On April 8, the Young and New Members Committee hosted a webinar on the Small Business Reorganization Act’s new due diligence requirement for preference actions. Timothy McKeon (Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, PC; Boston) moderated the webinar, which featured Bankruptcy Judge Jerrold N. Poslusny (D. N.J.; Camden), Bethany J. Rubis (ASK LLP; Saint Paul, Minn.) and Shane G. Ramsey (Nelson Mullins Riley & Scarborough, LLP; Nashville, Tenn.).
The Small Business Reorganization Act of 2019 (SBRA) was signed into law on Aug. 23, 2019, and went into effect on Feb. 19, 2020. The SBRA includes changes affecting how and where preference actions may be brought. An amendment to § 547 requires that a trustee (or debtor-in-possession) consider a defendant’s defenses before bringing an action. This amendment, which is applicable in all bankruptcy cases (not just those under Subchapter V or small business debtor cases), requires the plaintiff to engage in reasonable due diligence regarding a defendant’s affirmative defenses before initiating a preference action.
Prior to the SBRA, "reasonable due diligence” did not appear in the Bankruptcy Code. The standard of “reasonable diligence” has been used in cases addressing disputes hinging on whether a creditor should have received notice in a bankruptcy case. See, e.g., Mennonite Bd. of Missions v. Adams, 462 U.S. 791, (1983) (a creditor's identity is “reasonably ascertainable” if that creditor can be identified through “reasonably diligent efforts”); In re Ritchie Risk-Linked Strategies Trading (Ireland) Ltd., 471 B.R. 331, 339–40 (Bankr. S.D.N.Y. 2012) (“Reasonable diligence does not necessitate impracticable and extended searches ... in the name of due process. Instead, reasonable diligence involves a search focusing on the debtor’s own books and records.”).
The panel also discussed the potential implications for Federal Rule of Bankruptcy Procedure 9011 and the new requirement. In particular, the panel looked to In re Excello Press Inc., 967 F.2d 1109 (7th Cir. 1992), and Berger Indus. v. Artmark Prods. Corp. (In re Berger Indus.), 298 B.R. 37 (Bankr. E.D.N.Y. 2003), for guidance. The Young and New Members Committee thanks the panelists for their time and efforts in preparing and presenting this webinar.
Did you miss the webinar? Watch the video reply here: Preference Update: SBRA’s Due Diligence Requirement.