Although debtors who file for Chapter 11 bankruptcy generally cannot pay prepetition debts until a plan which complies with the “absolute priority rule” is confirmed, there are a number of now well-established exceptions to this rule. As noted (although not actually ruled upon) by the United States Supreme Court in its controversial “Jevic” decision, “[c]ourts, for example, have approved ‘first-day’ wage orders that allow payment of employees’ prepetition wages, ‘critical vendor’ orders that allow payment of essential suppliers’ prepetition invoices, and ‘roll-ups’ that allow lenders who continue financing the debtor to be paid first on their prepetition claim.” Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 985 (2017).
With regard to so-called “critical vendor” orders, it has been common practice for more than two decades for debtors who commence chapter 11 bankruptcy cases immediately to seek authority to deem certain of their vendors as “critical,” thereby allowing such vendors to leapfrog their prepetition and otherwise second-to-last-in-line (only above equity) claims to the top of the feeding order, resulting in the lucky creditors potentially being at least partially, if not fully, paid in the very early stages of the proceeding.
Courts have adopted a fairly uniform, yet somewhat amorphous and circular test for what type of creditor can reasonably be deemed “critical”—it is one to whom payment is “critical to the debtor’s reorganization.” In re Financial News Network Inc., 134 B.R. 732, 736 (Bankr. S.D.N.Y. 1991). In practice, courts routinely leave the determination as to which vendors are “critical” to “the sound business judgment of the debtor.” In re United Am., Inc., 327 B.R. 776, 782 (Bankr. E.D. Va. 2005). This wide grant of discretion, however, often leads to disgruntled creditors who have not been designated as “critical” and other parties in interest—including creditors’ committees—questioning whether the debtor’s decisions in this regard are truly objective, made at arm’s length and otherwise justified. However, as evidenced by the Second Circuit Court of Appeals’ recent decision in GLM DFW, Inc. v. Windstream Holdings, Inc. (In re Windstream Holdings, Inc.), 2021 U.S. App. LEXIS 4630 (Feb. 18, 2021), it is nearly impossible to obtain redress in this regard, given both the wide discretion provided to debtors and other nearly impenetrable roadblocks, such as the doctrine of equitable mootness.