Steve Jakubowsky, in his Bankruptcy Litigation Blog, discusses the aftermath of the Seventh Circuit’s decision in the K-Mart bankruptcy case, wherein the court struck down the payment of pre-petition claims of “critical vendors.”  After the District Court reversed the Bankruptcy Court order authorizing the payments (but before the Circuit affirmed the District Court), K-Mart filed adversary proceedings to avoid and recover the post-petition payments. Count I was based upon §549 and Count II was grounded in §105.  Steve describes the subsequent order on motions to dismiss as follows:

In a wide-ranging, 62 page unpublished opinion, Judge Sonderby denied the creditors’ motion to dismiss Count I, but granted the motion to dismiss Count II. In so doing, the opinion —

  • details the complex procedural history of the case, including the quick thinking employed by the litigants when the district court’s bombshell reversal came down a mere two days before the start of Kmart’s confirmation hearing (pp. 2-13);
  • rejects the movants’ “plain meaning” arguments that recovery should be denied under Code section 549 because the Court had previously authorized such payments (pp. 13-24);
  • notes the banishment by the 7th Circuit of the term “equitable mootness” from the local lexicon (pp. 20-21);
  • dissects when a “private right of action” arises in the bankruptcy context (such as “in connection with alleged violations of the discharge injunction and the filing of inflated secured claims”), and concludes that no such “separate and independent action exists under §105(a)” (pp. 24-33);
  • reviews at length the doctrine of judicial estoppel and its inapplicability to this case, finding not only that Kmart was not “exploiting” the 7th Circuit’s reversal of the critical vendor order, but that “application of the doctrine under the circumstances of this case would itself amount to [] a perversion [of the doctrine of judicial estoppel]” (pp. 33-48);
  • affirms the adequacy of provisions in the confirmed plan purporting to retain these avoidance actions, even though the pre-confirmation plan modifications were made without attempting to resolicit votes on the plan (pp. 48-58); and
  • punts the remaining arguments, including detrimental reliance, equitable estoppel, and recoupment, as “fact-intensive defenses inappropriate for disposition at this time” (pp. 58-61).

Judge Sonderby obviously has long ruminated about the mess spawned by the reversal of her “critical vendor” order. Now, in an unpublished decision, she has given us much to ruminate about too.

As of this date, the Eleventh Circuit has not ruled upon the critical vendor issue. However, some cases within the Circuit that have addressed the issue include In re Tropical Sportswear Int’l Corp., 320 BR 15 (M.D. Fla. 2005) and In re Fultonville Metal Products Co., 330 B.R. 305 (Bankr. M.D. Fla. 2005).