Recent Changes to Bankruptcy Code Helps Lenders and Creditors with Preference Claims

Kenneth C. JohnstonPartner, Johnston Clem Gifford PLLC

Authored by David Clem

Congress enacted the Small Business Reorganization Act last year, which became effective in February 2020. The SBRA amended the Bankruptcy Code to streamline small business bankruptcy administration. The legislature intended to reduce bankruptcy costs for small businesses in the hopes that more of them could survive the Chapter 11 reorganization process.

The SBRA also amended the Bankruptcy Code in ways that will help lenders and creditors with respect to preference claims.

Regarding preference claims in general: when a business files bankruptcy, the trustee can examine the debtor’s recent payment history and seek to claw back payments made in the 90 days prior to filing. Bankruptcy Code Section 547 allows these “preference claims” under the theory that a debtor’s creditors should be treated equally—the debtor should not be able to favor some creditors over others. Creditors can resist preference claims by showing that they received the payment in the ordinary course of busines or in a “contemporaneous exchange for new goods or services.”

Preference claims are relatively routine—in the past, trustees could seek to claw back payments without regard for a creditor’s potential defenses. But the SBRA amended the code to require trustees to consider a creditor’s possible defenses before filing the claim. Now, they may file claims only “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses.” See 11 USC § 547(b). This may discourage or reduce preference claims.

The SBRA also raised the threshold for preference claims filed in the debtor’s venue—the bankruptcy court itself. In the past, the trustee could pursue preference claims in the bankruptcy court if the claims exceeded $13,650. The relatively low threshold encouraged settlements, especially from creditors more distant from the venue. The SBRA raised the venue threshold to $25,000. See 28 USC § 1409(b). This change may also discourage or reduce preference claims.