September 10, 2019, New York – President Trump recently signed a new law titled – Small Business Reorganization Act of 2019 (“SBRA”). The SBRA will come into effect on February 2020. The SBRA is designed to fill a gap in the current bankruptcy laws by providing a framework for small businesses to successfully reorganize in bankruptcy court. The primary outcome of the “SBRA” is the creation of a subchapter to Chapter 11 for small business debtors, i.e., those with no more than $2,725,625 in secured and unsecured debts combined. This will address the unique issues faced by these companies in the bankruptcy process.
Currently, Section 547 of the Bankruptcy Code permits a debtor, subject to certain conditions and defenses, to “clawback” payments made to creditors within 90-days of the filing of a bankruptcy petition (or one-year for “insiders”). The Bankruptcy Code does not explicitly require a debtor or trustee to undertake any due diligence before commencing an action under section 547 but says that a debtor or trustee “may” do so. Under the new law, the bankruptcy trustees or debtors need to consider the potential statutory defenses of a creditor (recipient of alleged preference) based on “reasonable diligence in the circumstances and taking into account a party’s known or reasonably knowable affirmative defenses.” before commencing a lawsuit. The amendment may provide additional defense to parties sued under section 547.
The SBRA also impacts where preference defendants can be sued. Currently, claims under $13,650 must be brought in the district where the defendant resides (as opposed to where the bankruptcy case is pending), but the SBRA raises this threshold amount to $25,000. Often, the simple costs to defend an out-of-state preference action outweighed the benefits of pursuing valid defenses in small preference actions.
From the above amendments, it does not appear that any drastic changes will occur in the preference practice. The trustees will continue to send preference demands to creditors and will continue to file suit when there is even the slightest of doubt in the case. However, we can hope that under the new law, debtors or trustees would consider statutory defenses of alleged defendants much seriously before initiating complaints against them.