Kmart’s Rocky Road: $1B Creditors Reject Bankruptcy Exit Plan

Just when Kmart thought it had bankruptcy court approval of its reorganization plan all sewn up, a few creditors are throwing up roadblocks.

NEW YORK — Just when Kmart thought it had bankruptcy court approval of its reorganization plan all sewn up, several creditors appear to be rocking its solvency boat.

Kmart said Monday that most of its creditors had approved its proposed plan to exit Chapter 11. However, a few creditors for some of Kmart’s subsidiaries voted to reject the plan. Most of those are owed money from supply deals or leases. They hold claims against Kmart that total nearly $3.9 billion, with creditors holding about a quarter of that amount rejecting the plan. Still, the retailer said in a statement that it didn’t believe those rejections were material and expected to exit bankruptcy proceedings by the end of the month.

But some creditors aren’t providing Kmart with the rubber stamp for a Chapter 11 exit that it might prefer.

As reported, ESL Investments Inc. and Third Avenue Trust, two major creditors, agreed to invest $300 million to bail the retailer out of bankruptcy in exchange for more than half of the equity in the reorganized Kmart. Upon consummation of the plan, ESL would become Kmart’s largest shareholder, with a 49 percent equity position. Third Avenue would own just 5 percent of the equity, according to Kmart in court documents.

The timing of Kmart’s planned exit is proving to be critical to its own survival. According to sources, Edward Lampert, who heads up ESL, has said that he would pull his investment in the discounter if it does not exit by the end of May. ESL officials could not be reached for comment. A Kmart spokesman said the retailer does not comment on rumors and speculation.

A challenge Kmart now faces includes an emergency motion filed by Capital Factors Inc. to block the exit plan from being confirmed before the bankruptcy court can decide issues relating to the $367 million that Kmart paid to certain so-called "critical vendors" after it filed for Chapter 11.

In some bankruptcy courts, judges have accepted the view that a critical vendor is a supplier that is so important to the continuation of the debtor’s business that if it doesn’t get paid, the supplier may discontinue shipments and jeopardize the debtor’s reorganization efforts. Payments made to vendors in such a manner put them ahead of others in the unsecured creditor food chain because they don’t have to wait until the end of the reorganization process to get paid.
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