Understanding the Common Causes of Adversary Proceedings in Bankruptcy

Bankruptcy proceedings can result in long-term consequences for the debtor, both positive and negative, and it should be of little surprise that such cases can feature complexities that are best handled by a skilled and experienced legal team.

One such issue is the institution of adversary proceedings. Adversary proceedings are a secondary lawsuit within the primary bankruptcy case. An adversary proceeding is governed by Part VII of the Bankruptcy Rules, which mirrors in many respects the Federal Rules of Civil Procedure.

Adversary proceedings may be filed for a variety of reasons, but the examples below are particularly common.

Fraudulent Transfers

A fraudulent transfer adversary complaint may be filed when a debtor transfers money to another party (such as an insider) within four years of filing bankruptcy with the intent of actual or constructive fraud. In such a case, the bankruptcy trustee may file a lawsuit in order to prove such fraud was performed with either the intent of delaying or hindering creditors.

Preferential Transfers

In a preferential transfer adversary complaint (commonly referred to as a preference action), the bankruptcy trustee may file a complaint if the debtor repaid any of their creditors within 90 days before the debtor filed bankruptcy, or one year if such transfer was to an insider such as a family member.

During a preference adversary, the trustee must also prove that the debtor was insolvent at the time of the transfer, that the debtor did not receive anything in return for the transfer, and that the transfer gave the creditor more than it would have received during a Chapter 7.

Litigation on Behalf of the Debtor

Often times a debtor will have claims against various third parties, which can be filed to recovery money on behalf of the estate for the benefit of creditors. For example, a debtor may have claims for breach of contract, professional malpractice claims against accountants and lawyers, or claims against former officers and directors.

Dischargeability of Debt

If a creditor suspects a debtor incurred the debt fraudulently, the creditor may file an adversary proceeding seeking to prevent the dischargeability of debt owed by the debtor. A debtor found guilty of incurring this sort of fraudulent debt, such as supplying false information when applying for credit or a loan, may lose their ability to discharge the debt forever.

Objection to Discharge

In the event of suspected fraud on the part of the debtor, an adversary complaint can be filed by a creditor, the panel trustee, or the Office of the United States Trustee seeking to deny the debtor’s entire discharge. This complaint can also be filed if the debtor has been alleged to have failed to comply with court orders. The complaint may seek to prevent the discharge of just a portion of a debt (such as that owed on a credit card), or all debts owed by the debtor.

These are just a few of the most common adversary proceedings – there are many more enumerated adversary proceedings. If you are involved in a bankruptcy that requires an adversary proceeding, let us help. Our attorneys handle bankruptcy litigation on a contingency-fee basis, so you will not pay any legal fees unless and until we successfully obtain a recovery in your case.

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