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Bankruptcy FAQ


The recent bankruptcies of several large brands have impacted many of our members. A number of members have received letters from attorneys or bankruptcy trustees demanding they return payments received during the 90 day “look back” period prior to the brand filing for bankruptcy. Below is some information in response to common questions about these letters. The following is provided as initial guidance, and is not intended as legal advice. Members should consult with their legal advisors.  

Frequently Asked Questions Regarding Bankruptcy Cases Filed by Your Clients

1. Why did I receive a letter regarding a client’s bankruptcy?

 Answer: If your client files for bankruptcy, you may receive letters from the bankruptcy court or from a law firm representing the debtor or its trustee. 

One common letter is a “notice to creditor.” This letter is to inform you that your client initiated bankruptcy proceedings. Normally, this notice puts a hold on your ability to collect on any outstanding invoices directly from the client. It also includes a deadline by which you must submit a “proof of claim,” which is information and evidence about how much your client owes you. It is important to comply with this deadline. If you miss the deadline, you may lose your ability to recover anything from the client. If you receive a “notice to creditor” letter, you should consult with your attorney about how best to respond.

Sometimes, you may also receive a letter demanding that you return money that the client recently paid you. The Bankruptcy Code provides that certain payments made by debtors to creditors within 90 days before the bankruptcy petition was filed may be “clawed back,” i.e., returned to the client so that it may be distributed to the creditors as part of the bankruptcy plan. For more information,  Google “Bankruptcy Preferences Section 547.” 

2. What should I do if I receive a letter demanding that I repay money?

Answer: First, do not ignore the letter. These letters are common, customary, and usually legitimate. If you receive a letter of demand, send it to your attorney to confirm its legitimacy. You may then respond to it in writing via an email.  You may request an extension of time to respond to the letter if needed. Usually, this is granted.

There are “defenses” to the demands. Common applicable defenses include (1) the “subsequent new value” defense (i.e., an offset for the value of new services provided to the client after the first payment occurring during the preference period), and (2) the “ordinary course of business” defense (i.e., an exemption for payments made as part of, and according to the regular schedule of, your usual course of dealings with the client). 

It is possible to negotiate down the amount to be returned, structure repayments over time, or avoid the repayment altogether. You should  discuss with your attorney how best to respond to the demand letter..

3. What can I do to protect myself from a future bankruptcy filing by my client?

Answer: First, exercise risk management. If you find that your client is showing signs of financial distress, such as by way of late payments, do not extend more credit than you can afford to lose.  Second, require payment in advance whenever you can. Be aware that any payments received within 90 days of a bankruptcy petition will always be at risk of being subject to the “claw back” under the Bankruptcy Code.  

4. What if I already paid out the money to my artists or to cover production expenses, do I still have to return it?

Answer: Just because you receive funds from a client that you then pay over to an artist or vendor, that does not necessarily shield you from liability. However, it may be advisable to segregate the money you receive to cover your fees and overhead from the money that simply “passes through” your company.

One potential bankruptcy defense is whether the recipient of the payment had “dominion or control” over the funds. This is not a clear-cut defense, but it would be helpful evidence if you always segregate the portion of funds you collect on behalf of your artists into a separate account from your operating account. Have your contract with both your client and artist state that you will do so. The segregated account will be helpful evidence to show that you did not have “dominion or control” over the funds.

If possible, have the client pay the production expenses to the production company directly, rather than have the funds pass through your account.

Please note that, although this practice may relieve you from having to pay back money you received from a client, it may expose your artist, production company, or other vendor to a similar clawback claim. 

5. What should I do if the money I received from the client was in exchange for an assignment or license of a copyright?

Answer: Retain a bankruptcy attorney. The treatment of licenses and copyrights in bankruptcy is complex. Clients sometimes have authority to override bankruptcy freezes to pay out IP licenses or buyouts for work that continues to be used post-bankruptcy. It is common for a debtor/client to treat these issues as favorably as possible for the debtor. Bankruptcy operates under a “protect your rights or don’t complain” standard. Notice may be given by mail, in single spaced, dense paragraphs that are hard to understand. This is an area that should be explored with your attorney.      

6. What should I do if I get bankruptcy notices in the mail?

Answer: No joke! – Read them! Make a friend join you for a cup of coffee and read them together. Have a good laugh and some sympathy for the people who make their living writing stuff like that, but read them! Theoretically, the documents are meant to be comprehensible to an ordinary reader. If you cannot understand them, retain a bankruptcy attorney.

7. What is a Notice of a Proof of Claims Bar Date?    

Answer: This is a notice of an important deadline. Don’t miss the deadline! It is a deadline for filing a claim for the amount you are owed from the client. All you have to do is fill out a form that will be mailed to you. (A fillable pdf version is available online). In some of the bigger and better run bankruptcy cases, a third-party provider is used. They have a website where you can file the claim through their website. It is easy to do. You attach invoices and basic back-up information to show how much is owed to you up to the petition date. Be sure you receive confirmation that you have timely filed the claim. Again, do not miss the deadline, which is a deadline of actual receipt of the claim by the court or claims processor; it is not sufficient to only have your claim postmarked by the deadline.