What Types of Bankruptcy Cases Must Be Filed as an Adversary Proceeding?

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.

What Is 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.

Types of Cases Filed as Adversary Proceedings

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:

• recover money or property from a party other than the debtor
• determine the validity, priority, or extent of a lien or other property interest
• object to or revoke the debtor’s discharge (the order that wipes out qualifying debt), or
• determine the dischargeability of a particular debt.

Other less common matters must proceed as an adversary proceeding, too. These include:

• a request asking the judge to order that a particular action stop (injunction)
• asking for the court’s opinion on a matter (declaratory judgment)
• changing the order in which a creditor would get paid (claim subordination), or
• deciding whether a matter should be moved to a different court.

Other Lawsuits Brought as Adversary Proceedings

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.

Transferring Cases from Other Courts

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.

Who Can File an Adversary Proceeding?

Anyone who has an interest in a matter relating to a bankruptcy case can file an adversary complaint.

• Trustees. A trustee might use an adversary proceeding to force a creditor or third party to turn over property that they’re holding for the debtor. It’s also used to recover a preferential payment (money the debtor paid to a creditor shortly before filing for bankruptcy) or a fraudulent transfer (wherein the debtor changes property ownership to avoid paying a creditor).
• Creditors. A creditor might file an adversary proceeding against a debtor to have a debt declared nondischargeable.
• Debtors. A debtor might file an adversary proceeding to determine whether it’s possible to wipe out taxes or student loans or to ask the court to remove a lien from their property.

What Is a Contested Matter?

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:

• a motion to lift the automatic stay
• a motion to modify a Chapter 13 plan
• an objection to a proof of claim, or
• an objection to the debtor's claimed property exemptions (the property the debtor can protect from bankruptcy).

But even those “simpler” matters can escalate and be converted into an adversary proceeding.