Adversary Litigation

The attorneys at John R. Foley P.C. are experienced in a variety of adversary proceedings, large and small.  We have represented debtors, creditors, and trustees.  We understand the ins and outs of bankruptcy litigation and how it differs from—and resembles—traditional litigation.  Bankruptcy litigation differs significantly from bankruptcy practice and from civil litigation, requiring specialized knowledge of the Bankruptcy Code combined with a thorough grasp of civil litigation practice. An attorney specializing in bankruptcy litigation will also be a skilled negotiator, as many claims settle rather than continuing through a full bench trial.

Not every bankruptcy case has an adversary proceeding. In fact, adversary proceedings are relatively rare and typically occur in larger and corporate bankruptcies.  Most bankruptcies are not adversarial and are resolved with cooperation between the debtor, the trustee, and the creditors.  Nevertheless, adversary proceedings are an extremely important aspect of bankruptcy when they occur.

While staying within the parameters of the Bankruptcy Code, we zealously pursue our clients’ interests.  JRFPC has attorneys admitted to the Eastern District of Michigan Bankruptcy Courts as well as the Southern District of New York.

About Adversary Litigation

An adversary proceeding is a case within a case, so to speak.  When a debtor files for bankruptcy, the bankruptcy itself (also known as a petition for relief) is a “case” as that term is generally used.  An adversary proceeding is essentially a lawsuit that takes place within the bankruptcy and subject to the bankruptcy court’s jurisdiction.  Most disputes are handled by the bankruptcy court, but in a few types of cases the bankruptcy court can only make recommendations to the federal district court.

Adversary proceedings generally include causes of action that either are created by the Bankruptcy Code or that relate to the administration of a bankruptcy estate.  Examples of adversary proceedings include objections to confirmation of a plan of reorganization, and objections to discharge, or the dischargeability of certain debts (a case typically brought by a creditor). Adversary proceedings also include claims asserted by the bankruptcy estate against third parties, motions seeking to obtain possession of certain property belonging to the estate, and the determination of the extent and validity of liens.

For example, a Debtor might file an adversary proceeding against a landlord over a lease disagreement.  Because the Debtor is in bankruptcy, a lawsuit that would normally go through state courts is filed in the bankruptcy court instead.

One key difference between adversary proceedings and cases in state or federal court is that there are no juries.  An adversary proceeding is a trial in front of the bankruptcy judge.

Disputes attributed to bankruptcy are common, but not all adversary proceedings are central to the bankruptcy. The bankruptcy court divides cases into core and non-core issues based on the relationship of the matter to the bankruptcy issue. Core issues are those that are closely related to the bankruptcy itself, such as disputes over the contents of the debtor’s estate.  Non-core issues often pre-date the bankruptcy and involve matters that would need to be resolved regardless of the bankruptcy, such as tax disputes.

The bankruptcy court has jurisdiction over core issues and can make rulings on them.  For non-core issues, the bankruptcy court may still conduct a trial, but the court cannot determine the issue.  Instead, the bankruptcy court will make a recommendation to the federal district court.

Adversary proceedings between debtor and creditors: Disputes between the debtor and the creditors can stem from a variety of causes. One of the most common questions in an adversary proceeding is whether the debt in question is dischargeable. Some debts, under current law, cannot be discharged in bankruptcy.  For example, domestic support obligations (such as child support and some spousal support) and student loans cannot generally be discharged in a bankruptcy, and therefore remain as obligations of the debtor.

Other issues presented in bankruptcy adversary proceedings include whether a party violated the automatic stay, or whether the Debtor made fraudulent or preferential transfers, or any number of other types of cases.  A creditor may also file a lawsuit against the Debtor if the creditor has reason to believe the Debtor filed bankruptcy to escape payment obligations.  The Debtor may file an adversary proceeding against a creditor as well, for example if the Debtor is seeking to discharge a lien.

Between the debtor and trustees: A trustee can bring the same kinds of adversary proceedings that a creditor can, such as objections to discharge or adversary proceedings based on disallowed transfers.  A trustee often brings an adversary proceeding to bring property back into the Debtor’s estate, such as property that was transferred outside certain parameters.  The trustee and Debtor also sometimes litigate over exempted property and whether it should be sold to compensate the trustee.

Inadvertent fraud: Many adversary proceedings involve fraud on the part of the Debtor, and that fraud is often completely inadvertent.  Unlike civil fraud, which requires intent, a Debtor can commit fraud according to the Bankruptcy Code simply by paying the wrong thing at the wrong time.  It is important to work with an experienced bankruptcy attorney before filing for bankruptcy to avoid committing such fraud.  A good attorney can help a potential debtor minimize claims of fraudulent and preferential transfers, as well as defend against such claims in a bankruptcy.  Creditors and trustees, however, need to know what to be alert for to determine whether to bring an adversary proceeding based on such transfers.