as they would have been had the critical-vendors order not been entered. For all the millions at stake, this proceeding looks much like the Chapter 13 reorganization that produced In re Crawford, 324 F.3d 539 (7th Cir. 2003). Crawford had wanted to classify his creditors in a way that would enable him to pay off those debts that would not be discharged, while stiffing the creditors whose debts were dischargeable. We replied that even though classification (and thus unequal treatment) is possible for Chapter 13 proceedings, see 11 U.S.C. § 1322(b), the step would be proper only when the record shows that the classification would produce some benefit for the disfavored creditors. Just so here. Even if § 362(b)(1) allows critical-vendors orders in principle, preferential payments to a class of creditors are proper only if the record shows the prospect of benefit to the other creditors. This record does not, so the critical-vendors order cannot stand.
finding this reasoning "unpersuasive" in light of the "[m]any sections require equal treatment" of creditors
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stating that § 363(b) is a "more promising" source of authority for approving critical vendor motions than § 105 or other sections of the Code, "for satisfaction of a pre-petition debt in order to keep 'critical' supplies flowing is a use of property other than in the ordinary course of administering an estate in bankruptcy"
In Kmart, the debtor sought permission to immediately pay in full the prepetition unsecured claims of vendors it deemed critical.
Summary of this case from In re GVM, Inc.
In Kmart, the debtors, a retailer, and thirty-eight of its affiliates and subsidiaries, moved on the first day of the bankruptcy case to pay the pre-petition claims of 2,330 vendors.
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