David J. Kozlowski Examines Ethical and Practical Risks in Chapter 11 Critical Vendor Practice in ABI Journal

Morrison Cohen Bankruptcy, Restructuring & Governance Partner David J. Kozlowski authored an article in the American Bankruptcy Institute’s ABI Journal titled “Critical Vendors, Coercive Leverage and Lawyer Ethics in Chapter 11.” The piece explores the ethical and practical risks that arise in critical vendor practice and the inherent tension between preserving going-concern value and adhering to the Bankruptcy Code’s distribution scheme.

Drawing on leading cases, including In re Kmart Corp. and In Matter of AWECO Inc., the article highlights the evidentiary burden required to justify critical vendor payments and cautions against using equitable powers to circumvent statutory priority rules.

The article analyzes circumstances in which vendor pressure may cross the line into collection activity subject to the automatic stay, particularly where operational leverage is used to demand payment of pre-petition debt. It also emphasizes the importance of transparency and evidentiary support, noting that debtor’s counsel must build a robust factual record when seeking court approval for critical vendor payments.

In addition, David examines the professional responsibility risks facing vendor’s counsel, including the dangers of overstating legal entitlements or framing coercive collection pressure as routine commercial negotiation. He underscores that critical vendor relief is most defensible when it is narrowly tailored, evidence-based and subject to court supervision, not when “necessity” serves as a proxy for undisclosed leverage.

“The critical-vendor issue is a useful test of professionalism,” David wrote. However, he cautions that where demands become “off-docket” efforts to secure payment of pre-petition debt through operational coercion, “the legal and ethical footing becomes far less secure.”

ABI Journal subscribers may read the article here.