For practitioners, preference litigation under § 547 remains one of the most frequently litigated avoidance actions. While § 547(b) sets forth the prima facie elements, successful defense strategy often hinges on § 547(c) exceptions and valuation mechanics.
Below is a structured defense analysis.
I. Prima Facie Case Under § 547(b)
The trustee must establish:
- Transfer of an interest of the debtor in property
- To or for the benefit of a creditor
- On account of an antecedent debt
- Made while debtor was insolvent
- Within 90 days prepetition (1 year for insiders)
- Enabling creditor to receive more than in a hypothetical Chapter 7 liquidation
Key litigation pressure points:
- “Interest of the debtor in property”
- Insolvency rebuttal (particularly outside 90 days)
- Hypothetical liquidation analysis
II. Core Defenses Under § 547(c)
1. Contemporaneous Exchange for New Value (§ 547(c)(1))
Elements:
- Intent for contemporaneous exchange
- In fact substantially contemporaneous
- New value provided
Frequently applied in:
- COD transactions
- Cash-for-goods exchanges
- Replacement collateral scenarios
Litigation focus: documentation of intent and timing.
2. Ordinary Course of Business (§ 547(c)(2))
Post-BAPCPA disjunctive test:
Creditor must show transfer was:
(A) In payment of a debt incurred in ordinary course, AND
(B) Either:
- Subjectively ordinary between the parties, OR
- Objectively ordinary in industry terms.
Subjective Test
Compare:
- Timing
- Amount
- Payment method
- Collection pressure
Historical baseline analysis is critical.
Objective Test
Industry standard evidence required (expert testimony often necessary).
Strategic note: Many cases are resolved via summary judgment on ordinary course.
3. Subsequent New Value (§ 547(c)(4))
Elements:
- Creditor gave new value after preferential transfer
- On unsecured basis
- That remains unpaid (jurisdictional split on “remains unpaid” requirement)
Circuit splits remain regarding:
- Whether paid new value counts
- Whether postpetition new value qualifies
Critical in trade creditor cases.
4. Enabling Loan Defense (§ 547(c)(3))
Applies to PMSI situations.
Requires:
- Security interest secures new value
- Perfected within statutory window (30 days under § 547(e))
Frequently litigated in vehicle lien cases.
III. Threshold Defenses
A. Earmarking Doctrine
No “interest of the debtor in property” if:
- Third party provides funds
- Specifically to pay designated creditor
- No diminution of estate
Common in:
- Refinancing
- Guarantor payments
Jurisdictional nuance applies.
B. No Greater Recovery Test
If creditor would receive full payment in Chapter 7, trustee cannot establish § 547(b)(5).
Applies in:
- Fully secured creditor cases
- Oversecured scenarios
Requires liquidation analysis and secured status review.
C. Insolvency Rebuttal
Outside 90 days, insolvency must be proven.
Balance sheet test under § 101(32).
Expert testimony often required.
IV. Insider Preference Litigation
One-year lookback for insiders under § 547(b)(4)(B).
Heightened scrutiny:
- Family members
- Corporate officers
- Managing members
Ordinary course defense is often weaker in insider contexts.
V. Procedural Considerations
- Adversary proceeding required (FRBP 7001)
- Two-year statute of limitations under § 546(a)
- Summary judgment common
- Settlement frequently driven by cost-benefit analysis
VI. Strategic Defense Considerations
For defendants:
- Early document preservation
- Payment history reconstruction
- Industry expert evaluation (if invoking objective prong)
- Insolvency analysis if outside 90 days
- Evaluate collectability and settlement leverage
For trustees:
- Focus on net recovery after new value offsets
- Avoid low-value claims post-§ 547(c)(9) thresholds
- Analyze cost vs. estate benefit
VII. Policy Underpinnings
Preference law aims to:
- Prevent the race to the courthouse
- Discourage dismemberment of the estate
- Promote equitable distribution
It is not punitive — but it rebalances prepetition payment inequities.
Conclusion
Preference litigation under § 547 is fact-intensive and defense-driven.
Successful defense often turns on:
- Detailed payment history analysis
- Strategic use of ordinary course
- Aggressive new value offsets
- Careful liquidation modeling
For practitioners, meticulous record development and early motion practice are often outcome-determinative.
