When President Trump signed H.R. 3311 into law, it was not unsurprising that the bill was pro-creditor to some extent. While Congress intended that the Small Business Reorganization Act (SBRA) makes reorganization more streamlined for small business debtors, it offered some assistance to vendors, suppliers, and other businesses to deal with the multitude of preference lawsuits, which seem to occur expectedly, not just in small business cases, but in many cases under Title 11.

The treatment of preferences is found in § 547(b) of the Bankruptcy Code, where a trustee, debtor in possession, liquidating trustee, post-confirmation trust and others are authorized to avoid certain types of payments made by a debtor within 90 days prior to the filing of a bankruptcy case.

First, provisions of the SBRA affect where preference defendants may be sued by a debtor or trustee. Prior to the SBRA, any claim in the amount of $13,650 or less had to be brought in the district where the defendant resides. The SBRA raises the threshold amount to $25,000 so that defendants will have the ability to avoid even more preference actions in the court where the bankruptcy case is pending.

Presently, the Bankruptcy Code does not explicitly require a debtor or trustee to undertake any due diligence prior to commencing an action under § 547, which mentions it as a permissive rather than mandatory action.

For most cases, it is reasonable for plaintiff’s counsel not to conduct any pre-filing investigation about a defendant’s potential affirmative defenses. However, the SBRA now instills this requirement into preference litigation.

The SBRA requires a debtor or trustee to consider a party’s statutory defenses “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses” before bringing an action under § 547. This converts what was probably an implicit requirement prior to the SBRA, into an express one, thus providing an additional defense to parties sued under the preference provisions.

This also raises the following questions:

  • How much due diligence is “reasonable”?
  • What is a “reasonably knowable affirmative defense”?
  • To what extent must a trustee ascertain the existence and strength of the defendant’s affirmative defenses?

Creditors will seemingly have fewer preference actions to defend based on the SBRA. As with all changes in the law, time will only tell if its intended effects, goals, and purposes are achieved. The provisions of the SBRA take effect in February 2020.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to [email protected] or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

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