In an April 14 opinion, the U.S. Bankruptcy Court for the District of Delaware broke new ground in ruling on how a plaintiff in a preference action may plead compliance with the recently-added “reasonable due diligence” requirement in section 547(b) of the Bankruptcy Code. Agreeing with what it found to be the only other reported decision squarely on point, the Delaware bankruptcy court ruled that a plaintiff need not explicitly plead its “due diligence” in investigating its preference cause of action. Rather, a general allegation under Federal Rule of Civil Procedure 9(c) that “all conditions precedent have occurred” suffices.

Section 547 of the Bankruptcy Code governs a trustee’s (or a debtor-in-possession’s) cause of action to avoid a preferential transfer—i.e., a payment by a debtor within 90 days prior to the start of a bankruptcy case on account of an antecedent debt owed to the transferee that enables the transferee to receive more than it otherwise would in a hypothetical Chapter 7 liquidation. Subsection (b) of Section 547 sets out the elements of the plaintiff’s prima facie case, and subsection (c) sets out affirmative defenses. In the Small Business Reorganization Act of 2019, Congress added the following italicized text to section 547(b):