Pleading “Reasonable Due Diligence” In A Preference Complaint (In re Christmas Tree Shops)

By: Donald L Swanson

Under § 547(b) of the Bankruptcy Code (emphasis added):

• “the trustee may, based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses under subsection (c), avoid [a preferential transfer.” 

Question: What amount of detail is required in a preference complaint to satisfy the above-quoted “reasonable due diligence” requirement?

Answer:  It’s more than what the preference complaint provided in In re Christmas Tree Shops, LLC, Chapter 7 case (Adv. Pro. No. 25-50875, Delaware Bankruptcy Court; decided December 5, 2025, Doc. 18).

What follows is a summary of the Christmas Tree Shops opinion.

Chronology

May 5, 2023—Debtor files its voluntary Chapter 11 Petition.

August 16, 2023—Debtor’s case is converted to Chapter 7, and a Chapter 7 Trustee is appointed.

May 5, 2025—the two-years statute of limitations for filing a preference complaint (under § 546(a)(1)(A)) expires.

May 5, 2025—Debtor’s Chapter 7 Trustee files a preference Complaint against Defendant.

December 5, 2025—Bankruptcy Court, (i) dismisses the preference Complaint for failure to adequately allege compliance with the “reasonable due diligence” requirement of § 547(b), (ii) denies without prejudice Trustee’s request for leave to amend the Complaint, and (iii) authorizes Trustee to “file a motion to amend the complaint” within 14 days thereafter.  

Trustee’s Complaint Rejected

Trustee’s Complaint attempts to recover transfers totaling $736,820.85 as preferences under § 547.

Regarding the “reasonable due diligence” requirement of § 547(b), Trustee’s Complaint alleges only (in par. 14):

• “Although it is possible that some Transfers might be subject in whole or in part to defenses under 11 U.S.C. § 547(c), Defendant bears the burden of proof pursuant to 11 U.S.C. § 547(g) to establish any defense(s) under 11 U.S.C. § 547(c).”

Here’s how the Bankruptcy Court rejects the sufficiency of such allegations (at 7):

• “the court does not suggest that any magic words are required to establish this [§ 547(b)] condition precedent”;
• “the complaint here does not use the term ‘due diligence’ or any other language with similar meaning”;
• “the complaint contains no language that plausibly could be understood as alleging that the trustee made any inquiry at all into whether there were ‘known or reasonably knowable affirmative defenses’”; and
• “Accordingly, the complaint must be dismissed . . . without prejudice” because it “is possible that the trustee can re-plead and satisfy the due diligence condition precedent.”

Further, the Complaint’s paragraph 14 language, quoted above, merely states the obvious – that the defendant may have defenses and, if it does, it is the defendant’s burden to prove them. But such language would be true in virtually every instance. Instead:

• the trustee is required to plead that he performed due diligence and has taken into account known or reasonably knowable affirmative defenses; but
• “He has done neither.”

Legal Standards

The In re Christmas Tree Shops opinion identifies these legal standards as applicable.

Fed.R.Civ.P. 12(b)(6), Fed.R.Bankr.P. 7012 and related case law require that a complaint contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.  A claim has facial plausibility when the factual allegations allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.

Additionally, the complaint must give the defendant fair notice of what the claim is and the grounds upon which it rests.  Detailed facts are not necessary, but the defendant must be put on notice as to the basics of the plaintiff’s complaint by setting forth facts with sufficient particularity to apprise defendant fairly of the charges made so that defendant can prepare an adequate answer.

Further, the complaint must present well-pleaded facts, not mere conclusory statements, that establish the prima facie elements of the claim.

In considering a motion to dismiss, the Court must:

• accept all factual allegations as true;
• construe the complaint in the light most favorable to plaintiff; and
• determine whether, under any reasonable reading of the complaint, plaintiff may be entitled to relief.

The § 547(b) “reasonable due diligence” language creates a condition precedent, which is subject to this Fed.R.Civ.P. 9(c) requirement:

• “in pleading conditions precedent, it suffices to allege generally that all conditions precedent have occurred or been performed.”

So, to satisfy § 547(b), the plaintiff only needs to allege that it conducted reasonable due diligence into the defendant’s known or reasonably knowable affirmative defenses—which the Complaint in this case fails to do.

Examples of Sufficient Allegations

The In re Christmas Tree Shops opinion provides two examples of language in other preference complaints that have been construed as satisfying the “reasonable due diligence” requirement of § 547(b).

In one case, the preference complaint adequately alleges:

• “Plaintiff also performed Plaintiff’s own due diligence evaluation of the reasonably knowable affirmative defenses available to Defendant. As part of Plaintiff’s due diligence, Plaintiff reviewed the books and records in Plaintiff’s possession and identified that Defendant potentially has 0 in invoices qualifying for the subsequent new value defense under section 547(c)(4) of the Bankruptcy Code.”
• “However, the subsequent new value defense is an affirmative defense, for which Defendant bears the burden of proof under section 547(g). The potential new value is based on the invoice date in the books and records. As the dates for new value are often based on the shipping dates for goods and the actual dates of service for services, this new value is subject to adjustment. Accordingly, Plaintiff puts Defendant to its burden of proof to establish it is entitled to this new value.”
• “Based upon Plaintiff’s review of the information, if any, provided by Defendant prior to filing this Complaint, and after performing Plaintiff’s own due diligence evaluation of the reasonably knowable affirmative defenses to avoidance of the Transfer(s), Plaintiff has determined that Plaintiff may avoid some or all of the Transfers even after taking into account Defendant’s alleged affirmative defenses.”

In another case, the preference complaint adequately alleges more succinctly:

• “Based on the Plaintiff’s review of its records and after performing its own due diligence evaluation of the reasonably knowable affirmative defenses to avoidance of the transfers, Plaintiff has determined that it may avoid the transfers even after taking into account the Defendants’ alleged affirmative defenses.”

Leave to Amend—Denied & Granted

The trustee’s request for leave to amend if this court dismisses the complaint is denied because, under Third Circuit precedent, a plaintiff seeking leave to amend a complaint must submit a draft amended complaint so that the court may determine if amendment would be futile.  But the trustee has not submitted a draft amended complaint, and a failure to do so is fatal to the trustee’s request.

Therefore:

• the request to amend is denied, without prejudice; but
• the Trustee may file a motion to amend the complaint, along with a draft amended complaint and redline, within 14 days.

Conclusion

Presumably, the amended complaint will relate back to the time of the originally-filed complaint.  Otherwise, the amended complaint will be time barred.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.