Loans Disguised as Invoice Purchase Agreements

Courts have found that invoice purchase agreements may constitute disguised loans, which are subject to preferential avoidance by a bankruptcy trustee under Section 547 of the Code.

Creditors have tried to avoid the effect of Section 547 by entering into these “invoice purchase agreements” which are secured by the debtor’s property such as accounts, inventory, and general intangibles. Under these arrangements, the creditor agrees to purchase the debtor’s accounts receivable at a discount below face value.

These arrangements are often avoided on the basis that they are not true sales, and are instead financing agreements. A common element of these sham purchases is the complete shifting of risk of uncollectability of the account to the debtor. If the agreements were true sales, then the purchaser would accept the accounts whether or not they were collectible.