By: Jennifer Saba
Kmart has extended the deadline for newspapers to accept its settlement regarding critical vendor status to April 23, E&P has learned. The law firm representing the retailer, Barack Ferrazzano Kirschbaum Perlman & Nagelberg, began sending out letters yesterday to papers involved in Kmart’s critical vendor case.
As it stands, well over $30 million is at stake involving 1,070 newspapers that have been caught up in a lawsuit brought against Kmart regarding its Chapter 11 proceedings and the definition of critical vendors.
The issue stems from when the retail giant filed for Chapter 11 in January 2002. The bankruptcy court allowed Kmart to pay “critical vendors” — companies that must be paid in order to continue doing business. Kmart had proposed the list when the company first filed for Chapter 11. This meant any newspaper — because all newspapers were listed as critical vendors — that was owed money prior to the January 2002 Chapter 11 filing was eligible to receive back payments or “prepetition” payments.
In April 2003, Capital Factors Inc. brought suit against Kmart challenging the makeup of the critical vendor list, which in total includes 2,330 suppliers that collectively have received $300 million in prepetition payments.
The case went to the United States Court of Appeals for the Seventh Circuit, which found that Kmart did not adequately prove that the vendors listed were critical to doing business. As a result, Kmart had to regain prepetition money, which forced the retailer to file suit against critical vendors, including many newspapers, in January 2004.
Newspapers are now faced with two options: accept Kmart’s settlement terms or mount a defense. The terms of the deal require papers that were paid less than $250,000 in prepetition payments to pay back 70%; those that were paid more than $250,000 are required to pay back 80%. “For the larger guys it might be worth it to go after [Kmart],” said Dawn Hertz, general counsel for the Michigan Press Association and of counsel to Butzel Long. “If you have to eat 80% and you have a large number that makes a lot more sense.”
According to William Barrett of Barack Ferrazzano Kirschbaum Perlman & Nagelberg about 30 papers have taken the payback deal.