Types of Adversary Proceedings and How to Defend Against Them

In bankruptcy law, an adversary proceeding is filed to litigate a major issue that affects the debtors’ and creditors’ rights. It is typically lodged by a creditor objecting to some aspect of the debtor’s entitlement to debt discharge. The proceeding is in essence a lawsuit, commenced by the filing of a complaint and involving discovery, motions and possibly a trial. This litigation can be lengthy and disruptive and might derail the bankruptcy case. However, successful defense is possible with the aid of skilled counsel.

These are among the adversary proceedings most frequently filed:

• Nondischargeability actions (11 U.S.C. § 523) — These actions seek to exclude certain debts from discharge, effectively holding the debtor responsible for their payment despite the bankruptcy. Common grounds include allegedly incurring debts through fraud, embezzlement or willful and malicious injury to another person or entity. The creditor has the burden of proof. 

• Preference and fraudulent transfer claims (11 U.S.C. §§ 547 and 548) — These claims seek to claw back pre-bankruptcy payments or transfers alleged to unfairly benefit one creditor over others. A trustee can recover payments made during the 90 days before filing (one year if made to insiders) that unfairly prefer one creditor over others. A trustee can undo transfers made within two years of the filing if less than reasonably equivalent value was received in exchange.

• Lien validity or priority disputes (11 U.S.C. § 506) — These disputes involve the validity, priority or extent of liens, such as when multiple creditors claim competing security interests in the same collateral. The court’s determination in these matters will decide which creditor has a superior claim or whether a lien is valid at all.

• Objections to discharge (11 U.S.C. § 727) — Creditors or the trustee can object to the debtor’s overall entitlement to a discharge by alleging concealment of assets, the making of false statements under oath or the failure to maintain adequate financial records. A successful objection can result in the denial of a discharge, leaving the debtor liable for all debts.

• Breach of fiduciary duty or business tort claims — These claims are brought against company insiders, officers or directors accused of mismanagement, self-dealing or breaches of fiduciary duties. They are often lodged in Chapter 11 cases by creditors, trustees or the debtor in possession to recover damages for the estate or to void harmful transactions.

An attorney experienced in adversary proceedings can provide a strategic defense through motions to dismiss, summary judgment and well-martialed settlement negotiations. Possible approaches include:

• Challenging the factual basis of claims — Attorneys can dispute the allegations underpinning the creditors’ claims, such as the assertion of fraud or the intent behind a transfer.
• Asserting statutory defenses — Certain defenses are built into the Bankruptcy Code, such as contesting the timing of a transaction to refute a preference claim.
• Negotiating settlements — Often, resolving disputes through settlement can be more cost-effective and quicker than litigation, preserving estate resources.
• Demonstrating compliance and good faith efforts — It may be shown that the debtor acted in good faith and complied with all procedural requirements.

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