CHAPTER 11 OPERATIONS

require the debtor to put on a case to demonstrate both what unsecured creditors are likely to receive under a plan of reorganization and what they would receive upon liquidation. That may be a difficult evidentiary demonstration to make in the first days of a complex chapter 11 case. At least one bankruptcy court applied the Kmart standards, however, and authorized critical vendor payments where the evidence showed the vendors were truly unique and it would take the debtor four to six weeks to replace them.

Even if the requisite showing could be made to convince the court to permit payment of "critical" vendors, debtors' counsel should be careful in what they ask for. Obtaining such permission eliminates the argument debtors' counsel usually make to demands for payment of prepetition claims, that the Bankruptcy Code simply does not permit it. Consequently such an order may impose greater cash demands on the debtor than were anticipated. Debtors' counsel must also be careful to define the supply requirements and the credit terms with sufficient particularity so that the order can be enforced against a vendor who obtains the payment of prepetition claims and thereafter restricts the supply or the credit terms. Vendors' counsel must be careful that the order does not give the debtor purchasing priority over other customers, or unduly restrict the vendor's ability to terminate credit terms based on the debtor's postpetition delinquencies or further financial deterioration.