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The 'Doctrine of Necessity'

By Michael L. Cook and William R. Fabrizio

Last month, we explained that a bankruptcy court lacks “either the statutory or equitable power to authorize” the debtor's payment of pre-bankruptcy nonpriority unsecured claims, as noted in Capital Factors, Inc. v. Kmart Corp. (In re Kmart Corp.) We explained that the clear, no-nonsense opinions of the district court and the Court of Appeals reversed four bankruptcy court orders, and we explained why the Seventh Circuit's Kmart decision is noteworthy. We went on to discuss the “Doctrine of Necessity” (the Doctrine), a current justification used by some bankrtupcy courts to permit the post-petition payment of certain assertedly “essential” pre-petition claims in Chapter 11 reoganized cases.

This month, we discuss Principal Judicial Precedents, Decisions Favorable to the Doctrine, Cases Rejecting the Doctrine, and The Rebirth of the “Doctrine of Necessity.”

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