German insolvency law has a rule that reads like a warning label: a creditor who extracts payment from a failing debtor through pressure, early payment, or unusual terms in the month before the petition gives the money back, no questions asked about what it knew. American law reaches a similar place by a different road. Under the Bankruptcy Code, a payment received in the 90 days before a filing is presumptively recoverable, and the creditor’s main escape, the ordinary course defense, evaporates when the payment was the product of collection pressure. New Mexico creditors learned this in bulk during the Furr’s Supermarkets Chapter 11 in Albuquerque two decades ago, and the Tenth Circuit’s rules haven’t softened since.
What does a trustee have to prove, and what changed recently?
Under 11 U.S.C. § 547(b), a trustee or debtor in possession may avoid a transfer of the debtor’s property to a creditor, on account of an antecedent debt, made while the debtor was insolvent, within 90 days before the petition (one year for insiders), that let the creditor receive more than it would in a Chapter 7 liquidation. Insolvency is presumed for the 90 days under § 547(f). Since 2019 the statute has required the trustee to act “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses,” a basis for pushing back on form demand letters that ignore obvious defenses. Two dollar figures updated April 1, 2025 also matter. Transfers aggregating less than $8,575 can’t be avoided against a non-consumer debtor under § 547(c)(9), and under 28 U.S.C. § 1409(b) a suit to recover less than $31,425 from a non-insider on a non-consumer debt must be brought where the defendant resides, which keeps a Roswell supplier out of a Delaware courtroom, though courts are split on whether that rule covers preference actions. And the rule that a check is transferred when the bank honors it, not when it’s delivered, comes from a New Mexico case, Barnhill v. Johnson, 503 U.S. 393 (1992).
How does the ordinary course defense work in the Tenth Circuit?
Section 547(c)(2) protects a payment on an ordinary-course debt if the payment was either made in the ordinary course of business between the parties or made according to ordinary business terms in the industry; since 2005 one prong suffices. The Tenth Circuit explained the policy in Clark v. Balcor Real Estate Finance, Inc. (In re Meridith Hoffman Partners), 12 F.3d 1549 (10th Cir. 1993): preference law discourages “unusual action that may favor certain creditors or hasten bankruptcy by alarming other creditors,” so the defense protects routine dealings and nothing else. The Bankruptcy Appellate Panel’s four-factor test from Payne v. Clarendon National Insurance Co. (In re Sunset Sales, Inc.), 220 B.R. 1005 (10th Cir. BAP 1998), governs the subjective prong: the length of the relationship, whether the amount or form of payment differed from past practice, whether either side engaged in unusual collection or payment activity, and the circumstances of the payment. Late payments aren’t ordinary unless the creditor proves lateness was the norm between the parties. The circuit’s most recent word, Jubber v. SMC Electrical Products, Inc. (In re C.W. Mining Co.), 798 F.3d 983 (10th Cir. 2015), held that even a first-time transaction can be ordinary when the payment was made on normal terms with no collection activity by the creditor. The defense rewards creditors who behaved like nothing was wrong.
Which collection tactics turn a payment into a preference?
The cases draw the line at coercion, not persistence. A supplier that phones a slow-paying customer is doing what suppliers do; the Eighth Circuit said as much in Lovett v. St. Johnsbury Trucking Co., 931 F.2d 494 (8th Cir. 1991), where a documented history of late payments set the baseline for what was ordinary. Compare Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1563 (11th Cir. 1986), where a credit manager demanded “a show of good faith” and the debtor switched to cashier’s checks to keep the creditor from joining an involuntary petition; those payments lost the defense. XTRA, Inc. v. Seawinds Ltd., 888 F.2d 640 (9th Cir. 1989), reached the same result where the creditor terminated contracts, demanded immediate payment, and raised rates. Threats of suit or credit hold, demands for a guaranty or deposit as a condition of continued shipment, a switch to certified funds, a negotiated catch-up schedule, owner-to-owner calls: each is evidence that the payment came out of pressure rather than routine. Consistency is the defense. A creditor that always put accounts on hold at 60 days and did so again stands on far firmer ground than one that invented a new rule when it smelled trouble.
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What does a New Mexico example look like?
An Albuquerque mechanical subcontractor billed a general contractor on net-30 terms for three years, and the contractor paid on average 52 days after invoice. In the 90 days before its Chapter 11 filing, the contractor made four payments totaling $84,000: two at 50 and 55 days, consistent with history, and two at 20 and 25 days, after the subcontractor’s owner called the contractor’s owner and said he would pull crews off a hospital job. Under Sunset Sales, the first two payments look ordinary; chronic lateness was the pattern, and nothing about amount or form changed. The last two, $46,000, were faster than any payment in three years and followed an explicit threat, exactly the “unusual collection activity” the test asks about. The fallback is the subsequent new value defense in § 547(c)(4): if the subcontractor kept working and delivered $30,000 of unpaid labor and materials after those payments, that amount offsets the exposure. A realistic settlement is well below the $84,000 demand, but only if the creditor can produce the payment history and job records to prove it.
What about insiders, and does New Mexico law add anything?
For insiders, defined in § 101(31) to include officers, directors, controlling owners, and their relatives, the reach-back is one year, and New Mexico law adds a second remedy. The New Mexico Uniform Voidable Transactions Act, NMSA 1978 §§ 56-10-14 through 56-10-29, has no preference provision for arm’s-length creditors, but § 56-10-19(B) lets a creditor avoid a transfer to an insider for an antecedent debt made while the debtor was insolvent if the insider had reasonable cause to believe it. That claim must be brought within one year of the transfer under § 56-10-23, and § 56-10-22(F) supplies defenses for new value, ordinary course dealings, and good-faith rehabilitation efforts. An owner who repaid his own loan to the company before the filing faces both versions of the same question, and the state claim exists even when no bankruptcy is ever filed.
What should a creditor do when the demand letter arrives?
Neither pay the number in the letter nor ignore it. The letter usually arrives near the two-year anniversary of the petition, as the trustee’s limitations period under § 546 is about to run, and it states gross transfers with no credit for defenses. The response is a defense analysis: at least a year of pre-window payment history as the baseline, invoices and shipping records to compute new value, the terms applied to similar customers for the objective prong, and an honest inventory of every collection communication in the 90 days. In the District of New Mexico, Local Rule 9019-3 lets the court appoint a bankruptcy judge as mediator, and most preference cases resolve there. Remember § 502(d) too: until a preference judgment is paid, the creditor’s own claim is disallowed, which changes the math for a vendor expecting a distribution.
| Collection conduct in the 90 days | Likely effect on ordinary course defense | Authority |
|---|---|---|
| Routine reminder calls; payments consistent with a documented late-pay history | Defense preserved | Lovett; Sunset Sales |
| Consistently applied credit hold at the creditor’s usual threshold | Generally preserved | Tolona Pizza (7th Cir.) |
| Demand for cashier’s checks or wire after a payment dispute | Defense likely lost | Craig Oil |
| Threat to stop work, sue, or file an involuntary petition, then faster payment | Defense likely lost | Seawinds; Craig Oil |
| New deposit, guaranty, or catch-up schedule imposed mid-window | Defense likely lost | Yurika Foods (6th Cir.) |
| First-time transaction on normal terms, no collection activity | Defense available | C.W. Mining |
Frequently Asked Questions
What is a preference in bankruptcy?
A transfer to a creditor within 90 days before the petition (one year for insiders), on an existing debt, while the debtor was insolvent, that gave the creditor more than a Chapter 7 liquidation would.
Does pressuring a customer to pay make the payment a preference?
Pressure doesn’t create a preference, but it usually destroys the ordinary course defense. Threats, demands for certified funds, new deposits, and accelerated schedules are unusual collection activity.
Is there a minimum amount before a trustee can sue?
Yes. For non-consumer debtors, transfers aggregating less than $8,575 can’t be avoided, and suits for less than $31,425 against non-insiders generally must be filed where the defendant resides, though courts disagree on whether that venue rule applies to preference actions.
What is the new value defense?
Under § 547(c)(4), unpaid goods or services the creditor provided on credit after receiving a preferential payment reduce what the trustee can recover.
Can a New Mexico creditor pursue an insider preference outside bankruptcy?
Yes. NMSA § 56-10-19(B) lets a creditor avoid a transfer to an insider on an antecedent debt made while the debtor was insolvent, if the insider had reasonable cause to believe it, within one year of the transfer.
Should I just pay the amount in the trustee’s demand letter?
Almost never without analysis. Demand letters state gross transfers without crediting ordinary course, new value, or contemporaneous exchange defenses, and most claims settle for a fraction of the demand once defenses are documented.
How North Star Law Firm Can Help
North Star Law Firm defends New Mexico vendors, subcontractors, landlords, and lenders against preference and fraudulent transfer demands in the District of New Mexico and in out-of-state cases where a New Mexico creditor has been sued, and advises businesses on collection practices that preserve their defenses before a customer fails. Phillip Zagotti, JD/CPA, practices before the federal courts in the District of New Mexico, and the payment baselines and new-value reconciliations that decide these cases are accounting work as much as legal work. The firm’s preference clawback defense practice handles demand letters through adversary proceedings within its bankruptcy practice, and its earlier post on trustees who sell clawback claims covers what happens when the plaintiff is a claims buyer rather than a trustee. Contact North Star Law Firm before responding to a demand letter; the first response frames the settlement.