If you or your business has received a letter or inquiry from a bankruptcy trustee regarding payments received before someone filed for bankruptcy, it’s natural to feel confused—or even alarmed and angry. This kind of inquiry typically relates to what’s known as a preference claim. These inquiries are a normal part of bankruptcy proceedings, and with the right legal guidance, these issues are often manageable and even resolvable without going to court. Mishandling your response, however, could result in costly litigation or a court-ordered repayment.
In this article, we explain what a preference claim is, what it means to receive an inquiry from a trustee, and how best to respond.
What Is a Preference Claim?
In bankruptcy cases, a preference refers to payments made by the debtor to a creditor within the 90 days prior to filing for bankruptcy (or within one year if the payment was to an insider), which may be “clawed back” if the trustee believes the payment unfairly favored one creditor over others.
Under 11 U.S.C. § 547, the trustee may seek to recover these payments to ensure equitable distribution among all creditors. Even if your business received payment for legitimate goods or services, the trustee might still assert a preference claim. For example, if your company received a payment from a customer 30 days before they filed for bankruptcy, the trustee might try to recover that money—even if the payment was for an already billed invoice.
The trustee’s job is to ensure fairness among creditors. But bankruptcy law provides clear defenses, and you may not have to return anything at all.
Why Did You Receive an Inquiry?
If you received a letter or email from a trustee, it means you may have received one or more payments that fall within the “preference period.” A trustee’s inquiry is often a preliminary step to determine whether a formal preference action should be filed. You may be asked to provide details about payments received from the debtor, the nature of your business relationship, and any agreements or invoices related to the payments.
It is not yet a lawsuit—but it could lead to one if not handled properly.
How to Respond: Key Steps
Do Not Ignore the Letter
Failure to respond could result in a formal adversary proceeding (a lawsuit in the bankruptcy court) and a potential default judgment. Treat the inquiry seriously and act promptly.
Contact Legal Counsel Immediately
An experienced bankruptcy attorney can help assess the situation, determine the strength of any defenses, and prepare an appropriate response. Preference law is complex, and seemingly straightforward payments can have defensible exceptions.
Gather Relevant Documentation
Collect all records related to the payments and business relationship with the debtor, including invoices and purchase orders, payment records and bank statements, contracts or service agreements, and email or written communications. These documents will help evaluate whether you have a valid defense.
Evaluate Possible Defenses
Several defenses may shield a creditor from liability for a preference claim, such as:
- Ordinary course of business: Payments were consistent with previous transactions and typical industry standards.
- Contemporaneous exchange: Goods or services were provided in exchange for payment at or near the same time.
- Subsequent new value: You provided additional goods or services after the alleged preference payment.
Respond Professionally and Cooperatively
Often, a persuasive, well-documented initial response—especially when guided by legal counsel—can resolve the matter without litigation. Trustees are obligated to recover preferential transfers, but they also weigh the cost-effectiveness and strength of claims. A reasoned defense backed by documentation may lead the trustee to drop the claim or settle favorably.
Here to Help
A trustee’s inquiry regarding potential preference payments can be unsettling, but with a careful and strategic response, you can often resolve the matter efficiently. The key is prompt action, seeking legal counsel, and proper documentation. The Creditors’ Rights & Bankruptcy team at Perkins Thomspon has extensive experience representing clients on all sides of bankruptcy proceedings, and we know how to resolve these matters efficiently and effectively.
If you have received a trustee inquiry or demand letter concerning a preference claim, our experienced bankruptcy attorneys are here to help. Contact Alex Mihalov at Perkins Thompson today for a confidential consultation.
