(AP) 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 lower ruling that declared Kmart had no authority to pay suppliers including 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.
But Kmart 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 could refuse to do business with a financially troubled company without some assurances of payment, bankruptcy lawyers say.
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 such companies as Capital Factors Inc. that were excluded.
Kmart filed lawsuits in January to take back $174 million in payments made to key vendors.
About 45,000 other unsecured creditors were given about 10 cents on the dollar, paid mostly in new Kmart stock organized under Kmart Holding Corp., as part of the company’s plan of reorganization approved in May 2003.
It was not clear Monday whether the critical vendors would receive stock in exchange for returning the payments.
Kmart shares Monday closed down $3.26 to close at $102.73.
The case began when one creditor, Capital Factors of Boca Raton, Fla., challenged the payments because its clients did not receive them. Capital Factors held about$20 million in unsecured claims against the retailer.
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. Kmart’s bankruptcy led to the closing of 599 stores, termination of 66,000 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.