Bankruptcy Preference Concerns in Industrial Development Bond Financing

This article suggests several methods by which investors in industrial development bonds may be protected, in the event of the bankruptcy of the corporate borrower, from the preferential transfer rules of the federal bankruptcy laws. The key to protecting the investors from having payments made to them set aside by the bankruptcy trustee as voidable preferences is shown to lie in the structuring of the bond transaction. The authors indicate how proper structuring of the bond transaction may allow investors to keep pre-bankruptcy payments made by the corporate borrower, while doing no violence to the terms of section 547 of the Bankruptcy Reform Act By reducing preference risks to these investors, the use of industrial development bonds is encouraged, and the salutory effect they have on the economy promoted.