Preferential Transfers and the Trustee’s Duty to Investigate

What Recent Cases Tell Us After 2019 Amendment

Preferential transfer litigation has long been a cornerstone of bankruptcy practice and a source of frustration for defendants who feel they are swept into mass-filed adversary proceedings with little or no pre-suit investigation. Congress responded to these concerns in 2019 by amending 11 U.S.C. § 547(b) to require trustees to exercise reasonable due diligence taking into account a party’s known or reasonably knowable affirmative defenses.

Six years later, courts are still sorting out what that requirement actually means. A recent 2025 decision in Rebein v. Tempel Grain Elevators, LLP (In re Sandy Road Farms, LLC) adds another important data point. Trustees must now do at least a minimal, good-faith investigation into possible defenses before suing creditors for preferential transfers. However, courts have set a low bar. A simple statement claiming due diligence is often enough to move forward. The 2019 law intended to stop abusive lawsuits, but in practice, trustees still retain strong leverage in these cases.

A comprehensive review of the law, the defenses, and how courts are applying the 2019 statutory change.

Regarding preferential transfers under § 547, a trustee may avoid and claw back certain payments the debtor made before bankruptcy. A transfer is preferential if:

• It was made to or for the benefit of a creditor.
• It occurred within 90 days of the petition date (or one year for insiders).
• It was made on account of an antecedent debt.
• The debtor was insolvent at the time.
• The transfer allowed the creditor to receive more than it would have received in a Chapter 7 liquidation.

If these elements are met, the transfer is potentially avoidable.

Defenses to Preferential Transfers & Trustee’s Pre-Suit Obligations

Defendants often have viable defenses under § 547(c). The most common include:

• “Not a Preference” when the transfer wasn’t on account of an antecedent debt or otherwise fails an element of § 547(b).
• In “Ordinary Course of Business” if payments are consistent with the parties’ historical dealings or ordinary industry practice.
• The creditor gave “New Value” to the debtor after the allegedly preferential transfer, which is usually a straightforward calculation.

Historically, trustees have filed large batches of preference suits without thoroughly analyzing such defenses. Defendants either spent money to defeat baseless suits or paid nuisance settlements to avoid the litigation cost. Congress attempted to fix this problem in 2019.

The 2019 Amendment to § 547(b)

The Small Business Reorganization Act added new language requiring trustees to avoid transfers only after “reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses.”

The aim was to curb abusive preference litigation, but did it work? Courts have been grappling with whether this creates a new element of the preference claim, a pleading requirement, or merely a procedural obligation.

The 2025 Decision: In re Sandy Road Farms, LLC

Rebein v. Tempel Grain Elevators, LLP, Bankr. D. Kan. (Oct. 22, 2025), considered whether a trustee sufficiently pled the new “due diligence” requirement.

Background

The trustee began the process by sending a standard preference demand letter, to which the defendants responded with detailed explanations of their potential defenses. Unpersuaded, the trustee proceeded to file adversary complaints, asserting that the defendants had “failed to supply any viable and provable basis for defenses.” In those complaints, the trustee alleged that he had reviewed the debtor’s records, analyzed the relevant transfers, examined the asserted defenses, and even requested additional information to further evaluate any other potential defenses.

The defendants filed a Rule 12(b)(6) motion to dismiss, claiming inadequate due diligence.

The Court’s Ruling

The court held that the due diligence requirement in § 547(b) operates as a condition precedent to filing a preference action, but that this threshold is easily met at the pleading stage. According to the court, general allegations that the trustee performed due diligence are sufficient, and the trustee is not required to plead around potential affirmative defenses in order to state a valid claim.

In effect, even if a trustee is aware of meritorious defenses, a generic statement of diligence can survive a motion to dismiss under Iqbal/Twombly. This gives trustees significant litigation leverage, so defendants must now go through discovery, summary judgment, and trial to defeat a claim, even those the trustee might have known were weak or meritless. The court noted that its review was limited to the face of the pleadings. A better factual record could change the analysis later in the case.

What Other Courts Have Said About “Reasonable Due Diligence”

Collier on Bankruptcy

Courts frequently look to Collier on Bankruptcy for guidance on interpreting the due diligence requirement, and Collier poses several key questions: Does reasonable due diligence require conducting Rule 2004 examinations, or is reviewing the debtor’s books and records sufficient? Does the level of required effort vary depending on factors such as the size of the estate, the quality of the debtor’s records, or the availability of accounting personnel? And what does it truly mean for a trustee to take affirmative defenses into account? Collier ultimately concludes that the due diligence standard is an objective one—measured by what a competent trustee practicing in the relevant jurisdiction would do under similar circumstances.

In re: Reagor-Dykes Motors, LP, 2021 WL 2546664, Bankr. N.D. Tex. June 18, 2021

Here the court explained the amendment was intended to deter abusive suits, but whether it created a new pleading requirement is unclear. A trustee must exercise judgment before filing and not simply parrot the statutory language. The courts were critical where the complaint:

• Lacked context for the transfers
• Failed to describe the business relationship
• Ignored potential ordinary course or new value issues

The court emphasized that complaints must reflect at least some real investigation. For example, In re Trailhead Engineering, LLC, 2020 WL 7501928 (Bankr. S.D. Tex. Dec. 21, 2020), due diligence was sufficiently pled where the trustee mapped out the relationship between parties and reviewed bank records, invoices, correspondence, and contracts. This is the kind of factual context that satisfies the rule.

In re Center City Healthcare LLC (2022) Bankr. D. Del.

The trustee survived the motion to dismiss because the complaint alleged that the debtor had analyzed the transfers and potential defenses, sent demand letters, and invited an exchange of information, even though the specifics of those efforts were sparse. The court emphasized that a trustee does not need to plead how affirmative defenses were ruled out; it is enough to allege that those defenses were considered.

The Outlier: In re Arete Healthcare, LLC (2022) Bankr. W.D. Tex.

In this case, the trustee’s complaint did little more than recite the statutory language, claiming “reasonable due diligence,” “investigating,” and “taking into account defenses.” The court held that merely parroting the statute was insufficient. If due diligence is an element of the claim, the trustee must plead actual facts rather than conclusory statements. As a result, the motion to dismiss was granted.

Summary of Preferential Transfers in Bankruptcy Law

Congress intended to curb abusive preference litigation when it amended § 547(b) in 2019. But as recent decisions demonstrate, this goal has only been partially realized. Most courts allow trustees to meet the new requirement through simple, generic pleading, which is far short of the rigorous pre-suit investigation Congress appeared to contemplate. Nevertheless, some courts (Arete Healthcare and the analytical approach in Reagor-Dykes) signal a willingness to demand more.

For now, defendants should continue to respond vigorously to demand letters and create a written record of defenses early in the process. Whether that effort will stop a lawsuit may depend on the jurisdiction—but it will matter greatly once the case proceeds beyond the pleading stage.

Parkins & Rubio is Your Defense Against
Preference & Fraudulent Conveyance Actions

Parkins & Rubio defends Section 547 preference actions to protect clients from having to return legitimate payments, negotiate to reduce liability, avoid double loss, and guide clients through the technical bankruptcy process. We also defend Section 548 fraudulent conveyance actions to challenge a trustee’s claim that the transfer was improper, assert good faith or fair value statutory defenses, minimize financial loss, and protect legitimate payments.

Contact Armando Mendoza at 713-715-1663 or AMendoza@ParkinsRubio.com for more information.