Recently Cash Crash met a CFO of a large computer software company on a plane. The CFO was beaming because he just collected a $1 million receivable from GIA – money that would not have been paid without the economic bailout. Cash Crash asked the CFO if he considered the possibility that his money may vanish if GIA goes into bankruptcy in the next 90 days.
Bankruptcy Preferences. A bankruptcy preference threatens the CFO’s company with the possibility of a refund to the bankruptcy estate of the $1 million receivable paid to him by GIA. Moreover, a preference lawsuit almost certainly costs the company time and money in litigation. The law presumes that monies paid within 90 days of filing bankruptcy unfairly prefer those payees over other creditors. Those creditors receiving payment must then prove that such payments are defensible, and are “fair” to the other creditors and the bankrupt’s estate.
The three most common defenses to a preference lawsuit filed to recover payments made to creditors during the 90 day period prior to the filing of the bankruptcy petition are all based upon whether the payment was received –
- In exchange for new value (i.e., COD) or “substantially contemporaneous” new value;
- In the ordinary course of business and under ordinary business terms; or
- If, after the payment was received, the creditor provided new or additional value.
So, if the CFO’s company provided software to GIA shortly before or after he received the payment, and if the value of that software was about a million dollars, then the CFO may be able to beat a preference suit. Also, if the amount and the timing of the payment from GIA to the CFO were in keeping with the on-going, prior business relationship between the two, the CFO may be in the clear.