In Pinktoe Liquidation Trust v. Dellal (In re Pinktoe Tarantula Limited), Adv. Pro. No. 20-50597 (Bankr. D. Del. Apr. 14, 2023), Judge Laurie Selber Silverstein addressed a question that has divided bankruptcy courts since the Small Business Reorganization Act of 2019 (“SBRA”) amended Section 547(b): is the new “reasonable due diligence” requirement an element of a preference claim, or an affirmative defense? The court held it is an element — but, importantly, also held that because it operates as a condition precedent, Federal Rule of Civil Procedure 9(c) governs how it must be pleaded, not the heightened Iqbal/Twombly standard under Rule 8.

Background

Charlotte Olympia Dellal founded the Charlotte Olympia women’s clothing brand and, in 2013, formed three U.S. affiliates (collectively, the “Debtors”) to expand the brand into the United States. Dellal served as a director and officer of the Debtors. Debtor Pinktoe Tarantula opened a New York retail store and entered into a lease with L&M 65th Madison LLC (the “Landlord”), which Dellal personally guaranteed.

The Debtors filed for Chapter 11 in February 2018, and a confirmed plan vested the Pinktoe Liquidation Trust with the Debtors’ avoidance claims. In May 2020, the Trust sued Dellal — not the Landlord — seeking to avoid and recover $448,236.03 in lease payments made during the one-year period before the petition date, on the theory that the payments benefited Dellal as guarantor. The Trust also asserted a breach of fiduciary duty claim. Dellal moved to dismiss both counts.

The Court’s Due Diligence Analysis

The SBRA amended Section 547(b) to require that a trustee proceed with a preference action “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).” Most courts confronting the issue have sidestepped whether this language creates a new element or an affirmative defense. In re ECS Refining, 625 B.R. 425 (Bankr. E.D. Cal. 2020), is the only reported decision squarely addressing the question, and Judge Silverstein found its reasoning persuasive.

Looking to the structure of Section 547 itself, the court observed that subsection (b) sets out what a plaintiff must prove to avoid a transfer; subsection (c) establishes the affirmative defenses (ordinary course, contemporaneous exchange, new value); and subsection (g) allocates the burden of proof, placing avoidability under (b) on the plaintiff and nonavoidability under (c) on the defendant. Because the new due diligence language appears in subsection (b), the court concluded it is an element the trustee must prove — not a defense.

The Pleading Standard: Rule 9(c), Not Rule 8

This is where the opinion’s most practically significant holding emerges. Having concluded that due diligence is an element, the court characterized it as a condition precedent to bringing the action. Under Federal Rule of Civil Procedure 9(c) (made applicable by Bankruptcy Rule 7009), “it suffices to allege generally that all conditions precedent have occurred or been performed.” The Third Circuit has confirmed that pleading conditions precedent falls outside the Iqbal/Twombly framework. Hildebrand v. Allegheny Cnty., 757 F.3d 99 (3d Cir. 2014).

A trustee, therefore, need not plead detailed factual allegations describing the investigation conducted. A general allegation that all conditions precedent have been satisfied will suffice. Here, however, the complaint contained no due diligence allegation — general or otherwise — and Count I was dismissed on that ground, with leave to amend.

Disposition

The court dismissed Count I without prejudice and granted leave to amend, noting the Trust’s representation that it could plead the required allegation. Count II was also dismissed with leave to amend: the court found the Trust adequately pleaded breach of the duty of loyalty and good faith (Dellal’s self-interest as guarantor and brand-builder being apparent from the complaint), but failed to adequately plead the duty of care or the Debtors’ insolvency at the times of the alleged breaches.

Why This Matters

Pinktoe clarifies, at least in Delaware, that the SBRA due diligence requirement belongs to the trustee’s prima facie case. But the court’s Rule 9(c) holding tempers what might otherwise be a meaningful new burden: trustees can satisfy the pleading requirement with a general allegation, leaving factual development for discovery. The decision also offers a useful reminder that guarantor-directed preference theories remain viable — but require the same careful pleading as any other Section 547 claim.