As many in the trade are well aware, Chapter 11 debtors frequently seek bankruptcy court approval to pay the prepetition claims of vendors the debtor has deemed critical to the continued operation of its business and success of its Chapter 11 case. Debtors seek this relief based, in part, on the “necessity of payment” doctrine—that is, their business would be irreparably disrupted and their efforts to maximize value for their estates and creditors would be severely impaired if the “critical vendors” refuse to continue providing goods and services post-petition. While many courts routinely grant critical vendor relief on this basis, the Bankruptcy Code does not explicitly provide for the necessity of payment doctrine.

“Critical vendor” relief is very commonplace in the districts where the country’s most active commercial Chapter 11 dockets can be found. However, this is not necessarily true everywhere—particularly in bankruptcy courts on the West Coast and other states and territories that are bound by or inclined to follow precedent set by the U.S. Court of Appeals for the Ninth Circuit. The Ninth Circuit has held that bankruptcy courts cannot rely on the necessity of payment doctrine or a bankruptcy court’s broad equitable powers to approve payment of a vendor’s prepetition unsecured claim where other general unsecured creditors have to wait to receive payment (if at all) until the end of the case. This was recently illustrated by an Oregon bankruptcy court decision, In re MacMillan, where the bankruptcy court denied the debtor’s request to pay a critical vendor’s unsecured prepetition claim largely because the court could not rely on the necessity of payment doctrine due to the Ninth Circuit’s precedent.

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