Fending Off Creditors’ Challenges in Bankruptcy Adversary Proceedings

An adversary proceeding in bankruptcy is essentially a lawsuit within the context of a bankruptcy case. It is initiated by a creditor or another party who seeks to challenge certain aspects of the bankruptcy or to resolve disputes that arise within the bankruptcy process. These proceedings can significantly affect the debtor’s ability to obtain a discharge of debts or to retain certain property.

Debtors facing an adversary proceeding must mount an effective defense to protect their interests. Common grounds for adversary proceedings include objections to debt discharge and allegations of fraudulent transfers and preference payments. 

If the creditor claims that the debtor engaged in fraudulent activity or misrepresented financial information, the debtor could show they acted in good faith and that any inaccuracies in financial statements were unintentional. For example, the debtor can present evidence that they relied on faulty advice or misunderstood the requirements, along with any mitigating circumstances that could justify the debtor’s actions.

A fraudulent transfer occurs when the debtor has sold or gifted property to another party with the intent to hinder, delay or defraud creditors. A preference payment occurs when certain creditors are repaid within 90 days before the debtor files for bankruptcy while others are left in the lurch. proceeding. Creditors and sometimes the bankruptcy trustee use adversary proceedings to attempt to set these transactions aside. The debtor can raise several defenses, including the following:

• Debtor’s solvency — Establishing that the debtor was insolvent at the time of the transfer is a necessary element of proving a preference payment or fraudulent transfer claim. Debtors may argue they were solvent, making it difficult for trustees to recover the assets.
• Transfer in the ordinary course of business — This requires showing that the transfer aligns with usual practices based on several factors, including the debtor-creditor relationship, payment history and industry norms.
• Exchange for new value — This means showing that contemporaneously or soon after the alleged preferential payment, the creditor provided goods, services, credit or some other thing of value to the debtor, essentially offsetting the payment.
• Lack of intent to defraud — Proving a debtor’s intent in an alleged fraudulent conveyance case can be challenging. It usually involves circumstantial evidence, for which the debtor can offer alternative interpretations
• Exempt property — Debtors may show that the transferred property is exempt from the bankruptcy estate, making it ineligible for recovery.

In the case of a preference payment, the creditor who received it has a direct interest in preventing avoidance of the transaction and therefore will participate in the defense.

Substantiating any of these defenses requires documentation that includes detailed records of business transactions. In addition, a qualified bankruptcy attorney is essential to an effective defense in adversary proceedings and can often reach a beneficial settlement that averts protracted litigation.

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