United States: The Preference Payment Predicament

Last Updated: October 11 2017
Article by Ralph Colasuonno

Most companies extend unsecured credit to their customers as a routine and often daily part of their business—a supplier ships parts to its customer along with an invoice and, at some point thereafter, the customer submits payment. Life is good.

Imagine a scenario, however, where a supplier ships $1,000,000 worth of parts to its customer. An invoice is sent and sometime thereafter the supplier receives payment. Shortly after payment is received and applied, the supplier receives a letter from a U.S. Bankruptcy Trustee informing the supplier that its customer has filed for bankruptcy protection and demands the return of the $1,000,000 because such payment was made by the customer in the 90 days preceding the customer's bankruptcy filing. The trustee's letter also accurately points out that under the Bankruptcy Code (Code) a trustee may avoid and recover such "preferential" payments for the benefit of the bankruptcy estate. Finally, the letter indicates that failure to return the $1,000,000 will result in the trustee filing a lawsuit against the supplier, as creditor, for the return of the $1,000,000 paid by the customer, as debtor. All of a sudden life has become a bit more complicated.

All is not lost, however. If you find yourself in this situation as supplier/creditor, you should, upon receipt of such a letter demanding the return of alleged "preference" payments, immediately begin a detailed analysis to determine whether such payments were indeed preferential or whether you may have defenses to such an action. Maintaining excellent records of transactions with your customers will greatly aid in the analysis.

The first step in an analysis is to determine whether the payment meets all the statutory elements of a "preference" payment. Generally speaking, a trustee may recover payments made by your customer which were made on account of antecedent debt. The payment must occur while your customer is insolvent and within the 90 days preceding your customer's filing for bankruptcy. All of these elements must be met by the trustee or no preference case exists. For example, if you receive a "cash on delivery" or "cash in advance" payment during the 90 days preceding your customer's bankruptcy filing, no preference payment exists. The payment would not be considered "on account of antecedent debt" (i.e. a debt existing before the transfer was made).

If all preference elements appear to be met, you should proceed to the next step in the analysis to determine whether to avail yourself of any of the various statutory "defenses" to a preference claim under 11 USC 547(c). This includes determining whether the payment was made in the ordinary course of business between the parties, 11 USC 547(c)(2), or whether you gave subsequent new value to your customer following the alleged preferential transfer, 11 USC 547(c)(4). For the "ordinary course" defense, you must prove that the debt was incurred in the ordinary course of business between the parties and that the transfer to pay such debt was either (1) made in the ordinary course, or (2) made in accordance with ordinary business terms. You may use your account history, or course of dealing with your customer to prove this defense, or show the transfers were made within industry payment standards. The "subsequent new value" defense allows you to set-off the alleged preferential transfer amount by receiving credit for additional goods shipped to your customer following receipt of preferential payment during the 90 day preference period. Again, good record keeping is essential to prove credit.

Since it is impossible to predict when your customer might file bankruptcy, you can never truly avoid the preference problem. Of course, you should never turn down a payment from your customer out of fear that your customer may soon go bankrupt. The reality is that, despite legitimate concerns, your customer may never go bankrupt or, even if they do, the payment may not happen within the preference period (i.e. during the 90 days preceding the bankruptcy filing). Worst case scenario, even if your customer goes bankrupt and you have received payments during the preference period, good records will help quickly determine which payments are truly preferential and which ones may be protected. A preference action may be brought after the later of: (a) two years after the bankruptcy filing; or (b) one year after the appointment of a trustee. Therefore, retaining account histories and related information for at least four years is best.

Warner's Automotive Industry Group attorneys regularly assist our supplier clients with financially troubled customer situations, including the defense of preference recovery actions. To learn more, please contact a member of our Automotive Industry Group.

This article is reprinted with permission from Warner Norcross & Judd LLP. This article is not intended as legal advice. For additional information, please contact the author of this article.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.