Bankruptcy ✦ Preference & Clawback Defense
You Got Paid. Then the Trustee Asked for It Back.
A customer files bankruptcy, and a year or two later a demand letter arrives: return the payments you received, because the law calls them preferences, or worse, fraudulent transfers. It feels outrageous, and it is defensible. North Star Law Firm defends California vendors, landlords, lenders, and business owners against clawback claims in the Central District of California and the other California bankruptcy courts, from the demand letter through the adversary proceeding, with the forensic accounting that decides these cases done in-house.
The Short Answer
Yes, they can ask. No, you do not owe the number in the letter.
A bankruptcy trustee really can demand back money a bankrupt customer paid you, even though you delivered exactly what you sold and did nothing wrong. Preference law is no-fault by design. But the demand letter is an opening bid, not a bill. It almost always claims every dollar paid in the look-back window before any defense is applied, and in nearly every case at least one defense applies. The realistic outcome, when the defenses are quantified and presented, is a settlement at a fraction of the demand, or a dismissal. The two things that make that outcome worse are paying the letter to make it go away, and calling the trustee to explain yourself before your defenses are built.
- The trustee must prove the payment was on an old debt, made in the window, while the debtor was insolvent
- Ordinary course, new value, and contemporaneous exchange defenses are proven from your own records
- Small claims are barred outright; modest out-of-state claims cannot be dragged to a distant court
- Most cases settle once the trustee sees a defense analysis that would hold up at trial
- Spending the money is not a defense; a documented payment history is
- Do not pay, do not call, do not ignore: preserve the records and get the letter reviewed
Listen First
Preference clawbacks explained in plain English
This episode of the North Star Tax and Legal Briefing walks through how preference claims work, why honest creditors get targeted, the ordinary course and new value defenses with worked numbers, the difference between actual and constructive fraudulent transfers, and the four things to do and not do the day the demand letter arrives. The federal rules it describes apply in every California bankruptcy court; the California-specific pieces, including the four-year reach-back under California’s Uniform Voidable Transactions Act, are covered below.
The Law
What is a preference, and why can the trustee claw it back?
Under 11 U.S.C. § 547, a bankruptcy trustee (or a debtor in possession in a Chapter 11 or Subchapter V case) can recover payments a debtor made on existing debts within 90 days before the filing, or a full year for insiders, while the debtor was insolvent, if the payment let the creditor do better than it would have in a Chapter 7 liquidation. Notice what is missing from that list: any wrongdoing by you. Preference law exists to unwind the last-minute race among creditors, so the complaint is not an accusation. It is arithmetic, and it is answered with arithmetic. The statute presumes the debtor was insolvent during the 90 days, but that presumption can be rebutted with the debtor’s own financial records.
The statute builds in defenses, and they carry real money. The table below is the map the demand letter hopes you never read.
| Defense | Authority | How it works |
|---|---|---|
| Ordinary course of business | § 547(c)(2) | Payments consistent with your historical dealing with the debtor, or with ordinary industry terms, are protected. Your invoice-to-payment baseline over the prior year or two is the evidence, and the Ninth Circuit looks at timing, amount, method, and collection pressure together. |
| Subsequent new value | § 547(c)(4) | Goods or services you provided on credit after a payment offset the clawback dollar for dollar. In the Ninth Circuit the new value need not remain unpaid at the petition date to count, which makes this defense worth more in California than in some other circuits. |
| Contemporaneous exchange | § 547(c)(1) | Payment made at the time of delivery (COD terms, deposits against delivery) was never on account of an old debt at all. |
| Small-claim floor | § 547(c)(9) | In a business case, transfers totaling less than $7,575 (for cases filed on or after April 1, 2025) cannot be avoided at all; in a consumer case the floor is $600. |
| Venue floor | 28 U.S.C. § 1409(b) | A trustee cannot sue a non-insider in the bankruptcy court for a business debt under $27,750 (April 2025 adjustment) except in the district where you are located, which keeps modest claims from being hauled across the country. |
| Due diligence pleading | § 547(b) | Since 2019 the trustee must plead that the claim survives reasonable due diligence, including consideration of your known defenses. A letter that ignores your ordinary course history is vulnerable on its face. |
| Trustee’s deadline | § 546(a) | Avoidance actions must be filed within two years after the order for relief. A demand received near that date is often more bluff than threat. |
Fraudulent transfers: the claim that reaches back four years in California
A payment that is safe from a 90-day preference claim can still be attacked as a fraudulent transfer, and the trustee can use two sets of rules. Under 11 U.S.C. § 548 the reach-back is two years. Under 11 U.S.C. § 544(b) the trustee steps into the shoes of an actual creditor and borrows state law, and in California that is the Uniform Voidable Transactions Act, Civil Code § 3439 et seq., which reaches back four years from the transfer (Civ. Code § 3439.09), and for actual-intent fraud, one year from when the transfer was or could reasonably have been discovered, subject to a seven-year outer limit.
Actual fraud requires intent to hinder, delay, or defraud creditors, which courts find through the badges of fraud listed in Civ. Code § 3439.04(b): transfers to insiders, retained control, concealment, transfers made after suit was threatened, transfers of substantially all assets, and inadequate consideration. Constructive fraud requires no intent at all. It asks whether the debtor received reasonably equivalent value and was insolvent, undercapitalized, or unable to pay debts as they came due (§ 3439.04(a)(2), § 3439.05). That is a valuation question and a balance-sheet question, litigated with expert reports, and the creditor who paid a fair price and can prove it is protected as a good-faith transferee for value under § 3439.08.
How a clawback case runs in the Central District of California
Demand letters generally arrive one to two years into the case, as the § 546(a) deadline approaches, and typically give 30 days to respond before the trustee files an adversary proceeding, which is a lawsuit inside the bankruptcy case governed by the Federal Rules of Bankruptcy Procedure and the Central District’s Local Bankruptcy Rules. Large Chapter 11 and Subchapter V cases often generate hundreds of nearly identical preference complaints, filed by liquidating trustees and handled by counsel who expect most defendants to settle quickly at a formula. That expectation is the leverage you have: a well-supported defense analysis that would cost the trustee real money to litigate changes the settlement number immediately.
If the case is filed, the answer is due 30 days after the summons issues, and the court will set a status conference and a mediation. The Central District refers most adversary proceedings to its mediation program, and that is where most of these cases end. A contested case runs roughly nine to eighteen months to trial. Default is the one outcome to avoid at any cost: a default judgment for the full demand, plus interest and costs, is far harder to unwind than the claim was to defend.
What should you do when the demand letter arrives?
Four things, in order. Do not pay the sticker price: the letter typically demands every transfer in the window, before defenses, because many recipients simply write a check. Do not call the trustee or the trustee’s counsel yourself: an informal explanation that you “pushed them to pay because you heard they were in trouble” is the ordinary course defense dying on the phone. Do not ignore it: unanswered demands become adversary proceedings, and default is the most expensive defense of all. And preserve the entire payment history with the debtor, not just the preference window: invoices, due dates, payment dates and methods, shipping and delivery records, credit applications, and every collection email, and suspend any retention policy that would delete them. Every defense in the table above is proven from your own records.
Why an attorney-CPA for a preference fight?
Because preference defense is forensic accounting wearing a litigation suit. Ordinary course is a statistical argument about payment-timing baselines. New value is a running ledger computation. Insolvency, which the trustee must ultimately establish and which you can rebut, is a balance-sheet reconstruction as of a date years in the past. Reasonably equivalent value is a valuation. Building those analyses is CPA work, arguing them is lawyer work, and having both in one advocate, admitted to the United States District and Bankruptcy Courts for the Central District of California, means the numbers and the negotiation never lose anything in translation. Phillip Zagotti has defended creditors against preference and avoidance complaints brought by liquidating trustees in large retail bankruptcies and has served as the forensic accountant on solvency questions; both halves of this work are done in this office.
The Attorney-CPA Difference
The trustee has a spreadsheet. Bring a better one.
- Transfer-by-transfer defense analysis before any number is discussed
- Ordinary course baselines and new value ledgers built to evidentiary standards
- Threshold, venue, due diligence, and deadline defenses checked before anything else
- Solvency and reasonably-equivalent-value analyses prepared in-house for fraudulent transfer claims
- Negotiated resolutions with trustees, mediation in the Central District, and litigation when the demand deserves it
Questions & Answers
Preference clawback questions, answered
I did nothing wrong. Why is the trustee suing me?
Preference law is no-fault by design. The trustee does not have to show you did anything improper, only that you got paid on an old debt during the look-back window while the debtor was insolvent. The point of the statute is equal treatment among creditors, which is cold comfort when you are the one being asked to give money back. The defenses exist for exactly this reason.
How long does the trustee have to reach back?
Ninety days before the bankruptcy filing for a preference against an ordinary creditor, and one full year for insiders. For a fraudulent transfer claim it is two years under federal law and four years under California’s Uniform Voidable Transactions Act, which the trustee can borrow. Nailing down the exact transfer dates is always the first task.
I already spent the money. Doesn’t that matter?
No. The trustee is not tracing dollars; the question is whether the transfer itself is avoidable. What matters is the payment history that proves the ordinary course and new value defenses, not what happened to the funds after you received them.
Should I just settle the demand letter?
Not before the defenses are quantified. Trustee demand letters routinely claim the gross amount of every transfer in the window, ignoring new value and ordinary course defenses that can shrink the real exposure dramatically. Settlements happen in most cases, but the number should follow the analysis, not the letter.
I received a demand from a trustee in another state. Do I have to go there?
Not necessarily. For a business claim under the § 1409(b) threshold, the trustee must sue you in your home district. For larger claims, venue is usually in the debtor’s court, but the defense is prepared and negotiated from California, and mediation and hearings are commonly conducted remotely.
Is there a minimum amount the trustee can chase?
Yes. In a business case, transfers totaling less than $7,575 cannot be avoided at all, and the venue floor keeps smaller out-of-state defendants from being dragged to a distant court. Part of the first review is checking whether the claim clears those gates.
The demand letter has a deadline. So does your leverage.
Free review of the demand and your payment history with an attorney-CPA, including a first read on what the defenses are worth.