The "Boomerang" Effect

If you are owed money from a customer who is insolvent, beware of the "boomerang" effect that can happen to vendors. If the customer files for bankruptcy protection, there is a legal basis for seeking repayment of the funds that were made to vendors within 90 days of the bankruptcy filing if such payments are considered to be a "preference" payment over other vendors. This means the vendor provided a preference by way of payment received more than the vendor would have received if the case had been filed under Chapter 7 of the bankruptcy code (liquidation) and also more than the vendor would have been paid after the debtor company filed for bankruptcy protection.

In a Chapter 11 Bankruptcy filing earlier this year, Quantum Foods through the creditor's committee has sued over 72 vendors alleging preference claims and the entitlement to the repayment of millions of dollars. As vendors wade through quicksand of customer insolvency culminating in bankruptcy filings, they should be aware of payments made to them that can result in preference payments and liabilities back to the debtor a vendor may be subject to.

To learn more about risk management and how to avoid the boomerang effect, contact the Goosmann Law Firm at info@goosmannlaw.com or call 712-226-4000.