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'Necessity' Revisited: Wishing Won't Make It So
The April and May issues of The Bankruptcy Strategist featured a scholarly, interesting, and informative article by Michael L. Cook and William R. Fabrizio on the recent Seventh Circuit Kmart Opinion (In Re Kmart Corporation, 359 F. 3d 866 (7 Cir. 2004)) in which the Circuit Court affirmed the District Court's reversal (Capital Factors, Inc. v. Kmart Corporation, 291 B. R. 818 (ND Ill. 2003)) of four “critical vendor” orders entered by the Bankruptcy Judge. In all respects but one, Cook and Fabrizio concisely and accurately analyzed the Opinion as well as the history and basic flaws of the so-called “Necessity” Doctrine. Moreover, we agree not only with their conclusion that “the [Necessity] Doctrine … lacks explicit Code authorization,” but also with their flat rejection of such erroneous (and insulting) comments as that of the unnamed practitioner who was quoted by Reuters as stating that the District Court Opinion was “[A] tremendous blow to the efforts of the Chicago bench and bar to fashion their bankruptcy court system in the mold of Delaware and New York.” The Bankruptcy Strategist, April 2004, p. 2.
Overstating the Case
Unfortunately when they come to the Opinion of the Court of Appeals, Cook and Fabrizio overstate the case. Unlike the District Judge, the Seventh Circuit did not find a complete lack of “'statutory or equitable power to authorize' … payment of pre-bankruptcy non-priority unsecured claims.” Id., p. 1. Nor did the Circuit Court “virtually demolis[h]” the doctrine that the necessary authority may be found in Section 363 (b) of the Code itself. Id., p. 7. On the contrary, the court was very careful to avoid making — or even predicting — any decision as to the efficacy of Section 363(b), saying:
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