Filing for bankruptcy is a paperwork process for the most part, and it’s rare for there to be a disagreement for a judge to resolve. Although most bankruptcy debtors never see the inside of a courtroom, disputes arise in some cases. When the problem is complicated enough, the person bringing the action will file it as a separate matter called an adversary proceeding.
Adversary proceedings are lawsuits filed in connection with a bankruptcy case. As with other lawsuits, the case starts when the plaintiff (the person filing the adversary proceeding) files a complaint (the legal document that outlines the problem) against a defendant (often the debtor).
The clerk assigns the adversary proceeding a case number that’s different from the bankruptcy case number. Once filed, the adversary proceeds much like any other civil lawsuit. Each side will have an opportunity to collect evidence through the discovery process. Many litigants attempt to resolve the matter by negotiating a settlement. If an agreement can’t be reached, the matter will proceed to trial for resolution.
Almost any dispute in a bankruptcy case can be brought as an adversary proceeding, but under the bankruptcy rules, some matters must go through the adversary process. (FRBP 7001.) The more common matters include actions to:
Other less common matters must proceed as an adversary proceeding, too. These include:
In addition to the items listed in Rule 7001, other lawsuits will be filed as an adversary proceeding out of necessity even though the bankruptcy rules don’t require it. For instance, the bankruptcy court can resolve many lawsuits that could be filed elsewhere. Instead, it would be filed as an adversary proceeding and conducted under special litigation rules.
Example. You and your partner have a contract with Widgets, Inc. to purchase 1,000 ashtrays. You had received the order but hadn’t paid for it when you filed an individual bankruptcy case. You contend that the partnership owes the debt, not you personally. If you weren’t in bankruptcy, Widgets would file suit against you in a state court. Instead, it chooses to file an adversary proceeding against you in bankruptcy court.
Cases filed outside the bankruptcy court can often be moved to the bankruptcy court when one of the parties files a bankruptcy case. If the outside action was a lawsuit, it will be an adversary proceeding in the bankruptcy court.
When someone is required to file an adversary complaint under Rule 7001—such as to object to the dischargeability of a debt—the case will often include other issues that the court must resolve first. For instance, if a creditor objects to a debt being wiped out due to bankruptcy fraud, the court would need to determine whether the debtor committed fraud.
In other situations, the court might simply need to determine whether the debt is owed at all.
Example. Widgets, Inc. files a complaint against you seeking to have its debt declared nondischargeable. But before the court can decide that issue, it will have to consider whether you owe the company anything at all. The question of liability could be resolved in the main case through an objection to the creditor's claim and doesn’t have to be brought as an adversary. But, because the liability question is fundamental to the question of dischargeability, it’s brought along with the dischargeability action in the adversary proceeding.
Anyone who has an interest in a matter relating to a bankruptcy case can file an adversary complaint.
A dispute that isn’t on the Rule 7001 list and doesn’t require full-scale litigation can proceed as a “contested matter.” These usually involve less complicated issues and can be resolved more quickly (and cheaply) than an adversary proceeding. They almost always have something to do with the administration of the bankruptcy case. Some examples include:
But even those “simpler” matters can escalate and be converted into an adversary proceeding.