Kmart Holding Corporation confirms that it has filed a complaint in U.S. Bankruptcy Court for the Northern District of Illinois against Handleman Company to recover the $49 million critical vendor payment Kmart paid to Handleman at the outset of Kmart’s Chapter 11 bankruptcy proceedings in 2002.
Prior to filing the complaint against Handleman, Kmart requested either the return of the $49 million for placement in a segregated account to maintain the status quo, or a letter of credit guaranteeing that amount pending the outcome of the “critical vendor payment issue” which is under review with the Seventh Circuit Court of Appeals. Handleman refused to comply with Kmart’s requests.
Julian C. Day, President and Chief Executive Officer of Kmart, said: “This management team continues to work hard to improve business relationships with our vendors. Notwithstanding the legal outcome of the critical vendor payment issue, Kmart and our vendors seek to maintain positive and profitable relationships going forward.”
On April 10, 2003, the United States District Court for the Northern District of Illinois, Eastern Division, reversed the Bankruptcy Court’s order authorizing payment of prepetition claims of certain critical trade vendors. As a result, under the current state of law as determined by the District Court and certain other circuit courts, Kmart’s payment of $49 million to Handleman at the outset of the bankruptcy case was not authorized. Although it did not order the immediate return of the money, the District Court said, “It is not too late for the monies to be returned.”
The District Court decision has been appealed to the Seventh Circuit Court of Appeals. Kmart believes it has the fiduciary duty to its stakeholders to pursue recovery of the critical vendor payments in the event that the Court of Appeals affirms the District Court decision. In light of the magnitude of the amount of money paid to Handleman, it is important that Kmart’s ability to recover such amounts is protected. If the court’s ruling is adverse to Handleman, Kmart intends to pursue from Handleman recovery of the critical vendor payment. Kmart does not believe that any defenses that may be asserted by Handleman will prevent a recovery of money by Kmart.
