Judge OKs Kmart Emergency Payment

A judge granted an emergency request from financially ailing Kmart Corp. for permission to pay an immediate $10 million in back bills to keep its shelves stocked with liquor, a move it said was vital for its economic survival.

U.S. Bankruptcy Judge Susan Pierson Sonderby on Wednesday also gave Kmart the green light to pay $6 million to maintain shipments of imported goods from Martha Stewart, Jaclyn Smith, Kathy Ireland and other core brands.

At a six-hour hearing, Sonderby decided to hear more evidence before ruling on whether Kmart must make its $685,000 annual payment as a corporate sponsor of the Daytona 500 stock car race. She set a hearing for Feb. 20.

Kmart filed for reorganization under Chapter 11 of the Bankruptcy Act in January after a disappointing Christmas season and plummeting stock prices. It got permission then to halt payment of back bills to all but its "critical" creditors — suppliers of milk, eggs and music products as well as newspapers in which it advertises its wares.

Kmart attorney John Butler Jr. told Sonderby on Wednesday that liquor is vital to the company as well. He said suppliers in at least 19 states had warned that the law barred them from selling on credit. Deliveries were drying up, Butler declared.

"It has a high degree of popularity with customers in terms of drawing customers into its stores," Butler said.

A creditors committee formed by the court expressed no objection to paying the outstanding $10 million liquor bill. But a sharply worded protest came from Steven B. Tobin, an attorney for Capital Factors, a company that serves as a middleman between Kmart and many suppliers.

"Inch by inch, step by step, here we go again," Tobin said. "I realize that the amount is only $10 million. But a million here, a million there, pretty soon it builds up."

Tobin was equally critical of Kmart's request for permission to pay $6 million to cover letters of credit issued in the import of items bearing the Martha Stewart label and other of its core brands. The core brands represented $1 billion in imports last year alone, Kmart said.

Kmart lawyers said that unless the $6 million were paid, millions of dollars worth of goods might not reach stores. Butler said banks that financed the imports and overseas vendors are getting nervous because the money hasn't been paid and disruptions have set in.

He said the banks might not honor $190 million in fresh letters of credit unless old bills were paid up. Tobin scoffed at such talk.

"What they're saying to this court is that they won't honor letters of credit in the future unless they get their $6 million," he said. "... I don't think J.P. Morgan is not going to honor $190 million in letters of credit because they didn't get their $6 million."

Kmart is also in a dispute with International Speedway Corp. over its decision to pull out as a corporate sponsor of the big annual stock car race. The company says it notified the speedway of its decision on Feb. 1. If Sonderby agrees, Kmart won't have to pay the $685,000 called for under its corporate sponsor contract.

But the speedway says Kmart didn't notify it until Feb. 4, which would require payment of the annual fee. The hearing on that issue is the next step in the increasingly complex case that drew so many attorneys that Sonderby had to move to a larger courtroom.

Within hours of filing its petition in January, Kmart got court permission to walk away from leases on 350 locations where it had closed stores but was still paying on the leases. That should save Kmart $250 million annually, Butler said.

So far, Kmart hasn't commented on how many of the stores that are now open will be closed or which ones. The first word on that subject could come at a March 6 hearing at which Butler said he would unveil proposed procedures for store closings.