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The Bankruptcy Hotline
Forbearance Agreement Does Not Create New Value
The Seventh Circuit has ruled that a Microsoft software reseller's forbearance from reporting missed payments to Microsoft does not create new value pursuant to ' 547(c)(4) and that payments made to the reseller within the preference period must be returned to the bankruptcy estate. In re ABC-Naco Inc., No. 06-1719 (April 9).
Unsecured creditors sought the return of nearly $1 million in payments made by the debtor during the preference period for Microsoft products purchased from a reseller. The purchase agreement with the reseller called for the debtor to make quarterly payments for three years. As per Microsoft's policy, the debtor had signed two agreements that provided Microsoft with the right to revoke the licenses if the debtor failed to pay the reseller (who was not a signatory to these agreements). The debtor made regular payments until the third year, when it made payments late and ultimately made four payments within 90 days of its bankruptcy filing. The bankruptcy court held that the payments were not preferential and the district court reversed.
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