Kmart Pre-Bankruptcy Payments Criticized

In a decision likely to affect bankruptcy cases nationwide, a federal appeals court in Chicago has ruled that retailer Kmart Corp. should not have been allowed to pay $327 million to some key suppliers.

At issue in the decision this week were “critical vendor” payments. These payments go to suppliers that companies consider so important that their pre-bankruptcy bills must be paid right away, rather than after the bankruptcy process, when other creditors get paid.

The U.S. 7th Circuit Court of Appeals decided that Bankruptcy Court Judge Susan Pierson Sonderby should not have approved Kmart’s payment request because the company didn’t justify it.

The ruling means Kmart might have to sue its critical vendors, including dairy company Dean Foods Co. and food distributor Fleming Cos., to recover payments.