5 Common Types of Adversary Proceedings in Bankruptcy Cases

Someone fllling out Bankruptcy Court Hearing Form. - Dave Burns Law Office, LLC

In some bankruptcy cases, issues arise that require a bankruptcy court proceeding separate from the bankruptcy itself. These actions, called adversary proceedings, are a type of bankruptcy litigation. They take place as an independent legal action within the bankruptcy case. While there are a number of different kinds of bankruptcy litigation, there are some common types of adversary proceedings in bankruptcy cases.

Adversary Proceedings in a Bankruptcy Case Explained

A bankruptcy case itself is not an adversarial process. In most cases, the process consists of the bankruptcy petitioner presenting documentation and information to a bankruptcy trustee through a procedure set by the U.S. Bankruptcy Code.

However, in some bankruptcy cases, an issue or dispute arises that requires resolution by the bankruptcy court. A creditor, the trustee, or the debtor may raise the issue by filing an adversary proceeding with the bankruptcy court. The court resolves the dispute as a separate action within the bankruptcy case. The underlying bankruptcy case does not close until the adversary proceeding ends with settlement or a court decision.

If a bankruptcy attorney represents the petitioner in the underlying bankruptcy, that attorney may handle the adversary proceeding. However, in many cases, the debtor separately retains an attorney with specialized experience in bankruptcy litigation. Adversary proceedings require different knowledge and skills than the bankruptcy case itself.

The Federal Rules of Bankruptcy Procedure govern adversary proceedings. Rule 7001 includes a non-exhaustive list of ten types of proceedings that must be filed as adversary proceedings. However, the following types of adversary proceedings occur with some frequency.

Dischargeability of a Debt

Discharging debts is one of the benefits of filing for bankruptcy. While many debts are dischargeable, some are not. In addition, the U.S. Bankruptcy Code (Section 523) provides that a creditor can challenge the dischargeability of a debt in specific circumstances.

Filing a non-dischargeability action constitutes an adversary proceeding within the bankruptcy case. Generally, a debt incurred through actual or constructive fraud of the debtor can be the subject of a non-dischargeability action. Additional information about non-dischargeability actions is available in our article, When Can a Creditor Challenge the Dischargeability of a Debt in Bankruptcy Litigation?

Objections to Discharge

In some situations when there is fraud or illegal activity in the bankruptcy case itself, creditors or the trustee can object to discharge of all debts in the case. This type of objection to discharge generally alleges that the debtor hid or wrongfully transferred property or assets prior to filing for bankruptcy.

Objections to discharge and dischargeability actions are filed under different sections of the federal Bankruptcy Code. Typically, the United States Trustee files an objection to discharge under Section 727 of the Code. A creditor usually brings a non-dischargeability action under Section 523. For a more detailed explanation about the differences between these two types of actions, please refer to our article, Understanding Objections to Discharge in Bankruptcy.

Fraudulent Transfers

The bankruptcy trustee has the authority to void certain fraudulent transfers made by the debtor prior to filing the bankruptcy petition. This provision of the Bankruptcy Code sometimes is called the bankruptcy clawback provision.

If a transfer involves actual or constructive fraud, the trustee may file an adversary proceeding to recover the property (or its value) from the transferee. The trustee then uses the assets to pay creditors of the bankruptcy estate.

Fraudulent transfer actions are especially complex, because the trustee can proceed under the federal Bankruptcy Code or under state law. In Minnesota, using state law provisions extends the clawback period to six years, as compared to the two-year period allowed under the Bankruptcy Code.

Our separate article, Voidable / Fraudulent Transfers in Bankruptcy Cases, explains the role of Minnesota state law and provides examples of fraudulent transfers that occur in bankruptcy cases.

Preference Actions

The federal Bankruptcy Code includes a provision concerning avoidable preferences. The section authorizes the bankruptcy trustee to recoup certain payments to creditors made with a specified period before filing of the petition.

When the trustee makes a preference claim, an adversary proceeding often results. Our article Avoidable Preference Litigation in Bankruptcy Cases provides detailed information about these actions.

Debtor Adversary Proceedings

In some situations, a debtor initiates an adversary proceeding in the bankruptcy case. For example, the debtor may file an action against a creditor if the creditor violates of the automatic stay on debt collection provided by filing for bankruptcy.

Under the U.S. Bankruptcy Code, the automatic stay becomes effective when the bankruptcy petition is filed. It precludes actions by creditors attempting to collect pre-petition debts. The Code provides that a debtor injured by a creditor’s willful and deliberate violation of the stay provisions is entitled to recover actual damages, including costs and attorney’s fees.

Initiating or Defending Against an Adversary Proceeding

Most bankruptcy cases do not involve adversary proceedings. After the petition is filed, the case usually goes through the process in an orderly manner, without disputes or controversy.

However, when an adversary proceeding becomes necessary, legal counsel specifically practicing in the area called bankruptcy litigation often represent the parties. Bankruptcy court practice is very different from processing a bankruptcy petition and case.

Adversary proceedings require adherence to specific rules of practice and procedure. The attorneys collect and present evidence to the bankruptcy judge during the process. A bankruptcy litigation attorney also has negotiating skills that may result in a claim being settled, rather than fully litigated. While some attorneys who handle bankruptcy filings also handle adversary proceedings (bankruptcy litigation), many do not.

Talk With a Respected Twin Cities Bankruptcy Litigation Attorney

Bankruptcy litigation is a primary focus of my practice at the Dave Burns Law Office. I represent creditors and debtors in adversary proceedings in the United States Bankruptcy Courts in Minneapolis and St. Paul.

If you face any type of potential adversary proceeding in a bankruptcy case, I welcome you to contact me at (612) 677-8351 or by sending an email to me at dave@daveburnslaw.com. I am available to meet with clients in both Minneapolis and St. Paul and welcome inquiries from clients and referring attorneys throughout the State of Minnesota.

Categories: Bankruptcy, Litigation

The Dave Burns Law Office hopes you find this article helpful. But please do not rely on it as legal advice. The law changes regularly and the outcome of any legal matter depends on its unique circumstances. View full disclaimer