​In this article, we present a summary of the options available to companies in financial distress, including a discussion of the advantages of, and treatment of small businesses under, Chapter 11 of the Bankruptcy Code.

​Most bankruptcy attorneys will confess that they delight in telling the non-bankruptcy attorney for the other side that a bankruptcy case has been filed and that a contractual termination provision or other right governed by state law is suddenly superseded and rendered superfluous by the Bankruptcy Code, 11 U.S.C. § 101 et seq., which is federal law. In other words, my law trumps your law.
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When bankruptcy law and the policy considerations underlying it intersect (or collide) with intellectual property law, which is also primarily federal law and is based on its own compelling (and often competing) set of policy considerations, the analysis becomes much more complex. This article explores the attempts by Congress and the courts to resolve the issues that arise when intellectual property license agreements become part of a bankruptcy estate and describes the protections that may be available to, and the pitfalls that should be avoided by, licensors and licensees.

A preference is a transfer (usually a payment) that is made:

1. By an insolvent company to or for the benefit of a party,
2. On account of an existing debt,
3. Within 90 days (or a year, if the party receiving the transfer is an insider of the company) of the filing of the bankruptcy case; and
4. That allows the party to receive greater value than it would otherwise if the company making the transfer were liquidated.

​Chapter 11 of the Bankruptcy Code is federal statutory law. If a financially distressed company is seeking to continue to operate and emerge from bankruptcy as a new and improved company, while maintaining the option of selling off its assets in an orderly fashion, it would file Chapter 11. If it has no choice but to liquidate it may file Chapter 7, in which case a trustee is appointed to sell off the assets.