Trustee avoidance of pre-petition transfers that prefer one creditor over similarly situated creditors: prima facie elements, the 90-day and one-year reach-back periods, statutory defenses, and recovery from initial and subsequent transferees.
A preference action is the trustee's most routine recovery tool. Its purpose is not to punish wrongdoing but to enforce the Bankruptcy Code's policy of equality of distribution: pre-petition transfers that allowed one unsecured creditor to receive more than its pro rata share are unwound and redistributed across the class. The Supreme Court in Union Bank v. Wolas, 502 U.S. 151 (1991), confirmed that long-term debts as well as short-term trade debts can be subject to preference recovery, and that the ordinary-course-of-business defense applies to both. The action is filed as an adversary proceeding under Federal Rule of Bankruptcy Procedure 7001(1).
The trustee bears the burden of proof on all five elements of a preference. Section 547(b) authorizes avoidance of any transfer of an interest of the debtor in property:
The 90-day reach-back is the default. It is measured by counting backward from the petition date. The one-year extended reach-back applies only when the transferee was an insider at the time of the transfer. Levit v. Ingersoll Rand Financial Corp., 874 F.2d 1186 (7th Cir. 1989), the "Deprizio" decision, held that payments to outside creditors guaranteed by insiders could be avoided over the full one-year period; Congress subsequently amended Section 550(c) to limit recovery against non-insider transferees to the 90-day period, but the insider-guarantor remained exposed for the full year.
Once the trustee establishes a prima facie preference, the burden shifts to the defendant under Section 547(g) to prove an affirmative defense. The principal defenses are:
Section 547(g) places the burden of proving the prima facie elements on the trustee and the burden of proving an affirmative defense on the defendant. The insolvency presumption of Section 547(f) is rebuttable: the defendant may introduce evidence that the debtor was solvent on the transfer date, which shifts the burden of production back to the trustee. The "more than" test of Section 547(b)(5) is established by reference to the hypothetical Chapter 7 distribution at petition date; expert testimony on the projected distribution is common.
In Merit Management Group v. FTI Consulting, 583 U.S. 366 (2018), the Supreme Court resolved a circuit split over the Section 546(e) securities safe harbor. The Court held that, in evaluating whether the safe harbor applies, courts look at the overarching transfer that the trustee seeks to avoid, not at intermediate component transactions that pass through financial institutions as conduits. The decision narrowed the practical scope of Section 546(e) but did not alter the underlying Section 547 framework.
Preference actions are filed as adversary proceedings under Federal Rule of Bankruptcy Procedure 7001(1), initiated by complaint with a Section 547 cause of action and (almost always) a companion Section 550 cause of action for recovery. The complaint must be filed within the limitations period of Section 546(a): the later of two years after the order for relief, or one year after appointment of the first trustee, but in no event after the case is closed or dismissed.
Venue is governed by 28 U.S.C. Section 1409. For consumer-debt preference actions of $25,000 or less (and non-consumer preference actions below the larger threshold of Section 1409(b), as adjusted), the action must generally be brought in the district of the defendant's residence or principal place of business, not in the bankruptcy district.
Once the preference is avoided under Section 547, the trustee recovers the property (or its value) under Section 550. The trustee may recover from:
The trustee may not recover more than once for a given transfer (Section 550(d)). The Section 550 statute of limitations runs separately under Section 550(f).
The trustee identifies a series of pre-petition payments to a trade supplier within the 90-day window. The trustee files an adversary complaint. The supplier answers and asserts the ordinary-course defense under Section 547(c)(2) and a new-value reduction under Section 547(c)(4) for goods shipped after each payment. The matter proceeds through discovery, expert reports on industry payment norms, and either settlement or trial.
The trustee identifies a transfer to an officer of the corporate debtor seven months before the petition. The trustee files an adversary complaint within the Section 546(a) period. The defendant officer is precluded from the standard 90-day arms-length defenses for the 91-365 day window but may still invoke contemporaneous-exchange and subsequent-new-value defenses if the facts support them.
Preference litigation is the single largest category of bankruptcy adversary filings in many districts. For trustees and debtors in possession, preference recoveries are a primary funding source for unsecured-creditor distributions. For trade creditors, the practical hazard is recurring: a customer's bankruptcy filing creates retrospective liability for payments accepted in the ordinary course of business months earlier. Sophisticated trade creditors track their largest customers' financial deterioration in part to preserve the documentary record needed for the ordinary-course and subsequent-new-value defenses.
Burden of proof, not motive. A preference defendant who has done nothing wrong still bears the full burden of proving an affirmative defense once the trustee establishes the five-element prima facie case. The five elements are objective; subjective intent and good faith are relevant only to specific defenses (such as the Section 550(b)(1) protection for subsequent transferees) and to the rare Section 547(b)(5) hypothetical-distribution dispute.
This page provides general information about preference adversary proceedings under 11 U.S.C. Sections 547 and 550. It is not legal advice. Defense of a preference action is fact-intensive and time-sensitive; consult qualified bankruptcy counsel about a specific demand or complaint.