Common Adversary Proceedings in Bankruptcy Court

An adversary proceeding in bankruptcy is essentially a case within a case. It is a formal legal action initiated by one party against another party in the bankruptcy to settle a related dispute. Either party files a complaint detailing the reasons for seeking relief and the other party has the opportunity to respond. The proceeding is held before the same judge who is assigned the bankruptcy case. Similar to a lawsuit, an adversary proceeding involves discovery, settlement negotiations and ultimately a trial (without a jury) if there is no resolution beforehand.

Adversary proceedings address specific legal issues or claims, not the overall bankruptcy itself. However, they often determine how the bankruptcy will play out. These are the most common types of proceedings:

1. Objections to discharge — The U.S. Trustee may bring a proceeding to prevent the debtor’s discharge in bankruptcy, for such reasons as the debtor making false statements to the court or on the bankruptcy petition, disregarding court orders or otherwise acting in bad faith.
2. Objections dischargeability of a particular debt — Creditors can argue that certain debts shouldn’t be wiped out in bankruptcy. Examples of such debts include student loans, fraudulently obtained loans and debts arising from intentional harm.
3. Setting aside fraudulent transfers — Certain transfers made by the debtor before filing for bankruptcy can be voided if made with the intention to defraud creditors. This could involve gifting assets, or selling them well below market value, to family or friends. The bankruptcy trustee or a creditor can initiate a proceeding to retrieve the transferred assets for the benefit of all creditors. Proving such fraudulent intent can require detailed financial analysis.
4. Avoiding preferential transfers — Certain payments or transfers within a specific period before filing for bankruptcy are considered to unfairly favor some creditors over others. The U.S. Trustee can sue to recover such preferential transfers and distribute them equitably among all creditors. Determining if a payment constitutes an avoidable preference involves analyzing its timing, amount and nature as well as the debtor’s financial condition at the time.
5. Debtor-initiated proceedings — While most adversary proceedings are started by creditors or the U.S. Trustee, there are cases in which the debtor is the plaintiff. This could involve suing a creditor for illegal collection practices, for unfair or unsupportable claims or for failure to comply with an order for discharge of a debt.

An adversary proceeding can be far more complex than the bankruptcy itself. As such, it’s important to retain an attorney who is well-traveled in this subspecialty of bankruptcy law. An attorney experienced in adversary proceedings can often obtain positive results through a summary judgment motion, establishing there is no dispute about material facts and thereby avoiding the delay and expense of trial.

At the Law Offices of Michael Jay Berger in Beverly Hills, California, I know how to protect your rights and navigate adversary proceedings effectively. Call me at 310-271-6223 or contact me online to schedule a free consultation.