Kmart sues Texas papers to regain $535,000

Kmart has sued at least 35 Texas dailies and weeklies in an attempt to regain more than $535,000 the retailer paid for advertising placed dating back nearly two years ago.

Hundreds of more newspapers nationwide also were served notice of the lawsuit that Kmart Corp. filed on Jan. 26 in a federal bankruptcy court in Chicago seeking about $30 million from newspapers.

The Texas newspapers affected are primarily small to medium-size dailies and include several newspaper groups. At least one semiweekly newspaper in Texas also is affected.

The Newspaper Association of America’s legal department has been following the issue at the national level and issued the following summary of the case earlier this month.

As newspapers already were anxiously awaiting a ruling on their status as “critical trade vendors” in the Kmart bankruptcy, many papers were served earlier this month with a lawsuit seeking recovery of payments previously received from Kmart for advertising.  

This lawsuit is the most recent piece of a complicated bankruptcy proceeding that got under way a little more than two years ago.

NAA also is looking into whether it can facilitate a joint defense for those members that are interested.

A quick review of what has happened:  This past summer, newspapers began receiving letters from Kmart demanding a refund of payments made for advertising dating back more than a year and a half under an order issued at the outset of the company’s bankruptcy proceedings.

The demand letters were the result of a ruling from a federal district court in Illinois on April 10, 2003, that reversed a bankruptcy court’s order authorizing payment to certain critical trade vendors. Critical trade vendors include those vendors that the court determined needed to be paid in full and on time in order for Kmart to continue operating throughout, and ultimately beyond, the bankruptcy proceeding.

Newspapers were included and paid by Kmart as critical trade vendors under the bankruptcy court order, which was issued on Jan. 25, 2002

The federal district court’s April reversal of that order is what puts the validity of the payments to the newspapers in question, but the district court’s

order is currently under review by the 7th U.S. Circuit Court of Appeals in Chicago. Oral arguments were heard at the end of last month, and a ruling is expected this spring.

The status of the recent lawsuit against newspapers: Kmart recently filed an action against hundreds of newspapers to recover the critical trade vendor payments in order to protect its right to recover critical trade vendor payments should the circuit court uphold the district court’s ruling. That lawsuit, according to Kmart’s attorneys, will be held until the appellate court rules. Depending on the ruling, the lawsuit against newspapers and suits against other critical trade vendors will either move forward or be withdrawn.