Attorney for Creditors Defending a Bankruptcy Preference or Clawback Demand in New York

A letter arrives on the letterhead of a bankruptcy trustee or a liquidating trust. It says that in the ninety days before your customer filed for bankruptcy, you received $140,000 in payments, that those payments were "preferential transfers," and that you must return the money within thirty days or face an adversary proceeding in bankruptcy court.

You did nothing wrong. You shipped goods, you performed the work, you sent invoices, and you were paid what you were owed. The demand still has a statutory basis — and ignoring it is the one response guaranteed to make things worse. But preference demands are also routinely overstated, frequently sent in bulk without any review of the underlying account, and very often defeated or reduced substantially by defenses that exist in the creditor's own records.

This page explains what the trustee actually has to prove, the defenses that dispose of most trade-creditor claims, the deadlines on both sides, and how these disputes are realistically resolved.

What the Trustee Must Prove: 11 U.S.C. § 547(b)

A preference is not fraud and does not imply misconduct. Congress created the remedy to promote equal treatment among similar creditors and to discourage a race to dismember a failing business. To avoid a transfer, the trustee must establish every one of the following:

1. A transfer of an interest of the debtor in property — the money or property must have belonged to the debtor.
2. To or for the benefit of a creditor — including payments that benefit a guarantor, which is how insiders get pulled in.
3. On account of an antecedent debt — the obligation existed before the payment.
4. Made while the debtor was insolvent.
5. Made within 90 days before the petition date — extended to one year where the creditor was an insider, such as an officer, director, relative, or affiliated company.
6. That enabled the creditor to receive more than it would have received in a Chapter 7 liquidation had the transfer not been made.

Two structural points matter immediately. Under § 547(f), the debtor is presumed insolvent during the 90-day period, so element four is effectively conceded unless you can rebut it. But under § 547(g), the trustee carries the burden of proof on every element of § 547(b), while the creditor carries the burden on the affirmative defenses in § 547(c). And element six is a genuine defense in one common scenario: a fully secured creditor receives no more through payment than it would have received in liquidation, so payments to a properly perfected, fully secured creditor are generally not preferential at all.

The 2019 Due Diligence Requirement

The Small Business Reorganization Act of 2019 amended § 547(b) to require that the trustee proceed "based on reasonable due diligence in the circumstances of the case and taking into account a party's known or reasonably knowable affirmative defenses." Courts have divided on whether this is a pleading element or an affirmative defense, but its practical value to creditors is not in dispute: a substantive, document-supported response to a demand letter puts your defenses squarely within the trustee's knowledge. A trustee who sues anyway, on a claim the response showed to be defended, faces an argument that no longer exists at the pleading stage.

The same legislation raised the venue floor in 28 U.S.C. § 1409(b). Small non-consumer preference actions must be brought in the district where the defendant resides rather than in the bankruptcy court's home district — a meaningful protection against the economics of defending a modest claim in a distant forum. The threshold was set at $25,000 and is adjusted for inflation every three years, so confirm the figure applicable to the petition date in your case.

The Defenses That Win or Shrink Most Claims

Subsequent New Value — § 547(c)(4)

The most powerful defense for suppliers and subcontractors. To the extent that, after receiving a preferential payment, you extended further credit — shipped more goods, performed more services — that new value offsets the exposure. A creditor who kept doing business with a struggling customer throughout the preference period often reduces a six-figure demand to a fraction of it, and sometimes to zero. Courts differ on whether the new value must remain unpaid, and the answer materially changes the calculation, so the analysis has to be built on actual invoice and delivery dates rather than on a summary.

Ordinary Course of Business — § 547(c)(2)

A transfer is protected if the debt was incurred in the ordinary course of business or financial affairs of both parties, and the payment was either (A) made in the ordinary course of business between them, or (B) made according to ordinary business terms in the industry. Since 2005 these prongs are disjunctive — you need only one.

The subjective prong (A) is proven by comparing the payments in the preference period to the parties' own history: average days from invoice to payment, method of payment, invoice amounts, and whether collection pressure changed. A relationship in which invoices were consistently paid at 55 to 70 days for three years, and were paid at 60 days during the preference period, is a strong subjective case. What defeats it is a change in pattern — suddenly demanding payment before shipping, switching to wire transfers or certified checks, or a payment that follows a threat of suit. The objective prong (B) is proven with evidence of prevailing terms in your industry, sometimes through expert testimony.

This defense is won or lost on the payment ledger, which is why the first task in any preference matter is assembling the complete transaction history — typically two to three years before the petition date, not just the ninety days.

Contemporaneous Exchange for New Value — § 547(c)(1)

Where the parties intended a substantially contemporaneous exchange and the exchange was in fact substantially contemporaneous, there is no preference — the debt was not antecedent. This covers cash on delivery, payment against a bill of lading, and credit card or certified-funds transactions at the point of sale.

The Money Was Never the Debtor's Property

Element one fails entirely where the funds did not belong to the debtor. In New York this defense has unusual force in construction cases: funds received by an owner or contractor for an improvement of real property are impressed with a statutory trust under Lien Law Article 3-A for the benefit of subcontractors, suppliers, and laborers. Payments made out of Article 3-A trust funds are not transfers of the debtor's property and are outside § 547. Similar reasoning protects properly maintained escrow funds, payroll tax withholding, funds held as agent, and money supplied by a third party under the earmarking doctrine, where a new lender's funds are advanced specifically to pay an existing creditor and the debtor never controls their disposition.

Statutory Floors and Other Defenses

• § 547(c)(9) — no avoidance in a case involving primarily non-consumer debts where the aggregate value is below a statutory floor, adjusted every three years under 11 U.S.C. § 104. § 547(c)(8) sets a $600 floor in consumer cases.
• § 547(c)(3) — a purchase money security interest perfected within 30 days after the debtor receives possession.
• § 547(c)(5) — the improvement-in-position test for inventory and receivables floating liens.
• § 547(c)(6) — statutory liens that are not otherwise avoidable, including mechanic's liens perfected under the New York Lien Law.
• § 553 setoff — mutual pre-petition debts, subject to the 90-day improvement-in-position rules.
• § 550(b) — a subsequent transferee who took for value, in good faith, and without knowledge of voidability is protected; a bank or agent that merely passed funds through may also defeat liability as a mere conduit that never had dominion over the money.

The Other Clawbacks: § 548, § 544, and § 549

Preference is only one avoidance theory, and demand letters often bundle several.

• Fraudulent transfers — 11 U.S.C. § 548. Reaches two years before the petition. Either actual intent to hinder, delay, or defraud, or constructive fraud: the debtor received less than reasonably equivalent value while insolvent, undercapitalized, or unable to pay debts as they matured. Constructive fraud requires no bad intent by anyone, which surprises defendants — the good faith and reasonably equivalent value inquiries do the work.
• State law transfers — 11 U.S.C. § 544(b). The trustee may stand in the shoes of an actual unsecured creditor and use New York's Uniform Voidable Transactions Act, Debtor and Creditor Law §§ 270–281, adopted for transfers made on or after April 4, 2020. This extends the reach-back to four years, well beyond § 548, which is why older transactions still appear in demand letters.
• Post-petition transfers — 11 U.S.C. § 549. Payments received after the filing are recoverable on a much simpler showing. If you were paid after the petition date, that money almost always goes back, and it is a separate exposure from the preference analysis.

Deadlines on Both Sides

Under 11 U.S.C. § 546(a), an avoidance action must be commenced by the later of two years after the order for relief or one year after the appointment of the first trustee, if that appointment occurs within the initial two years. Section 549 actions carry their own two-year limit. In Chapter 11 cases, a confirmed plan may preserve claims in a liquidating trust with its own deadlines.

This produces the pattern creditors find so disorienting: the demand arrives eighteen to twenty-three months after the bankruptcy, long after the file was closed. It is not a sign the trustee has developed evidence. It is a sign the limitations period is about to expire, and it explains why the letters go out in batches with little case-specific review.

On your side, once an adversary proceeding is served, an answer is due within 30 days under FRBP 7012. Default judgments in preference actions are common and are entered for the full amount demanded. Never let one enter.

The Proof of Claim Trap

Two consequences flow from whether and how you participate in the main case, and both should be decided before the demand letter is answered.

Section 502(d) requires the court to disallow the claim of any entity from which property is recoverable under the avoidance sections, unless that entity has turned the property over. If you hold a substantial claim in a case with a meaningful distribution, an unresolved preference exposure can block it.

Jury trial rights. A preference defendant who has not filed a proof of claim generally retains a Seventh Amendment right to a jury trial and may seek withdrawal of the reference to the district court. Filing a proof of claim submits the claim to the equitable claims-allowance process and is generally held to waive that right. Because the prospect of a jury trial outside the bankruptcy court is real settlement leverage, this is a strategic decision, not a clerical one — particularly in cases pending in the Southern District or Eastern District of New York, where preference dockets are active.

How to Respond to a Demand Letter

1. Do not pay, and do not ignore. An unanswered letter becomes a complaint; a voluntary payment forfeits defenses worth more than the payment.
2. Calendar the limitations date from the petition date and the trustee's appointment. Some demands arrive on claims already time-barred.
3. Pull the full account history — at minimum two to three years of invoices, payment dates, check or wire dates, credit memos, and shipping or completion records. Payment date generally means the date the check cleared, not the date it was written, and that distinction moves transfers into and out of the 90-day window.
4. Build the new value schedule — every shipment or service delivered after each payment, with dates and amounts.
5. Compute the ordinary course baseline — average days to pay before and during the preference period.
6. Check whether you were secured, held a mechanic's lien, or were paid from trust or escrow funds.
7. Issue a litigation hold on emails, collection notes, and credit files. Internal messages about tightening terms are exactly what the trustee will seek in discovery.
8. Respond substantively and in writing, with the supporting schedules attached. This is where the § 547(b) due diligence requirement earns its keep, and where most claims are resolved without litigation.

Settlement Economics

Preference claims settle, and the numbers reflect defenses rather than principle. A creditor with a documented new value schedule and a stable payment history often resolves for a small percentage of the original demand, and claims fully covered by new value are frequently withdrawn. Two realities shape the negotiation: the trustee's recovery is for the estate net of professional fees, so a claim requiring full litigation is worth less to the estate than a prompt reduced payment; and the cost of defending through discovery and trial can approach the exposure on a modest claim, which is what the bulk-demand model relies on. The purpose of a rigorous early response is to change that calculation before either side has invested in litigation.

If you also hold an unpaid balance, a claim in the case, or collateral, those pieces belong in the same negotiation. Our related page on recovering a judgment when the debtor declares bankruptcy covers claims, liens, and dischargeability, and the meeting of creditors is often where the estate's real posture becomes visible.

Frequently Asked Questions

The debtor owed me the money. How can taking it be improper?

It generally is not improper, and no wrongdoing is alleged. Section 547 is a distributional rule: it pulls back payments made during the debtor's slide into bankruptcy so that similarly situated creditors share proportionally. That is also why the defenses are broad — Congress did not intend to punish creditors who kept supplying a struggling customer.

We were paid in cash before delivery. Are we exposed?

Generally no. Payment at or near delivery is a contemporaneous exchange for new value under § 547(c)(1), not a payment on an antecedent debt.

The demand covers a payment we received four months before the filing.

Then it falls outside the 90-day window unless you are an insider, in which case the reach is one year — or unless the trustee is proceeding on a fraudulent transfer theory under § 548 or New York's Debtor and Creditor Law, which reach two and four years respectively. Identify which statute is actually being invoked before responding.

We are a subcontractor who was paid on a New York construction project.

Examine Lien Law Article 3-A immediately. Funds received for the improvement of real property are statutory trust assets, and a payment out of trust funds is not a transfer of the debtor's property — a complete defense to the preference element rather than an affirmative defense.

Can we just refuse to appear? The claim is small and the court is far away.

No. A default judgment is entered for the full amount and is enforceable like any other federal judgment. If the claim is small and non-consumer, 28 U.S.C. § 1409(b) may require the trustee to sue where you reside instead, which is itself a reason to appear and raise it.

Should we file a proof of claim while a preference demand is outstanding?

Decide it deliberately. Filing preserves a share of any distribution but is generally treated as waiving the right to a jury trial on the preference claim, and § 502(d) may block the claim anyway until the preference is resolved. The right answer depends on the size of your claim, the projected distribution, and the strength of your defenses.

You can contact the Law Offices of Albert Goodwin by phone at 212-233-1233 or by email at [email protected].