An ABI Committee Newsletter
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| Vol 19, Num 3 | November, 2025
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by Charles M. Tatelbaum, Tripp Scott, P.A., Fort Lauderdale, Fla.
David A. Ray, Tripp Scott, P.A., Fort Lauderdale, Fla.
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WSJ Pro Bankruptcy recently reported that “Suppliers Get Burned in Expensive Bankruptcy Cases.” It was also recently reported that business bankruptcies increased more than 70% in 2024. Many of these business bankruptcy cases involve small-to-medium-sized businesses that are now struggling because of the various economic and political factors that have reduced sales and increased the costs of doing business. At the same time, many commercial and private lenders are lowering and restricting business borrowings based on the fear of a possible business downturn.
When a business seeks protection under chapter 11, it is almost always authorized
by the bankruptcy court to continue operating its business as a debtor-in-possession, which enables the corporate debtor to operate its business as a fiduciary subject to court supervision. In such situations, there is often a need for credit to be extended by existing vendors, suppliers and subcontractors to the debtor-in-possession so that it can continue to operate. Bankruptcy law provides that credit extended to a debtor-in-possession must be paid in the ordinary course of business, but in the event of a failure or liquidation, the debt will be entitled to top priority amongst the unsecured creditors. Because of the uncertainties of the continuing business, many creditors are hesitant to simply extend credit to a debtor-in-possession based on a promise of timely payment and an amorphous priority in the event of liquidation.
Beginning with the first chapter 11 proceeding for
Kmart, bankruptcy courts developed the “critical vendor” concept, which is a situation where a particular supplier of goods or services is deemed to be of critical importance to the viability and continuation of the debtor-in-possession’s operation. Upon such a finding, the bankruptcy court may authorize the debtor to pay to the creditor all or part of its pre-bankruptcy obligations on the condition that the creditor extend new and many times increased credit to the debtor-in-possession. As an inducement for the extension of this credit to the debtor-in-possession, the court can enter an order granting the creditor what is known as “super-priority status.” This means that in the event of a liquidation, the critical vendors’ obligations will be paid ahead of all other unsecured creditors except those that may have equal super-priority status.
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