Preference recoveries brought under Section 547 of the Bankruptcy Code are one of the main litigation tools that bankruptcy trustees, debtors-in-possession and liquidating trustees can use to bring additional funds into a bankruptcy estate. A preference action allows for the recovery of payments made by a debtor to a creditor shortly before bankruptcy that provided the creditor an advantage over other, similarly situated creditors.
Through the Small Business Reorganization Act of 2019 (SBRA), Congress made preference litigation more difficult by amending 11 U.S.C. §547(b) to impose a new due diligence requirement on plaintiffs bringing preference litigation. The SBRA added the following language to 11 U.S.C. §547(b):
the trustee may, based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses under subsection (c), avoid any transfer of an interest of the debtor in property —
