An adversary proceeding is a separate lawsuit commenced by the bankruptcy trustee administering a bankruptcy case or by a creditor, relating to the overall discharge of all the debtor’s debt, or to the discharge-ability of a particular debt, or to the retrieval and marshalling of assets through turnover proceedings, or avoidable transfer actions, such as actions to reverse fraudulent conveyances, or preferential transfers. A creditor, Trustee or other party in interest must initiate an adversary proceeding as a separate lawsuit within a bankruptcy case and serve the Defendant(s) and/or Debtor with a summons and complaint. The Defendant(s) and/or Debtor typically have 30 days from the date of the Summons to respond to the Complaint filed by the Creditor or Trustee. Failure to do so, may result in a default judgement being entered against the Defendant(s). Therefore, it is imperative to immediately address an adversary proceeding Summons & Complaint’s once served. In order to properly defend an adversary proceeding, one needs knowledge of Bankruptcy local rules, Federal Rules of the Bankruptcy Procedure, and General Bankruptcy Procedure. Attorney representation is highly recommended in order to effectively litigate and defend an adversary proceeding.
Typically, a Creditor files a Complaint in an attempt to avoid its debt being discharged in the bankruptcy case. Creditor’s often allege false pretenses, false representation, actual fraud, and/or malicious intent. In many instances, the Creditor may fail to adhere to Court rules and deadlines and/or the Court’s Scheduling Order, and may fail to give adequate dispositive proof, ad/or enough evidence to prove its allegations. As such, the opposing counsel may seek to dismiss the action. Notwithstanding how much may be at stake as to the monetary claim amount in the adversary proceeding, obtaining legal representation is always highly recommended. Even if a Creditor is suing you for $5,000, obtaining attorney representation could be in your best interest, allowing a better resolution of the matter and possibly preventing a default judgment being entered against you. There are also various settlement options in adversary proceedings, allowing the Defendant(s) and/or the Debtor to negotiate with the Creditor to settle the debt in question. This, preventing the debt from being declared non-dischargeable is critical to allow the debtor to get the full benefit of the Bankruptcy case.
The Bankruptcy Trustee can also pursue litigation efforts through filing an adversary proceeding. Trustees most often file adversary proceedings based on fraudulent transfers, preferential transfers, discharge revocation and property turnovers. Fraudulent Transfer issues typically arise when debtors transfer money and/or assets to another entity or person (typically an insider) within several years of filing of the bankruptcy with fraudulent intent. The Trustee may pursue this matter in an adversary proceeding alleging that an avoidable transfer occurred and that the debtor had the intent to hinder or delay creditors at a time when the debtor was insolvent. Preferential transfers are actions to recover payments on loans by the Debtor to Creditors within 90 days of the bankruptcy filing, to third parties and within one (1) year of the bankruptcy filing, for insiders. Trustee adversary proceedings can be resolved with the proper representation. Efforts in obtaining the appropriate documentation, proving solvency and lack of fraudulent intent at the time of transfer are common methods in defending these adversary proceedings.
A debtor can also commence an adversary proceeding against a creditor and most commonly does when the debtor seeks to void or remove a lien, turn over an asset or avoid an avoidable transfer.
Generally, if there is some merit and proof for the action, the costs to litigate most adversary proceedings dictate that once the parties realize their respective positions that they negotiate toward the likely resolution of the matter in the form of a settlement. If there is no merit or proof for the action, a Motion to Dismiss may be made by the Defendant. Having counsel to negotiate and litigate an adversary proceeding is critical for a fair resolution for a litigant.
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