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The Bankruptcy StrategistLJN NewslettersNewsSections

Section 547(C)

By Brian L. Shaw

In recent years, one of the hottest topics in bankruptcy law has been the use and appropriateness of critical vendor orders (hereinafter, CVOs). Critics argue that CVOs directly contradict the mandate of the Bankruptcy Code requiring equal treatment of similarly situated creditors. Even worse, critics point out, is that requests for CVOs are often presented, and the CVO entered, in the first days of a Chapter 11 bankruptcy case on shortened and limited notice to a minimal amount of creditors, days or weeks prior to the appointment of any statutory committees under Section 1102. Thus, it is often the case that the very creditors that are being discriminated against by court sanctioned preferential behavior are not given the notice and/or do not have the knowledge to allow them to appear and object to the entry of the CVO.

In contrast, supporters of CVOs argue that the CVO flows out of the principal purpose of Chapter 11 of the Bankruptcy Code: the rehabilitation of a financially distressed business. After all, if a Chapter 11 debtor loses its critical vendors, it will be unable to emerge from bankruptcy as a viable entity. Supporters of CVOs also point to a long line of case law arising out of the old federal railroad receiverships to note that while CVOs are not expressly authorized by the Bankruptcy Code, they are supported by a long line of established case law that has been part of the insolvency process for decades and cannot be ignored.

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