Bankruptcy and Adversary Proceedings

An adversary proceeding is a separate court action that is filed within a person’s bankruptcy case. Although it is related to the original bankruptcy, it is assigned a different case number and, therefore, becomes a separate case that requires a separate resolution.

Essentially, an adversary proceeding is a vehicle used to let the judge know that the plaintiff, the party who files the complaint that begins an adversary proceeding, wants some form of relief that is available under bankruptcy law. Creditors, the bankruptcy trustee, who is the person assigned to oversee a bankruptcy case, or the debtor may file an adversary proceeding.

There are no adversary proceedings in the majority of bankruptcy cases, but it is a form of action that is available for resolving certain important issues.

What Are Some Common Examples of Adversary Proceedings?

Several kinds of adversary proceedings are common in bankruptcy cases. Some common ones are as follows:

• Objection to Discharge of a Debt. This is one of the most common actions filed as an adversary proceeding. It is usually filed by a creditor who objects to the discharge of their debt in the bankruptcy case.
  • A creditor may claim that the debtor is attempting to escape a debt through the use of fraud. The creditor may also file to have a discharged debt revoked, if it has already been discharged. There are deadlines for filing this type of action; typically, it is 60 days after the first meeting of creditors;
• Action to Recover Property: If a debtor sold some of their property immediately before filing for bankruptcy, the trustee may seek to recover it. The trustee would file an adversary proceeding for this purpose;
• Liens: The debtor may file an action to determine the validity, priority or extent of liens or to have a lien discharged;
• Discharges: A debtor may file an action to determine whether a certain debt can be discharged, for example, tax debt or student loan debt;
• Equitable Relief: Any party may file an action to obtain an injunction or other type of equitable relief;
• Action to Subordinate a Claim: One creditor may file a complaint to lower a claim in level of priority, known as “subordination of a claim”;
  Injunctions: An adversarial proceeding must be used to obtain an injunction;
• Action to Move Case: An adversarial proceeding is required if one party wants to move the case to another court.

The most common are objections to the discharge of a debt, actions to determine the validity of a lien, and actions to recover property that was sold prior to the start of the bankruptcy proceeding.

The following actions must be dealt with as adversary proceedings:

• An action recover money or property;
• An action to determine the status of a lien status or another property interest;
• An action to modify the debtor’s discharge;
• An action to determine if a debt can be discharged;
• An action to obtain an injunction;
• An action to subordinate a creditor’s claim or interest;
• An action to get a declaratory judgment;
• An action to move a case to a different court.

Other types of actions that are not normally included among adversary proceedings may still be treated as adversary proceedings by the court, if they are related to the bankruptcy, or need to be resolved before the bankruptcy comes to a conclusion.

Cases pending in other courts might also be transferred to bankruptcy court, if they are related to the issues in the bankruptcy. Legal issues that are related to the bankruptcy are often considered along with the bankruptcy. These would be issues relating to the assets and debts of the debtor.

How Does an Adversary Proceeding Take Place?

The party who wishes to file an adversary proceeding must take certain steps to initiate their action. This party is referred to as the “plaintiff” in legal terminology, as is the party who begins any civil lawsuit. The plaintiff may be the debtor, the bankruptcy trustee, or a creditor.

The party who opposes the plaintiff in an adversary proceeding becomes the defendant. Often, this is the debtor. The steps in an adversary proceeding are basically the same as the steps in any civil lawsuit:

• Filing of the Complaint: The plaintiff files a document that is called a “complaint” in the bankruptcy court seeking relief. The complaint must include a statement of the facts of the issue, the claim against the defendant, and the relief sought by the plaintiff. The plaintiff must also pay any necessary filing fees to the court clerk.
  • The clerk assigns a number to the case; it is different from the bankruptcy case number. The clerk also issues a summons, which must be served on the opposing party, or “defendant”, along with the complaint.
• Filing of the Answer: The opposing party must file a formal answer to the complaint;
• Settlement or Trial and Decision: The case then proceeds as any other civil case. The plaintiff and defendant will gather evidence using discovery methods. They attempt to settle the case informally or, possibly, through an alternative dispute resolution process, such as mediation, or a settlement conference.
  • If the case is not settled, then there is a trial before a bankruptcy judge or a jury. During the trial, the parties present evidence and their arguments, and the judge or jury renders a verdict for one party or the other.

The court that hears the trial of an adversary proceeding follows the Federal Rules of Bankruptcy Procedure. These rules are similar to the Federal Rules of Civil Procedure, which govern civil lawsuits in other federal courts. The decision of the judge or the jury can be appealed as can the decisions of every federal court.

What Is a Contested Matter?

If an issue in a bankruptcy requires a hearing and decision from the judge, but not the presentation of evidence, it is a “contested matter.” A contested matter usually starts with the filing of a motion by a debtor, creditor or trustee that asks the court to take some action. For example, the motion may ask the court to lift the automatic stay. The court can allow discovery, i.e. the exchange of evidence between the parties, but that process does not occur without the permission of the court.

If the parties cannot agree to a settlement of the issue, the judge then makes a ruling on it. Contested matters require less time, effort, and expense than do adversarial proceedings.

Examples of contested matters include:

• Automatic Stays: An automatic stay is put in place when a debtor files their petition for bankruptcy. The stay stops creditors from attempting to collect on their debt while the bankruptcy case is pending. A motion to have the automatic stay lifted, filed by a creditor, would be a contested matter;
• Objections to Debt Amounts: Objections to the validity of the amount a creditor claims they are owed by the debtor would be treated as a contested matter;
• Objections to Claimed Property: “Claimed property” is property which the debtor wants to exempt from their bankruptcy, because they want to keep ownership of it after the bankruptcy has concluded. A creditor or the trustee might object to the debtor’s “claimed property” through a motion. An adversary proceeding is not required.

Do I Need an Attorney for a Bankruptcy Adversary Proceeding?

Bankruptcy can be complicated and it involves a lot of technical terminology. If your bankruptcy involves a contested matter or an adversary proceeding, you should consult an experienced bankruptcy lawyer for expert help.

Your bankruptcy lawyer knows how to respond to adversary proceedings or motions regarding contested matters that you may confront. Also, your lawyer knows when you need to file an adversary proceeding or motion regarding a contested matter in order to protect your interests. You need the expertise of a qualified bankruptcy lawyer to advise you if your bankruptcy involves adversary proceedings.