Quieting the Rebellion: Eliminating Payment of Prepetition Debts Prior to Chapter 11 Reorganizations

Abstract

Imagine Milton's, a hypothetical office supply store with serious financial problems. Milton's cannot sell enough office supplies to meet its various financial obligations: It owes money to numerous creditors, including its suppliers of staplers, notebooks, and pencils. Because Milton's does not have enough money to pay its creditors, it has two realistic options: a) it can attempt to pay off certain creditors, and leave others unpaid;2 or b) it can seek the protection of the Federal Bankruptcy Code.3 Ideally, the Bankruptcy Code will protect both debtors and creditors and will facilitate an orderly and fair reorganization process. In reality, however, the system works differently. Imagine that the Christmas shopping season is quickly approaching and Milton's must have staplers from Supplier A and pencils from Supplier B if it wishes to have a successful Christmas season and continue operating.4 Unfortunately, Suppliers A and B have not been paid for earlier shipments of staplers and pencils. Although the Bankruptcy Code prohibits them from acting to collect on previous debts, nothing requires them to continue shipping supplies to a store that owes them money.5 In order to solve this problem, parties circumvent the Bankruptcy Code by persuading a court to grant payments to these necessary9 or essential prepetition creditors.6