BANKRUPTCY CORNER
BANKRUPTCY CORNER
Pleading Due Diligence in Preference Actions
JASON S. RIGOLI
Preference claims are creatures of bankruptcy, the purpose of which is to“( 1) avoidance power promotes prime bankruptcy policy of equality of distribution among creditors by ensuring that all creditors of same class will receive same pro rata share of debtor’ s estate; and( 2) by providing for recapture of payments to creditors, avoidance power reduces incentive to rush to dismember financially unstable debtor.” See 11 U. S. C. § 547; In re Smith, 966 F. 2d 1527, 1535( 7th Cir. 1992), cert. dismissed, 506 U. S. 1030, 113 S. Ct. 683, 121 L. Ed. 2d 604( 1992)( citations omitted).
In 2020, section 547 was amended and included the following:“… the trustee [ or debtor ] 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)….” 11U. S. C. § 547( b). This language creates a condition precedent and requires the trustee or debtor to consider the overall circumstances of the case and affirmative defenses of a target before bringing a preference adversary proceeding. A plaintiff is therefore required to plead that the condition precedent was satisfied. Federal Rule of Civil Procedure 9( c) only requires a plaintiff“ to allege generally that all conditions precedent have occurred or been performed.” What must be pled?
Judge Horan for the Bankruptcy Court in Delaware issued an opinion on December 5, 2025, dismissing a complaint by a trustee for failing to properly plead that the condition precedent had been satisfied. See Miller v. Prestige Patio Co. Ltd.( In re Christmas Tree Shops, LLC), Adv. Pro. No. 25-50875( TMH), 2025 Bankr. LEXIS 3152, 2025 WL 3510820( D. Del. Dec. 5, 2025). In Christmas Tree Shops, the trustee had alleged the following: "[ a ] lthough it is possible that some Transfers might be subject in whole or in part to defenses under 11 U. S. C. § 547( c), Defendant bears the burden of proof pursuant to 11 U. S. C. § 547( g) to establish any defense( s) under 11 U. S. C. § 547( c)." Id. at * 5( quoting ¶ 14 of complaint). With respect to the trustee’ s allegation Judge Horan stated:
The language that the trustee cites merely states the obvious- the defendant may have defenses and if it does, it is the defendant ' s burden to prove them. This would be true in virtually every instance. The trustee is required to plead that he performed due diligence and has taken into account known or reasonably knowable affirmative defenses. He has done neither. Id. Judge Horan contrasted the trustee allegations with the allegations of due diligence in other cases.
First, Judge Horan pointed to an opinion in another case where Judge Goldblatt had found that the due diligence requirement had been satisfied, where the plaintiff had detailed the due diligence conducted including reviewing books and records, identifying that nothing qualified as a new value, qualifying the diligence with the fact that there could be information that might come to light to establish an affirmative defense but that it was the defendant’ s burden under 11 U. S. C. § 547( g) and affirmatively stating that plaintiff had conducted due diligence and determined the transfers could be avoided even taking into account the affirmative defenses. Id. at * 6-7( citing Off. Comm. Unsecured Creditors v. Nimble Gravity, LLC( In re Pack Liquidating, LLC), 2024 Bankr. LEXIS 2641, 2024 WL 4633499, * 3( Bankr. D. Del. Oct. 30, 2024).
Judge Horan next addressed Robichaux v. Moses H. Cone Mem. Hosp. Operating Corp.( In re Randolph Hosp., Inc.), 644 B. R. 446, 462( Bankr. M. D. N. C. 2022) on which the trustee was relying. Christmas
Tree Shops, 2025 Bankr. LEXIS 3152 at * 7. Judge Horan pointed out that the Court in Randolph Hospitals found that“[ t ] he [ p ] laintiff has done more than recite the introductory sentence of § 547( b) and alleges that he has determined he may avoid the subject transfers ' after reviewing his records ' and evaluating the reasonably knowable affirmative defenses with due diligence.” Id. at * 7( quoting Randolph Hosp., Inc., 644 B. R. at 462).
Ultimately, Judge Horan found that the trustee recitation that there may be defenses but it is the defendant’ s burden to raise such defenses did not satisfy the pleading requirements under the Federal Rules and dismissed the $ 736,820.85 preference claim against the defendant. Id. at * 4 and * 8-9. Furthermore, the complaint was dismissed with prejudice because while the trustee requested leave to amend, the trustee did not attach a draft complaint to such request to demonstrate that amending the complaint would not be futile as required under Third Circuit precedent. Id. at * 8-9. The Eleventh Circuit has a similar precedent, requiring a separate motion“ set [ ting ] forth the substance of the proposed amendment or attach a copy of the proposed amendment." Wiand v. ATC Brokers Ltd., 96 F. 4th 1303, 1311-12( 11th Cir. 2024)( internal citation and quotation marks omitted).
Conclusion
For both plaintiffs and defendants in preference actions it is vitally important to review the complaint and ensure that the“ due diligence” is appropriately pled otherwise it might be fatal to the preference claim being asserted.
This article was submitted by Jason S. Rigoli, Esq., Furr and Cohen, P. A., 2255 Glades Road, Suite 419A, Boca Raton, FL 33431, jrigoli @ furrcohen. com
PBCBA BAR BULLETIN 12