In an underreported amendment to the Bankruptcy Code, the Small Business Reorganization Act amended §547(b) of the Code to add an explicit requirement for the bankruptcy trustee or debtor in possession to conduct “reasonable due diligence” before filing a preference action. The apparent goal of this amendment to the Bankruptcy Code is to reduce the number of frivolous preference lawsuits pursued by trustees. In view of these new explicit due diligence requirements, creditors should reconsider their initial response strategy by impressing upon trustees the risk of filing a preference lawsuit before reviewing available documents and other evidence that may readily reveal viable defenses for potential defendants.

Continue Reading