“Surprise, surprise,” he said facetiously.
A district court in New York has upheld a so-called critical vendor order.
Counsel for the objecting creditor, Davor Rukavina, told ABI that his client will appeal to the Second Circuit. Rukavina is in the Dallas office of Munsch Hardt Kopf & Harr PC.
The Typical Big Case First-Day Order
It was a mega-case, typical of those filed in the Southern District of New York and Delaware. Represented by sophisticated counsel and financial professionals, the debtor was a broadband service provider owing some $5.6 billion for borrowed money, both secured and unsecured.
Immediately after filing the chapter 11 petition, the debtor filed a critical vendor motion, seeking interim and final authority to pay prepetition claims of creditors whose goods or services were essential to the success of the reorganization.
The motion declared that 263 creditors, potentially falling within the category of critical vendors, had prepetition claims aggregating about $80 million, or some 20% of accounts payable.
Generally describing an eligible supplier, the motion said that a vendor would be “critical” if loss of the goods or services would “immediately and irreparably harm” the debtor’s business. The motion went on to describe 10 more detailed criteria the debtor would apply in deciding whether a supplier could be a critical vendor.
The motion did not identify any suppliers that might potentially qualify as critical vendors. To enhance the debtor’s ability to negotiate, the debtor didn’t want suppliers to know they might be eligible for preferred treatment. However, the debtor did provide the critical vendor list to the U.S. Trustee, the official creditors’ committee, and the court for in camera review.
There was one objection: from an unsecured creditor with a $2 million claim. The objecting creditor was not a critical vendor, and its executory contract was ultimately rejected.
Critical Vendor Order Upheld on Appeal
Overruling the objection, Bankruptcy Judge Robert D. Drain of White Plains, N.Y., gave final approval to the critical vendor motion. He said the procedure had been adopted “in numerous cases . . . .” His order gave the debtor “sole discretion” in deciding who would be a critical vendor.
The objecting creditor appealed, but District Judge Cathy Seibel upheld Judge Drain in a 29-page opinion on April 3.
The objector argued most fervently on appeal that the debtor had usurped the court’s function in deciding who should be a critical vendor.
Judge Seibel countered by saying that courts typically allow payments to be made in the sound judgment of the debtor. As precedent, she mostly cited bankruptcy court decisions from Delaware and New York.
Judge Seibel added that court determination of critical vendor status would be “impractical” and “unnecessary” in large cases, given oversight by the U.S. Trustee and the creditors’ committee. She therefore rejected the objector’s “delegation” argument.
Next, the objector argued that it was error to make a secret of the critical vendors’ identities.
For starters, Judge Seibel said that a list of critical vendors never had been filed with the court, so Section 107 did not come into play. With exceptions, that section provides that court filings must be publicly available.
Even if Section 107 did apply, Judge Seibel cited courts holding that the names of critical vendors could be redacted in public filings as protected commercial information under Section 107(b)(1).
Finally, Judge Seibel dealt with the merits. In other words, did the debtor’s motion and proof meet the standards for granting a critical vendor motion?
Under Section 363(b), the debtor has “broad flexibility” to make payments outside of the ordinary course of business after articulating “some business justification” beyond the appeasement of major creditors, Judge Seibel said.
Judge Seibel listed the three requirements for invoking the “doctrine of necessity” under Section 105(a) to pay prepetition claims: (1) the vendor must be necessary for a successful reorganization; (2) the debtor must exercise sound business judgment; and (3) the favorable treatment of critical vendors must not prejudice other unsecured creditors.
The objector contended there should be three more tests: (1) the vendor will otherwise refuse to provide goods or services; (2) the goods or services are critical; and (3) the debtor has no alternative supplier.
Judge Seibel said that the objector’s “arguments are simply not supported by the case law or the record.” She said that prior decisions in New York and Delaware did “not require a formal refusal to provide services, and while the existence (or not) of such a refusal is a factor to be considered, [the objector] has failed to support its contention that it alone is dispositive.”
Judge Seibel affirmed, holding that Judge Drain “appropriately applied the doctrine of necessity in this case.”
“Surprise, surprise,” he said facetiously.
A district court in New York has upheld a so-called critical vendor order.
Counsel for the objecting creditor, Davor Rukavina, told ABI that his client will appeal to the Second Circuit. Rukavina is in the Dallas office of Munsch Hardt Kopf & Harr PC.
The Typical Big Case First-Day Order
It was a mega-case, typical of those filed in the Southern District of New York and Delaware. Represented by sophisticated counsel and financial professionals, the debtor was a broadband service provider owing some $5.6 billion for borrowed money, both secured and unsecured.
Immediately after filing the chapter 11 petition, the debtor filed a critical vendor motion, seeking interim and final authority to pay prepetition claims of creditors whose goods or services were essential to the success of the reorganization.
The motion declared that 263 creditors, potentially falling within the category of critical vendors, had prepetition claims aggregating about $80 million, or some 20% of accounts payable.