It is one of the most jarring letters a business can receive. A customer paid you months ago – money you were legitimately owed, for goods you delivered or services you performed. Then the customer filed bankruptcy. Now a trustee is demanding that you give the payment back, and threatening a federal lawsuit if you don’t.
This is a preference action, and if you are on the receiving end of one, two things are true at once. First, the demand is real: the Bankruptcy Code allows trustees to claw back certain pre-bankruptcy payments, even payments on perfectly valid debts. Second – and this is the part the trustee’s form letter never emphasizes – creditors have powerful statutory defenses, and a large share of preference demands are settled for a fraction of the amount claimed, or defeated outright, once those defenses are properly documented and asserted.
The two worst mistakes a creditor can make are paying the full demand reflexively and ignoring the letter until a complaint arrives. Before doing either, read this guide, gather your records, and talk to a bankruptcy attorney who represents creditors. The attorneys at Bunch & Brock in Lexington have defended Kentucky businesses in preference actions for decades; call 859-254-5522 or contact us online before you respond to the trustee.
What Is a Preferential Transfer in Bankruptcy?
When a business slides toward bankruptcy, there is rarely enough money to go around, and debtors tend to pay the creditors they most want to keep happy – key vendors, friendly lenders, family members, insiders. Section 547 of the Bankruptcy Code (11 U.S.C. § 547) exists to unwind that favoritism. It treats certain eve-of-bankruptcy payments as preferences – transfers that preferred one creditor over the others – and allows the trustee to recover them for the bankruptcy estate, where they are redistributed among all creditors of the same class.
Under § 547(b), the trustee may avoid a transfer of the debtor’s property if all of the following elements are met:
- The transfer was made to or for the benefit of a creditor;
- It was made on account of an antecedent debt – a debt that existed before the payment was made (this is why cash-up-front sales are generally safe);
- The debtor was insolvent at the time of the transfer;
- The transfer occurred within 90 days before the bankruptcy petition – or within one year before the petition if the creditor was an “insider,” such as a relative, officer, director, controlling owner, partner, or affiliate; and
- The transfer allowed the creditor to receive more than it would have received in a Chapter 7 liquidation had the payment never been made.
That 90-day (or one-year) window is called the preference period or reachback period. Two features of the statute stack the deck in the trustee’s favor. Intent is irrelevant – neither the debtor nor the creditor needs to have intended anything improper, and “I didn’t know they were in trouble” is not a defense. And under § 547(f), the debtor is presumed to have been insolvent during the 90 days before filing, so the trustee ordinarily does not have to prove that element unless the creditor comes forward with evidence to rebut it. Under § 547(g), the trustee bears the burden of proving the elements of a preference, and the creditor bears the burden of proving any defense.
Creditors understandably find this regime infuriating: you are being asked to return money you were owed, because your customer later filed bankruptcy. The law’s justification is equality of distribution. Without preference recovery, the last creditors paid before a filing would be repaid in full while everyone else split what was left. But Congress balanced that policy with meaningful protections for creditors who were simply doing business normally. That balance lives in the defenses, and the defenses are where these cases are won.
Who Brings a Preference Action – and Where
In a Chapter 7 case, the preference claim belongs to the Chapter 7 trustee. In a Chapter 11 case, it may be pursued by the debtor-in-possession, by a Chapter 11 trustee, by a creditors’ committee that has been granted standing, or – most commonly in larger cases – by a liquidating trustee or plan administrator appointed under a confirmed plan, often a year or more after the filing. In a Chapter 12 family farmer case, the trustee or the debtor may bring the claim. In a Chapter 13 case, preference actions are rare in practice.
Preference actions are brought as adversary proceedings – separate lawsuits filed inside the bankruptcy case, governed by the Federal Rules of Bankruptcy Procedure and, largely, the Federal Rules of Civil Procedure. For Kentucky creditors, that usually means the United States Bankruptcy Court for the Eastern District of Kentucky (Lexington, Frankfort, Covington, Ashland, London, Pikeville) or the Western District of Kentucky (Louisville, Bowling Green, Owensboro, Paducah) – unless the debtor filed elsewhere, which raises the venue question discussed below.
The Trustee’s Due-Diligence Obligation
Before the demand letter arrives, the trustee owes you something. Since the Small Business Reorganization Act amendments took effect in February 2020, § 547(b) has provided that the trustee may avoid a preference only “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses under subsection (c).”
In plain terms, the trustee is not supposed to send a demand to every creditor who received a payment in the 90-day window without first evaluating the obvious defenses. Courts have divided over exactly how much this language requires – some treat it as an element the trustee must plead and prove, others as a lesser procedural requirement – but either way, a demand letter that ignores your ordinary-course payment history, or the new value you extended after the payment, is vulnerable on this ground. Pointing that out, with documentation, is often the opening move in knocking a demand down.
The Creditor’s Defenses Under § 547(c)
Ordinary course of business – § 547(c)(2)
The most frequently asserted defense protects a payment on a debt that was incurred in the ordinary course of business between you and the debtor, if the payment was either (A) made in the ordinary course of business or financial affairs between you and the debtor – that is, consistent with the historical timing, amounts, and method of the debtor’s payments to you – or (B) made according to ordinary business terms in your industry. Since the 2005 amendments these are alternative tests, not cumulative ones. You can prevail on your own consistent payment history with this debtor even if industry norms differ, or on industry norms even without a long history.
What defeats this defense is evidence that the relationship changed during the debtor’s decline: collection calls and pressure, demands for faster payment, a switch from invoicing to cash-on-delivery or wire transfer, unusual lump-sum catch-up payments, or payments made noticeably earlier or later than the historical pattern. Courts typically compare the days-to-pay during the preference period against a baseline period before it; if the preference-period payments fall within the historical range, the defense is strong.
Subsequent new value – § 547(c)(4)
For trade creditors, this is often the single most valuable defense, and the trustee’s initial demand rarely accounts for it. If, after receiving a preferential payment, you gave the debtor new value – shipped more goods, performed more services, extended more unsecured credit – that was not secured by an otherwise unavoidable security interest and was not paid for by an otherwise unavoidable transfer, your preference exposure is reduced dollar-for-dollar by that new value. A vendor who received $50,000 during the preference period but shipped $35,000 of additional product afterward may owe, at most, $15,000. Reconstructing the invoice-and-payment timeline is tedious, but it routinely shrinks demands dramatically, and it is work the trustee will not do for you.
Contemporaneous exchange for new value – § 547(c)(1)
A transfer that both parties intended as, and that in fact was, a substantially contemporaneous exchange for new value – you deliver goods, the debtor pays at or near the same time – is protected, because it does not pay an antecedent debt in any meaningful sense. COD transactions are the classic example. Timing and documented intent both matter; a check that bounces and is replaced weeks later can lose the protection.
Minimum thresholds – § 547(c)(8) and (c)(9)
Small transfers are off-limits entirely. In a case filed by an individual debtor whose debts are primarily consumer debts, the trustee cannot avoid a transfer if the aggregate value of all property transferred to you is less than $600. In a case that is not primarily a consumer case – a business bankruptcy – the floor is $8,575 for cases filed on or after April 1, 2025. The Judicial Conference adjusts this figure for inflation every three years (the next adjustment is due April 1, 2028), so older articles citing $6,825 or $7,575 are out of date; the figure that applies is the one in effect on the date the bankruptcy case was filed.
Venue protection for smaller claims – 28 U.S.C. § 1409(b)
A trustee may sue to recover a money judgment of less than $1,725, or a non-consumer debt against a non-insider of less than $31,425 (for cases filed on or after April 1, 2025), only in the district where the defendant resides – not wherever the bankruptcy is pending. For an out-of-state trustee, having to hire Kentucky counsel and sue a Kentucky creditor in Kentucky changes the settlement math considerably, and demands in this range are often dropped or steeply discounted once the creditor invokes the rule.
The statute of limitations – § 546(a)
Preference actions have their own deadline: generally the later of two years after the order for relief or one year after the appointment of the first trustee (if that appointment happens within the initial two years), and in no event after the case is closed or dismissed. Demands arriving near the deadline are often leverage-driven rather than merits-driven, and a complaint filed after it is subject to dismissal.
Other defenses exist for particular situations – purchase-money security interests (§ 547(c)(3)), floating liens on inventory and receivables (§ 547(c)(5)), statutory liens (§ 547(c)(6)), and alimony and child support payments (§ 547(c)(7)), among others. Which defenses fit, and how much they are worth, turns entirely on your payment records – which is why the first practical step in every preference defense is assembling the complete transaction history.
You Received a Demand Letter. Now What?
A few rules of the road from experience on these cases:
Do not pay the full demand reflexively
Trustees’ initial demands typically claim every dollar transferred in the window, before any defense is applied, and often include payments that are plainly protected. Most preference claims resolve for substantially less once the ordinary-course and new-value analyses are on the table, and the trustee’s counsel expects that negotiation.
Do not ignore it either
An unanswered demand becomes an adversary proceeding – an actual federal lawsuit – and a default judgment is the one outcome with no defense. Deadlines in adversary proceedings are short: an answer is generally due 30 days after the summons is issued.
Understand the hidden cost of delay
Under § 502(d), a creditor that has received an avoidable preference and has not paid it back can have its own claim against the bankruptcy estate disallowed until the preference is resolved – forfeiting whatever distribution it would otherwise have received on the unpaid balance of its invoices. Resolving the preference and preserving your claim usually have to be handled together.
Gather the record
Invoices, purchase orders, credit applications and terms, payment dates, check images and wire confirmations, dunning correspondence, and every shipment or service provided after each payment. The defenses are proved with documents, and the creditor controls most of them.
Do not contact the trustee without a plan
Statements made in an unrepresented phone call – “we knew they were behind, so we pushed them to pay” – can undermine the ordinary-course defense before it is ever asserted.
Get a statute-by-statute analysis before you negotiate
A credible defense letter that walks through the payment history, the new-value ledger, the threshold and venue rules, and the trustee’s due-diligence obligation changes the trustee’s settlement posture in a way that an unrepresented “but they owed me the money!” response never will.
If you have received a preference demand, the analysis can usually be completed within days of receiving your records. Call Bunch & Brock at 859-254-5522 to schedule a consultation before you reply to the trustee.
How Preference Claims Get Resolved
Most preference disputes settle. The trustee is typically working on a contingency or a budget, is managing dozens of similar claims, and has little appetite for trying a case against a creditor with well-documented defenses. Settlements are commonly structured as a lump-sum payment of a negotiated percentage of the demand, sometimes coupled with a waiver of the creditor’s claim against the estate, sometimes with the claim preserved. Where the defenses are strong enough – the ordinary-course pattern is consistent, the new value exceeds the payments, or the amount falls below the threshold – the right answer may be to refuse to pay anything and, if sued, to move to dismiss or for summary judgment. Choosing between those paths is a judgment call that depends on the numbers, the documentation, and the trustee involved, and it is the core of what experienced creditor’s counsel brings to the table.
Kentucky Has Seen This Up Close: The GenCanna Litigation
Preference and avoidance litigation is not an abstraction in the Commonwealth. In January 2020, creditors filed an involuntary Chapter 11 petition against GenCanna Global USA, Inc., a Winchester-based hemp and CBD producer, in the United States Bankruptcy Court for the Eastern District of Kentucky (Case No. 20-50133, later captioned In re OGGUSA, Inc.). The company consented to the bankruptcy, its assets were sold, and the years that followed brought waves of clawback and avoidance litigation reaching growers, equipment suppliers, vendors, lenders, and business partners across state lines – ordinary businesses that were paid for legitimate work and then pursued for the money afterward.
Bunch & Brock represented creditors caught up in the GenCanna case (see our creditors’ rights practice), and that experience informs how we approach every preference matter: we know how trustees and liquidating trustees build these claims, what documentation moves them, and where the settlement ranges tend to land. If you were paid by a Kentucky business that later filed bankruptcy – whether in agriculture, coal, healthcare, construction, hospitality, or any other industry – the same rules apply, and the same defenses are available.
Frequently Asked Questions About Preference Actions
I was legally owed the money. How can the trustee take it back?
Because preference law targets the timing and effect of the payment, not its validity. A payment on a perfectly legitimate debt is still avoidable if it was made in the 90-day window and allowed you to fare better than other creditors – subject to the defenses described above.
How far back can a bankruptcy trustee reach?
Ninety days before the bankruptcy filing for ordinary creditors; one year for insiders such as relatives, officers, directors, partners, controlling owners, and affiliates.
Is there a minimum amount for a preference claim?
Yes. In consumer cases, transfers aggregating less than $600 cannot be avoided. In business cases filed on or after April 1, 2025, the floor is $8,575. The threshold in effect on the petition date controls.
Do I have to be sued in the debtor’s bankruptcy court?
Not necessarily. Under 28 U.S.C. § 1409(b), a non-consumer claim of less than $31,425 against a non-insider (for cases filed on or after April 1, 2025) must be brought in the district where you reside. For a Kentucky creditor, that means a Kentucky bankruptcy court.
What is the deadline for the trustee to sue me?
Under § 546(a), generally two years from the order for relief, or one year from the appointment of the first trustee if later (and the appointment occurred within the two-year period), but never after the case is closed or dismissed.
Will fighting the preference claim affect my claim in the bankruptcy?
It can. Under § 502(d), an unresolved preference liability can block any distribution on your own claim. Resolving the preference and preserving your claim are usually handled together, and a settlement can address both.
What if I already filed a proof of claim?
Filing a proof of claim does not waive your preference defenses, but it can affect where and how the trustee may proceed against you. Have counsel review your claim before you respond to the demand.
Does this apply if the debtor was a Kentucky farm or agricultural business?
Yes. Preference law applies in Chapter 7, Chapter 11 (including Subchapter V), and Chapter 12 cases alike, and Kentucky’s agricultural bankruptcies have produced substantial preference litigation.
The trustee is offering a “discount” if I pay quickly. Should I take it?
Not before the defenses are evaluated. Early-pay discounts are calculated from the gross demand, before ordinary-course or new-value reductions. A 20% discount on a claim that should be reduced by 70% is not a bargain.
I am an insider – a family member or owner who was repaid a loan. What are my options?
Insiders face a one-year reachback and closer scrutiny, but the same § 547(c) defenses apply, and the statutory thresholds and burden of proof are the same. Insider preference cases are fact-intensive and benefit from early counsel.
Talk to a Kentucky Bankruptcy Attorney Before You Respond
A preference demand is a negotiation that begins the moment you respond – and the strength of your position depends on asserting the right defenses, with the right documentation, from the first letter. The bankruptcy attorneys at Bunch & Brock have decades of experience representing creditors in preference actions and throughout the bankruptcy process: analyzing exposure, building ordinary-course and new-value defenses from your records, invoking the threshold and venue protections, negotiating with trustees and liquidating trustees, and litigating in the Eastern and Western Districts of Kentucky when the settlement terms are not right.
Whether you have received a demand letter, been served with an adversary complaint, or simply learned that a customer who recently paid you has filed bankruptcy, talk to us before you pay or reply. Call our Lexington office at 859-254-5522 or contact us online to schedule a consultation.
This article is for general informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship with Bunch & Brock, PSC. Statutory dollar amounts reflect the Judicial Conference adjustments effective April 1, 2025, which apply to cases commenced on or after that date; different amounts apply to earlier cases. For advice about a specific demand or lawsuit, please consult a licensed attorney.
