By: Phillip Wang, Esq.

When a business files for bankruptcy, one of the common risks to creditors is the threat of preference actions. These claims, brought by bankruptcy trustees or debtors, aim to claw back payments made to creditors within 90 days prior to the bankruptcy filing. At Strategy Law, our seasoned Bankruptcy and Creditors’ Rights attorneys work with businesses and individuals across San Jose and the Bay Area to defend against these claims and protect your financial interests.

What Is a Preferential Transfer?

Under the Bankruptcy Code, a “preference” typically occurs when a debtor pays a creditor shortly before filing bankruptcy, potentially giving that creditor more than others in similar positions. While the trustee may seek to recover these payments, several defenses exist, and the right legal guidance can make all the difference.

Key Issues in Analyzing Course of Dealing

One common defense is the “ordinary course of business” exception. Our attorneys emphasize that courts often look at the payment history leading up to the 90-day preference period, especially the period immediately prior.

Some judges use a weighted average or analyze payment “buckets” by days to determine whether the alleged preference deviated from the norm. Others focus on the range of payments, rather than averages. Whichever method applies, the creditor must prove the transaction was not prompted by aggressive or unusual collection efforts, like suddenly demanding a certified check when regular checks were always used before.

What If There’s No Prior History?

First-time transactions aren’t automatically excluded from protection. Courts generally consider the agreed-upon payment terms. If the payment matches those terms, our Bankruptcy and Creditors’ Rights attorneys can argue that it qualifies under the ordinary course of business defense.

Meeting the Objective Test: Industry Standards Matter

Even if the parties’ history is limited or inconsistent, payments may still be protected if they align with industry standards. At Strategy Law, we work with industry experts and data to establish what’s “ordinary” in your line of business. As shown in certain cases, courts are often lenient as long as the terms fall within the broader practices of similar companies.

The Contemporaneous Exchange Defense

Another powerful defense is proving a contemporaneous exchange for new value. For instance, cash-on-delivery or advance payments typically qualify. The key is intent – both parties must intend the exchange to be immediate and equivalent. Our attorneys use this defense effectively when payments are made within two to three weeks, provided documentation supports the intent.

When Is a Transfer Made?

Timing is everything. Courts have ruled that for preference actions, a transfer occurs when the check is honored, not when it is received. However, for defense purposes, such as establishing new value or ordinary course, most courts consider when the check was delivered, giving vendors and service providers some leeway.

Protect Your Business with Strategy Law’s Bankruptcy and Creditors’ Rights Attorneys

Preference actions can place a significant burden on businesses already facing uncertainty. With deep experience in bankruptcy litigation and defense, the Bankruptcy and Creditors’ Rights attorneys at Strategy Law offer strategic, evidence-based counsel tailored to your situation.

If you’ve been served with a preference claim or want to proactively protect your rights in a bankruptcy matter, contact Strategy Law today. Let our legal team help you navigate these challenges with clarity and confidence.

This blog is written as of July, 2025.  Recommendations and legal requirements are changing rapidly, so please continue to review our legal updates or review postings on relevant government websites. 

All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations.  No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation