A decision by Bankruptcy Judge Teresa H. Pearson of Portland, Ore., reminds us that so-called critical vendor orders are not permitted in the Ninth Circuit, even when payment of a prepetition claim is critical.
Judge Pearson was bound by Ninth Circuit authority from 1983, even though critical vendor orders are de rigueur in other circuits.
The debtor was a rancher in chapter 11 with a dozen general, unsecured creditors. The debtor grew hay as feed for his own cattle.
The debtor had been using a neighbor to cut his hay. On filing, the debtor owed about $12,000 to the neighbor for cutting his hay. The neighbor refused to cut the debtor’s hay unless the prepetition claim were paid in full.
No one else would cut his hay, the debtor said. The debtor therefore filed a critical vendor motion seeking court authority to pay the neighbor’s $12,000 general, unsecured claim in full, but no other unsecured claims.
Citing Sections 363(b) and 105 as authority, the debtor said that the estate would lose value if he were forced to purchase feed for his cattle.
Judge Pearson denied the critical vendor motion in an opinion on June 29, citing B & W Enters. Inc. v. Goodman Oil Co. (In re B & W Enters Inc.), 713 F.2d 534 (9th Cir. 1983). Under B & W’s “binding authority,” she said that “the Ninth Circuit Court of Appeals considered whether the claims of certain unsecured creditors could be elevated over other creditors of the same class and concluded that ‘[t]his is not a power given the courts by the 1978 Act.’” Id. at 537.
Surveying authorities outside the Ninth Circuit, Judge Pearson cited a 1989 decision by Burton R. Lifland of New York and a 2002 opinion by Bankruptcy Judge D.M. Lynn of Forth Worth for approving critical vendor motions under the so-called doctrine of necessity, also known as the necessity of payment rule. Those courts found authority under Sections 105, 363(b) or 1107(a). See In re Ionosphere Clubs Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989); and In re CoServ L.L.C., 273 B.R. 487 (Bankr. N.D. Tex. 2002).
Judge Pearson said that the doctrine arose in railroad reorganizations under the former Bankruptcy Act and was continued under the Bankruptcy Code in Section 1171(b). She cited the Ninth Circuit for having “squarely held” in B & W “that the Necessity of Payment Rule and the Six Months Rule cannot be applied to cases other than railroad cases.” B & W, supra, 713 F.2d at 537.
Judge Pearson also cited a 1991 Ohio bankruptcy court decision for having approved a critical vendor motion under Section 105, but said it was written “well before” the Supreme Court’s 2014 decision in Law v. Siegel, 571 U.S. 415, 420-21 (2014). She paraphrased the Court for holding that Section 105 “may not be used to contravene the Code’s specific statutory provisions.” Id. at 1194-95.
The debtor argued by analogy that courts allow payment of employees’ prepetition wage claims. In response, Judge Pearson said there are “good reasons under the Bankruptcy Code to treat the payment of prepetition priority employee obligations differently than allegedly critical general unsecured claims.”
Judge Pearson said that priority wage claims must be paid in full as a condition of chapter 11 plan confirmation and that all employees are paid up to the statutory limit on each employee’s priority claim. The debtor, she said, was aiming to pay only one creditor who had no priority claim.
Finding no authority “that it finds persuasive that would allow the court to pay the prepetition claim of one general unsecured creditor in full immediately,” Judge Pearson denied the critical vendor motion, because “the Bankruptcy Code does not authorize this proposed payment.”
A decision by Bankruptcy Judge Teresa H. Pearson of Portland, Ore., reminds us that so-called critical vendor orders are not permitted in the Ninth Circuit, even when payment of a prepetition claim is critical.
Judge Pearson was bound by Ninth Circuit authority from 1983, even though critical vendor orders are de rigueur in other circuits.
The debtor was a rancher in chapter 11 with a dozen general, unsecured creditors. The debtor grew hay as feed for his own cattle.
The debtor had been using a neighbor to cut his hay. On filing, the debtor owed about $12,000 to the neighbor for cutting his hay. The neighbor refused to cut the debtor’s hay unless the prepetition claim were paid in full.