To a layperson, the idea that a debtor can assert a cause of action against a company who supplied goods or services to a debtor before the bankruptcy case, whom the debtor then paid, seems preposterous. Yet, the Bankruptcy Code gives trustees and debtors in possession that right. In his The Recorder article “A New Regime in Preference Litigation” Senior Counsel Steve Werth explains the Small Business Reorganization Act (SBRA) and how that act modifies a trustee’s obligations before commencing preference litigation.
Werth noted that one of the provisions of SBRA, which went into effect February 22, 2020, amends the language of Section 547 to add a due diligence requirement. Although the intent behind the added language seems clear, it may not have its intended effect.
“There are two conflicting dynamics in preference litigation, each of which is correct some of the time, and if correct, cancels the other out,” wrote Werth. “The first is that … Suppliers cannot always know when–or if–their customers are in financial distress.”
Werth added: “The second dynamic is the opposite: the suppliers likely became aware of imminent bankruptcy, and the debtor certainly was.” Werth then discusses how the additional due diligence requirement affects each of these dynamics, and may result in unintended consequences.
Read the article here. (Subscriber-view only)