What is an Adversary Proceeding in Bankruptcy?
Adversary proceedings are lawsuits filed with the bankruptcy court that relate to an underlying bankruptcy case. Their purpose is to bring a matter before the bankruptcy judge for adjudication at trial in favor of one of two contested parties. The parties ask the judge to make a decision on key issues presented in their suit, involving bankruptcy law, other federal laws, and/or state laws.
Rules and Requirements
An adversary proceeding is filed and prosecuted by a plaintiff against a responding defendant. The procedural rules and requirements for adversary proceedings are set forth in the Federal Rules of Bankruptcy Procedure. Local rules of court may provide additional sources of guidance and instruction.
Procedurally, an adversary proceeding commences through filing of a complaint by the plaintiff. The complaint is served upon the defendant, who must respond to allegations of the complaint by filing an answer. There are filing and service fees required of the plaintiff to initiate an adversary proceeding. A case number is assigned to the matter once the court receives the plaintiff's filed complaint. The parties often engage in written and other types of discovery, such as depositions prior to the adversary proceeding being set for trial.
Adversary proceedings may be filed by the debtor, creditors, trustee (standing or panel), or U.S. Trustee’s Office. A creditor might file an adversary proceeding to lodge an objection to a debtor receiving a discharge. Creditors may also bring adversary proceedings to seek an exemption of the debt owed to them by the debtor from a debtor's pending discharge because the debt was the by-product of fraud, hindering conduct, malfeasance, willful injury, malicious injury, or personal injury. Creditors may seek a dismissal of the bankruptcy or loss of discharge for debtor due to bad faith in the conduct of debtor.
Reasons for Adversary Proceedings
Debtors bring adversary proceedings against creditors for violations of automatic stay protections when creditors pursue collection remedies against debtors despite bankruptcy code's prohibitions. Debtors bring adversary proceedings to seek hardship discharges from student loans and to attempt to strip, avoid, or extinguish liens.
Trustees file adversary proceedings to protect their interests. A standing trustee might file an adversary proceeding against a debtor to expose inaccurate bankruptcy filings or fraudulent records. Trustees file adversary proceedings against creditors to avoid preferences or fraudulent transfers in instances where a creditor received funds or property from debtor inappropriately, and the trustee seeks to undo the transaction and recoup funds. The U.S. Trustee files adversary proceedings to compel debtors in Chapter 7 to convert to Chapter 13 if there is bad faith in the filing, ineligibility for liquidation, and/or an ability to repay creditors through a plan. U.S Trustees also bring suits to dismiss debtor cases filed in abuse of the bankruptcy system.
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