A preferential transfer is a payment or a transfer of property by an insolvent business to a creditor shortly before (usually within 90 days) filing for bankruptcy. Under the United States Bankruptcy Code, trustees may attempt to “claw back” such payments made before a bankruptcy filing. The primary purpose of this rule is to insolvent debtors from favoring certain creditors. The goal is fairness—but the law also recognizes that many ordinary business transactions should not be undone.
If a company has been sued by a bankruptcy trustee to recover an alleged preferential transfer, the company may seek protection under several well-established defenses. Many routine payments qualify for the “ordinary course of business” defense. If the debt was typical for the parties and the payment timing, method, and amount were consistent with prior dealings (or industry standards), the transfer may be protected. Other defenses, such as contemporaneous exchange for new value, subsequent new value, or proof that that the creditor was fully secured, can significantly reduce or eliminate exposure. In many cases, trustees rely on volume filings and incomplete information, creating meaningful opportunities to challenge or negotiate claims.
Preference litigation is often defensible and frequently negotiable—but only with a strategic, evidence-driven approach. Because preference actions are highly fact-specific, documentation and timing matter greatly. A careful review of payment history, contracts, and post-payment activity is critical to evaluating the defense strategy.
If your company has received a demand letter or complaint, early action can materially improve the outcome, and we at Chugh, LLP would welcome the opportunity to evaluate your exposure and position you for the strongest possible defense.
