Bankruptcy from Olympus

On the first day of Kmart’s Chapter 11, its CEO asked for and received permission to use $300 million to satisfy prepetition obligations owed “critical vendors”—prepetition suppliers whom he claimed were essential to Kmart’s continued operations. The CEO explained that alternatives to assuring they continued to do business with Kmart— such as cash on delivery or providing them with irrevocable letters of credit—were “not part of [his] business plan.” The general creditors whose own recoveries were diminished by the same amount appealed, ultimately to the Seventh Circuit, where Frank Easterbrook reversed. Given the casual way in which the bankruptcy judge allowed several hundred million dollars to go to one group of general creditors at the expense of another, the outcome of In re Kmart Corp should not have surprised anyone. But it did.