Critical Vendor Orders Not Authorized Under the Bankruptcy Code
Critical Vendor Orders Not Authorized Under the Bankruptcy Code
According to Oregon BJ Today’s Rochelle’s Daily Wire discusses a recent decision out of the U.S. Bankruptcy Court for the District of Oregon, which held that the Bankruptcy Code does not authorize the immediate payment in full of prepetition non-priority unsecured debts, including those owed to critical vendors, “while all the other general unsecured creditors wait for confirmation of a plan or other proceedings in this case.” Following 9^(th) Circuit precedent, the bankruptcy court rejected the reasoning of several courts which have found support for critical vendor orders in Sections 105 and 363(b) of the Bankruptcy Code.
According to Judge Pearson, none of those provisions allow for the “use of property in contravention of other Bankruptcy Code requirements.” Moreover, the bankruptcy court rejected as dicta what other courts have described as the U.S. Supreme Court’s “apparent approval” of critical vendor orders in Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 467–68 (2017).
In the First Circuit there are opinions from the Bankruptcy Courts for the District of Puerto Rico and New Hampshire addressing critical vendor orders.
In In re Jeans.com, Inc., 502 B.R. 250 (Bankr. D.P.R. 2013), Judge Lamoutte held that such orders are permissible to the extent that the following factors are met:
- the payments are necessary to the reorganization process;
- a sound business justification exists in that the critical vendor(s) refuse to continue to do business with the debtor absent being afforded critical vendor status; and
- the disfavored creditors are at least as well off as they would
have been had the critical vendor order not been entered. Id. at 258. In In re Zenus Is Jewelry, Inc., 378 B.R. 432 (Bankr. D.N.H. 2007), the bankruptcy court denied the request to pay prepetition vendors because the vendors were willing to provide inventory on a cash-on-delivery basis. Id. at 434.