Additional Preference Protection in Recent Stimulus Legislation: Reality or Illusion?

The COVID-19 pandemic and related economic shutdowns have wreaked havoc on companies in numerous industries. As a result, many customers have sought extended payment terms, and trade creditors have agreed to defer their payment terms as an accommodation to their struggling customers.

However, such accommodations may have unintended consequences if the customer is financially distressed and eventually files for bankruptcy. Any extended payment terms, or other concessions or changes, may increase the risk that the creditor will be subject to preference liability (i.e., the turnover of payments made to the creditor within the 90-day period before the bankruptcy filing). This increased preference risk arises from the potential loss of the “ordinary course of business” defense, one of the major defenses to preference liability.