Adversary Proceeding

The civil law term adversary proceeding relates to a lawsuit filed in relation to a bankruptcy case. A party may file an adversary proceeding in order to petition the court asking for relief on a specific matter that is related to, but separate from, the bankruptcy, and requires action by a judge. Such matters usually have to do with distribution of the assets in bankruptcy. To explore this concept, consider the adversary proceeding definition.

Definition of Adversary Proceeding

Noun

1. A lawsuit filed separately, but in connection with, a bankruptcy case.

What is an Adversary Proceeding

An adversary proceeding is a civil lawsuit that is filed within a bankruptcy case, but which must be handled separately. An adversary proceeding may be filed by a creditor, the debtor himself, or the bankruptcy trustee. The party filing the adversary proceeding is seeking to gain a ruling which cannot be handled through a motion within the bankruptcy proceeding. This might include such actions as having a specific debt declared non-dischargeable, recovering property that was sold or transferred illegally or fraudulently, or seeking some remedy for violation of bankruptcy law.

For example:

John takes out an unsecured loan just before declaring bankruptcy. The lender claims John did this knowing he intended to file bankruptcy, and therefore with no intent to repay the loan. The lender may file an adversary proceeding asking the court to declare the loan non-dischargeable, so that it cannot be included in the bankruptcy. If the court grants the request, John would be responsible for repaying the loan, as it would not be included in the bankruptcy.

Adversary Proceeding by Bankruptcy Trustee

A bankruptcy trustee is assigned to each bankruptcy case to review the bankruptcy petition, looking for sign of fraud, and to help ensure creditors are repaid as fairly as possible. A bankruptcy trustee may file an adversary proceeding to request that the judge deny discharge of the filer’s debts. This may occur if he discovers evidence of fraud, hidden assets, or abuse of the bankruptcy system.

An adversary proceeding may also be filed by a bankruptcy trustee in order to recover payments made to a debtor immediately prior to bankruptcy filing (referred to as “preferential payments”), or to recover fraudulent transfers of money or property prior to filing bankruptcy.

Adversary Proceeding by Creditor

A creditor may file an adversary proceeding to avoid having its debt discharged. This may occur if the creditor can show the court that the debtor obtained the loan or financing fraudulently, or under other questionable circumstances.

Adversary Proceeding by Debtor

A debtor can also file an adversary proceeding in his own bankruptcy. This is most commonly done to ask the court to reprimand a creditor that has violated the automatic stay. In some cases, a debtor may need to file an adversary proceeding if he wants to have a second mortgage removed from his home, through a process called “lien stripping.”

Types of Adversary Proceeding

There are certain legal issues which simply cannot be decided by a motion to the bankruptcy court. These must be filed as a separate, but related, case within the court. Adversary proceedings have their own case numbers, and generally proceed much like a regular civil lawsuit. The most common types of adversary proceeding include:

• Fraudulent Transfer – may be filed by the bankruptcy trustee if he discovers evidence of fraud related to property that was transferred by the debtor within two years prior to the bankruptcy filing.
• Preferential Payment – a may be filed by the bankruptcy trustee if the debtor repaid any creditor more than a specified amount within 90 days before filing bankruptcy, or if the debtor repaid a family member within one year before bankruptcy.
• Dischargeability of Debt – a may be filed by a creditor who claims the debt was entered into fraudulently, and therefore should not be discharged in bankruptcy.
• Lien Stripping – may be filed by a debtor who has more than one mortgage on his home. This is a request that the court strip a second (or subsequent) mortgage from the property, treating it like an unsecured debt.
• Sale of Property Jointly Owned – may be filed by the bankruptcy trustee in the event the debtor owns property jointly with another person. In such a case, the trustee would ask the court to sever the debtor’s interest in the property, and force the co-owner to sell the property to pay the debtor’s claims.
• Objection to Discharge – may be filed by a creditor or the trustee, asking the court to deny discharge of debts in bankruptcy, by claiming the debtor has committed fraud, or somehow failed to comply with court orders.

Filing an Adversary Proceeding

When a plaintiff chooses to file an adversary proceeding, they must file a formal complaint with the bankruptcy court in which the bankruptcy was filed. The complaint outlines the facts, and states what remedy the plaintiff is requesting. After a formal complaint has been filed, it, and the court-issued summons, must be served on the defendant, who then has a specific amount of time to file a written response. If the defendant fails to file a response within the time limit, the plaintiff may be awarded a default judgment.

An adversary proceeding filed on a serious matter, such as fraudulently obtaining a loan, or fraudulent transfer of property, the matter often has to go to trial. It is a good idea to consult with an experienced attorney in such a matter.

Adversary Proceeding for Violation of Automatic Stay

On October 22, 2007, Debtors Mr. and Mrs. Myles filed a Chapter 7 bankruptcy petition. The creditors, including Progress Energy, were notified by mail on October 25, 2007. After being served, Progress Energy continued to send collection letters to the couple through January 2008. The plaintiffs (bankruptcy “debtors”) provided the court with a printed account history from the company’s website, showing that the debt the company was attempting to collect was delinquent prior to filing bankruptcy.

Progress Energy did not file an answer to the complaint. The court therefore awarded the debtors a default judgement. The debtors had requested damages in the amount of $10,920, only $920 of which was actual damages, the other $10,000 was a request for punitive damages for the continued “harassment” by Progress Energy. In the default judgment, the court awarded the plaintiffs

Since Progress Energy was found in default, the plaintiffs were awarded actual damages for their attorney fees, on grounds that the company willfully violated an automatic stay. The court, however, denied punitive damages in this case, as there was no claim that Progress Energy acted in bad faith, or that there were any real efforts made to stop the collections prior to filing the adversary proceeding.

Related Legal Terms and Issues

• Actual Damages – Money awarded to compensate someone for actual monetary or property losses. Also referred to as “compensatory damages,” the amount of money awarded is based on the proven loss, injury, or harm proven by the plaintiff.
• Bankruptcy – A federal court procedure by which individuals and entities can get rid of debts they are unable to pay.
• Civil Lawsuit – A lawsuit brought about in court when one person claims to have suffered a loss due to the actions of another person.
• Creditor – A person or entity to whom money is owed by another person or entity.
• Debtor – A person who is in debt, or under a financial obligation to another.
• Default – Failure to fulfill an obligation, or to appear in a court of law when summoned.
• Defendant – A party against whom a lawsuit has been filed in civil court, or who has been accused of, or charged with, a crime or offense.
• Plaintiff – A person who brings a legal action against another person or entity, such as in a civil lawsuit, or criminal proceedings.
• Punitive Damages – Money awarded to the injured party above and beyond their actual damages. Punitive damages may be awarded in cases where the defendant’s actions in regard to the case are malicious, or so reckless as to give a reasonable person pause. Punitive damages, also referred to as “exemplary damages,” are ordered for the purpose of punishing the wrongdoer for outrageous misconduct in a civil matter.