Preference actions—bankruptcy claims seeking to recover payments made to creditors the 90 days before filing—are often pursued broadly and aggressively. Credit professionals have long been frustrated by preference claims that feel more like leverage for nuisance settlements than efforts to promote fairness among creditors, as originally intended. Adding to that frustration, this scattershot approach to pursuing preference claims is often undertaken to fund payment of secured and administrative expense claims, not the general unsecured claims held by the creditors that are the targets of these claims, as explained by Bruce Nathan of Lowenstein Sandler.
The Change: A Due Diligence Requirement
In response to these concerns, Congress amended Section 547(b) through the Small Business Reorganization Act of 2019 (SBRA). The amendment requires plaintiffs to conduct “reasonable due diligence” before filing preference claims, including evaluating creditors’ potential defenses. The impact of this new due diligence requirement has been the subject of a fair amount of litigation since the SBRA’s relatively recent enactment. Recent rulings indicate that courts are starting to enforce the language more rigorously.
Key Development: Prestige Patio Decision (Delaware Bankruptcy Court)
Because financial risk is inherent in all business activity, credit professionals should establish clear thresholds for In Miller v. Prestige Patio (2025), the Delaware court dismissed a trustee’s preference complaint. The reason? The complaint failed to allege that the trustee conducted due diligence or considered known defenses.
The court held that:
- Plaintiffs must at least generally plead due diligence
- Boilerplate statements about defenses being the creditor’s burden are insufficient
Coming from one of the most prominent bankruptcy courts in the country, it reinforces that preference plaintiffs must adequately plead the due diligence requirement with sufficient factual assertions or risk dismissal of their complaints. It suggests courts may require trustees to allege actual due diligence actions, not merely recite statutory language.
Practical Takeaways for Credit Teams
While this development does not eliminate preference risk, it provides creditors with another tool to challenge weak claims. Credit teams should consider the following best practices:
- Monitor your Customer’s Financial Condition: Stay informed about your customer’s financial health and any signs of potential insolvency. When credit risk deteriorates, adjust credit limits to mitigate overexposure. Also conduct regular credit reviews and avoid complacency in your credit risk assessment practices.
- Document Transactions Carefully: Meticulously document all transactions with your customer. This should include detailed records of dates, amounts, payment methods, and reasons for each transaction. Additionally, maintain a comprehensive history of your business relationship.
- Consider Obtaining Adequate Collateral: To protect your interest, you could secure the debt with adequate collateral. This could include an irrevocable letter of credit or other credit documents that can reduce exposure.
- Consult with Legal Counsel: Seek legal advice from an experienced bankruptcy attorney to understand the risks and develop strategies to mitigate them. Flag weak complaints that lack due diligence and move to dismiss early.
Bottom Line
Prestige Patio signals that courts are beginning to demand real due diligence in preference actions, giving creditors a stronger basis to challenge poorly pleaded claims.
