Possible Disputes to Anticipate in a Chapter 11 Bankruptcy

Chapter 11 bankruptcy is designed to allow businesses to shield themselves from debts while they rebuild their finances and eventually emerge in solvent condition. Although it is a potent remedy, it can be fraught with complex issues that can disrupt the process. Sometimes these arise through the filing of an adversary proceeding, which is essentially a case with the Chapter 11 case.

These are the most common Chapter 11 disputes that can end up in adversary proceedings:

• Claim priority disputes between creditors — The U.S. Bankruptcy Code establishes a hierarchy for payment of certain debts before others. The “absolute priority rule” dictates that lower-priority creditors cannot receive payment until higher-priority claims are satisfied. Creditors may challenge each other’s relative priority and rights to collateral.

• Litigation over classification of debts — The way debts are classified in a Chapter 11 bankruptcy affects how creditors are treated under the reorganization plan. Disagreements can arise over whether debts should be considered secured or unsecured.

• Creditor objections to debt dischargeability — Creditors might allege fraudulent behavior or other actions by the debtor that disqualify a debt from discharge. The objecting creditors must prove their assertions in litigation that can prolong the bankruptcy case.

• Creditor objections to claimed exemptions — Debtors can protect certain assets by claiming exemptions provided by state or federal law. Creditors can contest the debtor’s eligibility for these exemptions, creating risk of asset loss for the debtor.

• Claims of fraudulent and preferential transfers — Creditors may alleged that the debtor made fraudulent or preferential transfers before filing for bankruptcy. These proceedings aim to recover assets unfairly distributed, which can be a contentious and lengthy process.

• Disputes over post-petition transfers — Creditors may claim that transactions made after the bankruptcy filing violate the automatic stay or are otherwise improper. These disputes can hinder the debtor’s ability to manage operations during bankruptcy.

• Actions seeking turnover of property — Creditors may bring a turnover action seeking a court order that requires a third party holding estate property to return it to the debtor or trustee. 

• Equitable subordination actions — Creditors may challenge the priority of other creditors’ claims based on alleged unfair practices. Subordination can rearrange the distribution of assets.

• Filing deficiencies and other debtor-related issues — Any deficiencies, such as incomplete documentation or schedules, can provoke creditor objections or trustee challenges, causing delays and additional complications.

• Issues raised by the bankruptcy trustee — The bankruptcy trustee, who oversees the Chapter 11 process, may raise issues concerning the debtor’s conduct, financial disclosures or compliance with court orders.

The interplay of creditor disputes, legal challenges and trustee actions can impact the debtor’s ability to successfully emerge from bankruptcy. A skilled Chapter 11 attorney representing the debtor in these disputes can often work out solutions to prevent delaying or derailing the case.

The Law Offices of Michael Jay Berger in Beverly Hills has extensive experience representing debtors in Chapter 11 cases, using strategic planning to promote their successful emergence from reorganization. Call 310-271-6223 or contact us online for a free consultation.