Preference Actions: Clarifying the Trustee's Pre-Filing Due Diligence Requirements in Section 547(b)

Ending the Practice of Filing Preference Actions Without Assessing the Merits

A live 90-minute CLE video webinar with interactive Q&A

This program is included with the Strafford CLE Pass. Click for more information.
This program is included with the Strafford All-Access Pass. Click for more information.

Wednesday, August 31, 2022

1:00pm-2:30pm EDT, 10:00am-11:30am PDT

or call 1-800-926-7926

This CLE course will discuss current developments about the trustee's pre-filing obligations under Section 547(b) of the Bankruptcy Code. The Bankruptcy Code does not define "reasonable due diligence in the circumstances of the case" nor what it means to take "into account a party's known or reasonably knowable affirmative defenses." This webinar will review the current state of the law, identify divergent approaches, and offer best practices and options in this continually developing area.

Description

To avoid the abuse of power under Section 547 of the Bankruptcy Code, the Small Business Reorganization Act of 2019 (SBRA) amended Section 547(b) of the Bankruptcy Code to subject a trustee’s exercise of his or her preference avoidance powers to two requirements. Now, the plaintiff may avoid allegedly preferential transfers "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 [547](c)" before commencing suit.

Some case law has developed but controversy still exists regarding what these elements require a trustee to do. The Bankruptcy Code does not define "due diligence under the circumstances of the case" and this will no doubt be the subject of litigation in the future. No one is certain whether reliance on the debtor's filings in the bankruptcy case constitutes "reasonable diligence in the circumstances of the case" or if a trustee must review additional records. Moreover, it is unknown what the consequences will be where a debtor's available books and records are limited or incomplete.

Equally unknown is what it means to adequately "take into account" the defendant's "known or reasonably knowable" Section 547(c) affirmative defenses, such as "contemporaneous exchange," "ordinary course," and "new value" (as well as other potential defenses). The analysis may be more complicated if the transferee was an insider.

Listen as our authoritative panel of bankruptcy practitioners reviews leading cases and guides you through Section 547(b).

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Outline

  1. Section 547(b) prefiling requirements
    1. Reasonable due diligence in the circumstances of the case
    2. Known or knowable defenses under 11 USC 547(c)
  2. Common defenses
    1. Contemporaneous exchange
    2. Ordinary course of business
    3. New value
  3. Consequences of failing to comply with one or both requirements
    1. Judgment
    2. Bankruptcy Rule 9011
  4. Venue issues in 28 USC 1409(b)

Benefits

The panel will review these and other essential matters:

  • What is "reasonable due diligence in the circumstances of the case"?
  • What is "a known or reasonably knowable affirmative defense"?
  • Will the plaintiff's analysis of defenses, if done by attorneys or accountants, be privileged or discoverable?
  • How will defendants establish a lack of due diligence or failure to take known defenses into account?
  • What are the consequences if a court finds that these conditions are not met?

Faculty

Blansky, David
David A. Blansky

Partner
LaMonica Herbst & Maniscalco

Mr. Blansky's practice focuses on commercial and business litigation. He frequently prosecutes avoidance claims on...  |  Read More

Hochheiser, Alan
Alan C. Hochheiser

Principal
Maurice Wutscher

Mr. Hochheiser is a leading practitioner in the areas of creditors’ rights and bankruptcy law. He advises and...  |  Read More

Kerschner, Matthew
Matthew Kerschner

Managing Associate
Thompson Hine

Mr. Kerschner is a managing associate in the firm's Business Restructuring, Creditors’ Rights &...  |  Read More

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