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Bankruptcy Adversary Proceedings Attorney

An adversary proceeding is a separate lawsuit filed within a bankruptcy case — deciding fundamental issues like the discharge or dischargeability of debt and the recovery of assets for the bankruptcy estate.

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Bankruptcy adversary proceedings — an illustrated overview

A Lawsuit Within Your Bankruptcy Case

What are Bankruptcy Adversary Proceedings?

An adversary proceeding is a separate lawsuit commenced within a bankruptcy case relating to matters fundamental to the bankruptcy process — such as the discharge or dischargeability of debt or the recovery of assets for the bankruptcy estate.

Adversary proceedings are generally commenced by the bankruptcy trustee administering a case or by a creditor. Usually the defendant is either the debtor or a party that was the beneficiary of some transfer of property or other assets made to it by the debtor. A creditor, trustee, or other party in interest must initiate an adversary proceeding with a Summons and Complaint and serve the defendant(s) and/or debtor. The defendant(s) and/or debtor typically have 30 days from the issuance of the Summons to respond to the Complaint with an answer or a motion to dismiss. Failure to timely respond may result in a default judgment being entered against the defendant(s). After the initial pleadings, the parties engage in discovery and court conferences to guide the litigation. If the matter is not settled, it will eventually go to a trial where the Bankruptcy Judge will ultimately decide the merits of the case.

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Section 01

A Narrower Question Than Ordinary Litigation

An adversary proceeding resembles litigation in other courts — except the question before the Bankruptcy Court is much narrower than in a general lawsuit by a creditor.

The question in an adversary proceeding, as opposed to the question in a general litigation by a creditor, is not whether the debtor owes the creditor money — because in a bankruptcy case general liability for dischargeable debt is assumed and is the norm. Rather, the issue in a bankruptcy adversary proceeding is whether that creditor’s debt will survive and not be discharged by the debtor’s bankruptcy filing.

On some occasions, dischargeability for a particular debt may turn on the intent, frame of mind, and ultimate actions of the defendant(s): were the defendants honest and well-intentioned when the debts were incurred, or were they dishonest, fraudulent, or intending to harm the plaintiff when they incurred these debts? Whether the debtor engaged in fraud, misrepresentation, illegal actions, and/or violations of a trust that have caused significant loss to a creditor are critical issues in commencing an adversary proceeding.

The Summons & Complaint

How an adversary proceeding is commenced

A creditor, trustee, or other party in interest must start the action with a Summons and Complaint — here is what follows once you are served.

The defendant and/or debtor is served with the summons

30 days to answer or move to dismiss the Complaint

Failing to respond risks a default judgment

Discovery, court conferences, then trial if unresolved

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Section 02

How Adversary Proceedings Relate to the Case & How to Strategize

Because an adversary proceeding can decide key issues in a bankruptcy case, it must be defended vigorously — and it is, in many ways, a separate matter from the case itself.

Since adversary proceedings are litigations that can decide key issues in a bankruptcy case, they need to be defended vigorously by a debtor or other adversary proceeding defendant. The adversary proceeding gets a separate docket number and separate docket entries from the bankruptcy case; although it is part of the case, it is deemed in many ways a separate matter. The defendant needs to answer the plaintiff’s complaint and motions and potentially defend a trial, as with any other kind of litigation in New York State Supreme Court.

Defending or prosecuting an adversary proceeding is a powerful tool for a trustee, a creditor, and/or the debtor, since bankruptcy litigation is unique in giving those familiar with bankruptcy law and procedural rules an advantage. Cases move more quickly in the federal Bankruptcy Court than in the NYS Supreme Court, because actions there receive more attention from the Bankruptcy Judge, who as a federal judge is more involved with the elements of the cases.

Why Experience Matters

Precision pleading and proof win these cases

The elements of a cause of action for an adversary proceeding must be pleaded and proved with precision.
The elements of any affirmative defenses must likewise be pleaded and proved with precision.
Familiarity with bankruptcy law and procedural rules is a decisive advantage in this forum.

There is a real advantage to having strong bankruptcy litigation experience, because the standards of proof and procedure in Bankruptcy Court are exacting.

Section 03

Defending Against Creditor Adversary Proceedings

A creditor commencing an adversary proceeding files and serves a complaint to try to keep its debt from being discharged — but the burden of proof rests on the creditor, not the debtor.

Typically, a creditor commencing an adversary proceeding files and serves a Complaint with the Bankruptcy Court in an attempt to avoid its debt being discharged in the bankruptcy case. Creditors often allege false pretenses, false representation, actual fraud, and/or malicious intent. The creditor needs to show that but for the debtor’s malfeasance and dishonesty, it would not have lent the money and the money would not have been lost. The creditor cannot engage in mere allegations, but needs to show that the debtor knowingly and with fraudulent intent duped the unsuspecting creditor. Because the Bankruptcy Code disfavors the debtor easily losing their discharge, the burden of proof is on creditors objecting to the discharge or dischargeability of debt. In many instances the creditor may fail to adhere to Court rules, deadlines, and/or the Court’s Scheduling Order, and may fail to give adequate dispositive proof or enough evidence to prove its allegations — and counsel for the debtor/defendant may then seek to dismiss the action.

Alleged “Credit Card Abuse”

The more common, minor action — a card holder objecting to significant purchases, balance transfers, or cash withdrawals shortly before filing.

Soured-Relationship Claims

Much more substantial actions — from former business partners, former spouses, and large lenders, involving more money and more motivation.

The Minor “Credit Card Abuse” Action

Often settled at a low amount

The more common creditor objection is a credit card holder objecting to what appears to be abusive use on their card — significant purchases, balance transfers, and/or cash withdrawals shortly prior to filing. These are usually more minor actions in terms of the amount of debt, and the creditor, who usually lacks good documentation, does not expect the debtor to defend and fight to justify these expenditures and to question the creditor’s proof. The combination of defense and negotiation usually allows a debtor to resolve these more minor, alleged “credit card abuse” actions with a low settlement amount.

The Substantial Soured-Relationship Action

Narrow the scope, then settle equitably

The other kind of creditor objection is much more substantial — usually from persons with whom the debtor had a relationship that went sour: former business partners, former spouses, large lenders, and others formerly engaged in business with the debtor. These proceedings involve much more money and motivation, and the creditor often comes in prepared to fight, believing the debtor is a bad actor as to the debt. Here the debtor is not usually invulnerable to all the allegations, so it is important to keep up with the creditor’s litigation posture and litigate just as intensely — to narrow the scope of the lawsuit to areas where the creditor really has something to complain about, and not to let the creditor expand its action beyond specific transactions where the debtor has vulnerability. By doing so, the action can focus on a narrower set of facts and eventually settle in an equitable manner.

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Section 04

Defending Against Trustee Adversary Proceedings

Trustees pursue litigation to marshal the assets of the debtor’s estate — most often through avoidable-transfer actions that let them recover funds to pay creditors.

Bankruptcy trustees often threaten to, or actually do, pursue litigation against third parties and/or the debtor where they believe they have grounds to do so, by filing an adversary proceeding in a case assigned to them. Trustees most often file adversary proceedings based on their obligation to marshal the assets of the debtor’s estate. They look for potential actions where they can retrieve funds or assets that had left the estate in a manner the trustee believes may have violated the law. By threatening or actually litigating adversary proceedings based on various kinds of avoidable transfers, trustees can enhance the funds in the estate and be better able to pay creditors. These potential actions can include causes of action based on fraudulent transfers, preferential transfers, and property turnovers.

Fraudulent Transfers

Money or assets transferred (often to an insider) for little or no compensation, with intent to hinder or delay creditors while insolvent.

Preferential Transfers

Loan payments made shortly before filing that preferred one creditor over others — 90 days for third parties, one year for insiders.

Property Turnovers

Actions requiring another person to turn over an asset that belongs to the debtor’s estate.

“Fraudulent Transfer” Issues

Transfers without sufficient consideration

Fraudulent transfer issues typically arise when debtors transfer money and/or assets to another entity or person — typically an insider like a family relative or friend — for little or no compensation within several years before filing, with a fraudulent intent to avoid paying creditors. The trustee may pursue this in an adversary proceeding alleging that an avoidable transfer occurred, that the debtor transferred assets without sufficient consideration, and that the debtor had the intent to hinder or delay creditors at a time when the debtor knew about its debt issues and knew it was insolvent.

“Preferential Transfers”

90 days / one year for insiders

Preferential transfers are actions to recover loan payments made by the debtor to creditors shortly before the bankruptcy filing. While these were legitimate debts, the creditors were preferred above other creditors who were not paid within this short period. The preference period is within 90 days before filing for transfers to third parties, and one (1) year prior to filing for transfers to insiders of the debtor. Trustee adversary proceedings can best be resolved with proper representation in the litigation, which causes the trustee to be more realistic about potential settlement. It is possible to defend against the trustee by reviewing the cases for their strengths and weaknesses, obtaining the appropriate documentation, and proving solvency and lack of fraudulent intent at the time of transfer — common methods of defending these adversary proceedings.

The trustee’s and creditor’s objectives, in short.

The trustee or creditor can, in an adversary proceeding, object to the discharge or dischargeability of debt — or, through turnover proceedings or avoidable-transfer actions such as actions to reverse fraudulent conveyances or preferential transfers, try to recover assets for the debtor’s estate.

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Section 05

Debtor-Initiated Adversary Proceedings

A debtor can also go on the offensive — commencing an adversary proceeding against a creditor or the trustee to void a lien, compel a turnover, or resolve dischargeability.

A debtor can also commence an adversary proceeding against a creditor and/or the trustee, and most commonly does so when the debtor seeks to void or remove a lien, have another person turn over an asset, modify the discharge or determine the dischargeability of debt, and/or obtain an injunction. Debtor-initiated adversary proceedings are less common, but can be a forceful manner for the debtor to alleviate debt and/or reach decisions that improve the debtor’s financial situation.

Debtor litigation is most common when dealing with hard-to-reach creditors where communication and negotiation is difficult — the Internal Revenue Service, the NYS Department of Taxation and Finance, a town or county clerk, a utility company, and other bureaucratic, hard-to-reach entities — over liens that the debtor seeks to remove from the property.

When a Debtor Files

Common debtor-initiated actions

Void or remove a lien from the debtor’s property.
Compel another person to turn over an asset.
Modify the discharge or determine the dischargeability of debt.
Obtain an injunction.

Especially useful against hard-to-reach entities — the IRS, NYS Tax, county clerks, and utilities — over liens the debtor seeks to remove.

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Section 06

Negotiation or Litigation — Which Resolution?

From summons to settlement or trial, an adversary proceeding follows the arc of any lawsuit — and the merit and proof behind the action point toward the right resolution.

Day 1

Summons & Complaint

The action is commenced and the defendant and/or debtor is served.

30 Days

Answer or Motion

The defendant answers or moves to dismiss; a default judgment can follow a missed deadline.

Pre-Trial

Discovery & Conferences

The parties exchange proof and attend court conferences that guide the litigation.

Resolution

Settlement or Trial

If unresolved, the Bankruptcy Judge decides the merits at trial.

Generally, if there is some merit and proof for the adversary proceeding, the costs to litigate most adversary proceedings dictate that — once the parties realize their respective positions — 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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Section 07

Benefits of Bankruptcy When an Action Is Likely

Even where a debtor is likely to be an adversary-proceeding defendant, filing bankruptcy can trade draining Supreme Court litigation for a narrower, more limited fight.

For an individual in the midst of legal trouble — expensive and persistent lawsuits in NYS Supreme Court, where the other side isn’t going to easily settle and the costs of defense are beyond the debtor’s ability — filing a bankruptcy case can make sense. The bankruptcy filing would stop the general litigation and discharge the debt, unless there is (as may be expected in extreme fact patterns) an objection to the dischargeability of the debt filed by the debtor’s visceral opponent from the general litigation.

If the creditor does initiate an adversary proceeding, the debtor has traded very draining and endless litigation in NYS Supreme Court for more focused and more limited litigation in the Bankruptcy Court. While the debtor did not totally get rid of the need to litigate, the rate of legal expenditures improves greatly, because the litigation target for the creditor is much narrower and harder to hit in Bankruptcy Court. There, the creditor not only has to show liability — it also has to show that the liability should be non-dischargeable due to the debtor’s dishonesty, misrepresentation, malfeasance, and/or fraud. The debtor is much better off litigating in Bankruptcy Court, where the creditor has a more challenging case and where liability can be narrowed from all the debt owed to only the debt that the creditor can prove was incurred through dishonesty, misrepresentation, malfeasance, and/or fraud.

The bottom line for a likely defendant.

A bankruptcy filing does not necessarily eliminate the litigation, but it changes the battlefield — from an open-ended Supreme Court fight over all the debt to a narrower Bankruptcy Court contest over only the portion the creditor can tie to fraud or dishonesty, on a schedule watched closely by a federal judge.

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Section 08

Why Adversary-Proceeding Defense With Our Firm

No matter how much is at stake as to the monetary claim amount, obtaining legal representation in an adversary proceeding is always highly recommended.

Obtaining attorney representation could be in your best interest — allowing a better resolution of the matter and possibly preventing a default judgment from 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. Preventing the debt from being declared non-dischargeable is critical to allow the debtor to get the full benefit of the bankruptcy case.

In order to properly defend an adversary proceeding, one needs knowledge of the Bankruptcy local rules, the Federal Rules of Bankruptcy Procedure, and general bankruptcy procedure. Attorney representation is highly recommended in order to effectively litigate and defend an adversary proceeding — and our office regularly represents clients in these matters from our office in Melville, Long Island.

Law Offices of Ronald D. Weiss, P.C. — Melville, Long Island

Protect your dischargePreventing a debt from being declared non-dischargeable preserves the benefit of your case.

Avoid a default judgmentA timely, well-pleaded response keeps a default from being entered against you.

Settle on favorable termsVarious settlement options let us negotiate the debt in question down.

Command of the rulesLocal rules, the Federal Rules of Bankruptcy Procedure, and general procedure applied with precision.

Our consultations are free — but our legal advice may be invaluable.

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