Credit managers increasingly find themselves navigating preference exposure in bankruptcy cases—both
as custodians of payment histories and as first-line recipients of pre-suit communications from trustees.
Preference law is designed to prevent unequal treatment among creditors in the run-up to bankruptcy,
but it has long imposed substantial costs on trade creditors who received routine payments in the ordinary
course. The Small Business Reorganization Act of 2019 amended 11 U.S.C. § 547(b) in an attempt to
rebalance these dynamics by requiring trustees to conduct and plead “reasonable due diligence” and to
take into account a creditor’s known or reasonably knowable affirmative defenses before suing.
On December 5, 2025, the Delaware bankruptcy court dismissed a Chapter 7 trustee’s preference complaint
in the Christmas Tree Shops bankruptcy case for failing to adequately plead Section 547(b)’s “reasonable
due diligence” requirement. The opinion is a practical road map for what preference plaintiffs
must allege—and, by implication, what trade creditors and defendants should expect to see—in a properly
pled preference complaint. It also frames an open question for the market: whether this due diligence
obligation has implications for pre litigation preference demand letters (as opposed to filed preference
complaints).
