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ANALYSIS: Behind Bankruptcy’s Low 2022 Preference Case Totals

Sept. 1, 2022, 9:00 AM

Earlier this year, I predicted an uptick in preference cases in 2022 because of the pandemic-generated rise in Chapter 11 cases in 2020. But this year’s data tells us a different story.

The Bankruptcy Code’s two-year statute of limitations for bringing avoidance actions (including preference cases) often means that if there’s a wave of Chapter 11 filings one year, there will be a corresponding wave of preference actions two years later.

However, in my examination of adversary proceeding complaints using the Nature of Suit (NOS) code for preference for Bloomberg Law’s Chapter 11 Petitions and Litigation: Midyear 2022 Report, I found that the number of complaints filed by mid-year 2022 was lower than in both the first and second halves of 2021.

A post-midyear evaluation shows that the downward trend in preference cases identified in my report has indeed continued: July’s total was similar to June’s, and August (as of 5 p.m. EDT on Aug. 31) had the lowest total in 2022 so far.

One possible reason for the lower totals could be the new rules for asserting preference cases.

The Small Business Reorganization Act of 2019, which also brought us Subchapter V, included amendments to 11 U.S.C. § 547(b). In order to assert a preference claim, a plaintiff must now exercise “reasonable due diligence,” and take into account a defendant’s known or reasonably knowable affirmative defenses under 11 U.S.C. § 547(c). While courts are still developing the meaning of “reasonable due diligence,” the new requirements may be a reason for the low number of preference cases.

Alternatively, more debtors may simply be declining to pursue preference litigation by, for example, agreeing to a preference waiver in the terms of the plan of reorganization, possibly at the behest of the creditors committee.

For more Chapter 11 filings trends, venues, law firms, judges, preference litigation, Subchapter V trends, plan confirmation speed and more, download our free Chapter 11 Petitions and Litigation: Midyear 2022 Report, here (for subscribers) and here (for non-subscribers)

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