Department store giant Kmart should not have been permitted to pay about $327 million to major suppliers including Dean Foods Co and Fleming Companies Inc, a Chicago IL federal appeals court ruled recently.
"Critical vendor" payments are at the heart of this decision. Such payments go to suppliers that companies regard as so important that their pre-bankruptcy bills must be settled immediately, instead of after bankruptcy proceedings, when other creditors receive payments.
Bankruptcy Judge Susan Pierson Sonderby should not have approved Kmart's payment request because the firm didn't justify it, according to the ruling by the United States Court of Appeals for the Seventh Circuit.
Kmart filed for bankruptcy in January 2002 after a dismal holiday shopping season added to its financial difficulties. According to bankruptcy experts, the amount Kmart paid to its critical vendors was among the largest on record.
Because of this ruling, Kmart might have to sue its critical vendors, including dairy company Dean Foods and food distributor Fleming, to recover payments.
In 2003, Fleming filed for bankruptcy protection, which will complicate Kmart's collection effort.
