Preference Actions in Subchapter V: Who Can Be Sued
- Melissa A. Youngman
- 2 days ago
- 6 min read
Melissa Youngman, PA and Winter Park Estate Plans & ReOrgs represent businesses in Chapter 11 and Subchapter V cases before the United States Bankruptcy Court for the Middle District of Florida, including the Orlando, Jacksonville, Tampa, and Fort Myers divisions, with a primary practice footprint in Orange, Seminole, Osceola, Volusia, Lake, and Brevard counties.
Business owners preparing to file often ask a version of the same question: can the bankruptcy process reach back and unwind payments made before the case started. The answer is yes, under 11 U.S.C. § 547, and the payments most exposed are the ones made to favored creditors in the weeks and months before filing. This post explains how a preference claim works, who actually holds the power to bring one in a Subchapter V case, and the defenses that protect ordinary, arm's length payments from being clawed back.
The topic matters most to a Central Florida business that paid down a friendly vendor, a family member, or an insider before deciding to file. Understanding the exposure before the petition is filed is key.
Section 547: What a Preference Claim Actually Reaches
Section 547(b) lets a trustee, or a debtor in possession standing in a trustee's shoes, avoid certain transfers made before the case began. Five elements have to line up: the transfer of an interest of the debtor's property, made to or for the benefit of a creditor, to pay an antecedent debt, while the debtor was insolvent at the time, which resulted in a creditor collecting more than it would have received in a hypothetical Chapter 7 liquidation. The reach-back period is 90 days before filing for an ordinary creditor and one year for an insider, a category that includes officers, directors, and relatives of an individual debtor.
The statute does not require bad intent. A landlord who receives a late rent payment two weeks before a petition is filed can be a preference target even if neither side thought about bankruptcy at the time. That is why the analysis has to be done transaction by transaction, not by asking whether a payment felt fair.
Who Holds the Power to Sue: Debtor in Possession, Not the Trustee
Section 1184 answers a question that surprises many business owners who assume the Subchapter V trustee runs the litigation. In an ordinary Subchapter V case, the debtor continues to operate as a debtor in possession, and § 1184 gives that debtor in possession most of the rights and powers of a trustee, including the avoidance powers under §§ 544 through 550. The Subchapter V trustee appointed under § 1183 performs a narrower role: facilitating a consensual plan, monitoring the debtor's finances, and disbursing plan payments in a nonconsensual case. Bringing a preference lawsuit against a vendor or an insider is ordinarily the debtor's decision, made through counsel, not the trustee's.
That allocation shifts only if the debtor is removed as debtor in possession for cause under § 1185 or the case converts to Chapter 7. In either of those situations, a different fiduciary steps into the avoidance-power role. For most small and mid-size Subchapter V cases filed in the Middle District of Florida, the debtor stays in possession for the life of the case, and the decision whether to pursue a preference claim against a supplier, a landlord, or an insider rests with the business itself and its counsel, weighed against the cost and relationship consequences of suing a company you may still want to do business with after confirmation.
The Ordinary Course of Business Defense
Section 547(c)(2) protects a payment made in the ordinary course of business or financial affairs of both the debtor and the creditor, according to ordinary business terms. This is the defense that shields routine trade credit. A construction subcontractor paid on its usual thirty-day terms, in the usual amount, through the usual method, has a strong ordinary course defense even if the payment falls inside the 90-day window. What defeats the defense is a change in pattern right before filing: paying faster than usual, paying a different amount, or switching from checks to wires because a supplier tightened credit terms after hearing rumors of distress.
Contemporaneous Exchange for New Value
Section 547(c)(1) protects a transfer the parties intended as, and that in fact was, a substantially contemporaneous exchange for new value given to the debtor. A supplier who receives payment at the counter for goods delivered that same day has not received an avoidable preference, because the debtor's estate is not worse off. The defense fails when there is a real gap between the payment and the new value, or when the payment was actually satisfying an older invoice dressed up as a same-day exchange.
Subsequent New Value
Section 547(c)(4) protects the creditor who, after receiving an allegedly preferential payment, extends new value to the debtor that remains unpaid and is not itself secured by an avoidable transfer. A vendor who was paid on an old invoice but then shipped another round of unpaid inventory before the petition can offset that new value against the earlier payment. This defense is calculated invoice by invoice and is often the difference between a six-figure demand and a modest settlement.
Practical Limits and Strategic Considerations
Because the debtor in possession controls the decision to sue, the more common question in a Central Florida Subchapter V case is not "will the trustee come after my vendor" but "should the business spend estate resources suing a supplier it needs going forward." Counsel typically screens the 90-day and one-year ledgers early in the case, separates payments with strong ordinary-course or new-value defenses from genuine outliers, and reserves litigation for transfers to insiders or one-off favored creditors where the recovery justifies the cost and the relationship is expendable. A business that moved money to an owner, a family member, or an affiliated entity in the year before filing should expect that transfer to receive the closest scrutiny of all, from the trustee monitoring the case even if the trustee is not the one filing suit, the US Trustee's office, and from any creditor with standing to raise the issue at confirmation.
What This Means for Central Florida Business Owners
For a business in Winter Park, Maitland, Orlando, Lake Mary, Oviedo, Kissimmee, or Clermont weighing a Subchapter V filing, the preference rules are a planning tool as much as a litigation risk. Reviewing payments to insiders and favored creditors before the petition is filed, rather than after a demand letter arrives, lets a business correct course, document legitimate ordinary-course terms, and walk into the case with a clear picture of what is and is not exposed.
Melissa Youngman, PA represents businesses in Chapter 11 and Subchapter V cases throughout the Middle District of Florida. For more on the Subchapter V trustee's role and powers, see our hub guide on the Subchapter V trustee.
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