Defending Preference Actions in Bankruptcy: What Creditors Need to Know

Preference actions are one of the most common tools trustees use to recover money in bankruptcy cases, and one of the most frustrating experiences for trade creditors, landlords, service providers, and other businesses that did nothing wrong. Payments that were routine at the time they were made can suddenly be labeled “avoidable,” forcing creditors to defend lawsuits or pay settlements simply to make the problem go away.

Although Congress attempted to curb abusive preference litigation several years ago, recent court decisions show that trustees still retain significant leverage. Understanding how preference claims work, what defenses are available, and how courts evaluate these cases is essential for any creditor facing a demand letter or lawsuit.

What Is a Preferential Transfer?

Under Section 547 of the Bankruptcy Code, a trustee may seek to avoid and recover certain payments made by a debtor shortly before bankruptcy. A transfer is potentially avoidable if all of the following elements are met:

• The transfer was made to or for the benefit of a creditor
• It occurred within 90 days before the bankruptcy filing, or within one year for insiders
• It was made on account of an antecedent debt
• The debtor was insolvent at the time of the transfer
• The transfer allowed the creditor to receive more than it would have received in a Chapter 7 liquidation

If these elements are satisfied, the transfer may be subject to clawback, unless a statutory defense applies.

Common Preference Defenses

Many preference defendants have strong defenses that can significantly reduce or eliminate exposure. The most frequently asserted defenses include:

• No Preference: One or more elements of Section 547(b) are not met, such as where a payment was not made on account of an antecedent debt.
• Ordinary Course of Business: The payments were consistent with the parties’ historical dealings or ordinary industry practice.
• New Value: After receiving an allegedly preferential payment, the creditor provided additional goods or services that replenished the estate, often determined through a relatively straightforward accounting analysis.

Despite the availability of these defenses, trustees have historically filed large numbers of preference actions without thoroughly evaluating them. Creditors were often forced to incur legal fees or pay nuisance settlements, regardless of the merits.

Trustee Due Diligence and the Modern Preference Landscape

To address these concerns, Congress amended Section 547 to require trustees to conduct reasonable due diligence before filing suit, including taking into account known or reasonably knowable affirmative defenses. The goal was to discourage assembly-line litigation and require trustees to exercise judgment before suing creditors.

In practice, courts have taken a restrained approach. Most decisions hold that trustees must conduct some investigation, but the threshold is modest. A general allegation that the trustee reviewed records and considered defenses is often enough to proceed past the pleading stage.
A recent 2025 decision, Rebein v. Tempel Grain Elevators, LLP (In re Sandy Road Farms, LLC), illustrates how courts are applying this standard.

The Sandy Road Farms Decision

In Sandy Road Farms, the trustee sent standard preference demand letters. The defendants responded with detailed explanations of their defenses. The trustee nevertheless filed adversary complaints alleging that he reviewed the debtor’s records, analyzed the transfers, evaluated asserted defenses, and requested additional information where necessary.

The defendants moved to dismiss, arguing that the trustee failed to conduct reasonable due diligence before filing suit.

The bankruptcy court held that the due diligence requirement functions as a condition precedent to filing a preference action, but that it is easily satisfied at the pleading stage. Broad allegations of diligence were sufficient, and the trustee was not required to plead facts negating affirmative defenses.

The practical result is that even claims with apparent defenses may survive dismissal, requiring creditors to litigate through discovery and potentially summary judgment before obtaining relief.

How Courts Are Evaluating Trustee Due Diligence

Courts across the country have taken similar, though not uniform, approaches.

A leading bankruptcy treatise emphasizes that due diligence is an objective standard, measured by what a reasonable trustee would do under the circumstances. Factors such as the size of the estate, the quality of records, and the availability of information may influence what diligence looks like in a given case.

Some courts have been critical of complaints that provide no meaningful context, fail to describe the business relationship between the parties, or ignore obvious ordinary course or new value issues. Where trustees describe the relationship, review transactional documents, and explain the basis for the claim, courts generally allow cases to proceed.

A smaller number of courts have demanded more. In certain cases, complaints that merely recite statutory language without factual support have been dismissed. While these decisions remain the exception, they signal that conclusory pleading is not always sufficient.

What This Means for Creditors

For creditors, the takeaway is clear. Preference litigation remains heavily tilted in favor of trustees at the early stages. Even where defenses are strong, courts often require a developed factual record before resolving disputes.

That makes early strategy critical. Creditors should respond thoughtfully to demand letters, document their defenses, and create a clear written record as early as possible. While that effort may not prevent a lawsuit in every jurisdiction, it can materially affect settlement leverage, discovery scope, and ultimate outcomes.

Parkins & Rubio: Experienced Preference Defense Counsel

Parkins & Rubio represents creditors in Section 547 preference actions, helping clients protect legitimate payments, reduce or eliminate liability, avoid double recovery, and navigate the bankruptcy process efficiently. We also defend Section 548 fraudulent conveyance actions by challenging improper clawback claims, asserting statutory defenses such as good faith and reasonably equivalent value, and minimizing financial exposure.

If you have received a preference demand letter or adversary complaint, experienced defense counsel can make a meaningful difference, from the first response through final resolution.