Bankruptcy Adversary and Motion Proceedings

Riverside, California Bankruptcy Attorneys

There are several types of adversarial litigation and motions which commonly arise in Bankruptcy Proceedings. The easiest way to describe them is to set them out under the Chapter in which it usually occurs, and the entity involved (ie individual Chapter 7 or Chapter 11 Reorganization cases).

Common Adversary Litigation in Chapter 7 and Chapter 11 cases against individual persons:

11 USC §523 This code section sets out various types of debt that are either automatically not dischargeable, or not dischargeable only if you acted, or failed to act in a particular way, and deals with specific debts to specific creditors, rather than the total discharge of all debts, some of which are as follows;

You obtained money, property, services or an extension of credit, by false pretenses, false representations, or actual fraud, or you used a materially false statement in writing, with the intent to deceive, in order to obtain money, property, services or credit. For fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. Or for willful and malicious injury to another person or their property.

Generally the creditor must file an adversary complaint against you in the Bankruptcy Court no later than 60 days after your first 341(a) hearing. The actual specific date is set by the court, and is set forth on the notice mailed to you and your creditors just after the case is filed. In most cases, if the creditor fails to file the complaint on time, they have forever lost their right to challenge the dischargeability of the debt.

In addition to the legal considerations as to whether or not your conduct fits within these categories, there are practical considerations that the creditor will take into account in deciding whether to file an adversary to prevent the discharge of all, or part of their debt. For consumer debts, one of the big considerations is his likelihood of winning, and then collecting. If an adversary proceeding is filed against an individual, and the creditor loses, the court in many cases will order the creditor to reimburse the debtor for the attorney fees incurred in defending the adversary. So the creditor winds up paying the lawyers on both sides of the controversy.

Even in cases where the debt should be non dischargeable because of improper conduct, and we have decided it is not defendable, many times we can settle these adversaries for 50% of the amount in controversy, without interest, costs, or creditors attorney fees. This is because in many instances, if we can create any reasonable uncertainty as to their winning, many creditors would rather settle for 50 – 60% in future payments, rather than taking any chance on losing, and paying both lawyers fees. As you can probably imagine, the experience and reputation of your individual attorney can have a very significant effect on the creditors desire to settle. Put yourself in their position; would you rather fight an 800 pound gorilla, or a chipmunk? Which one are you more likely to win against?

11 USC §727 This code section sets out various types of conduct that can result in the total denial of discharge as to all of your debts. The most common circumstances are:

You transferred, destroyed, concealed, etc, property with the intent to hinder, delay or defraud your creditors. Unfortunately there are no bright lines in assessing whether or not specific conduct fits here. The bankruptcy code allows persons to convert non exempt property into exempt property before filing the bankruptcy, to create the best results for the debtor.

These two positions are directly contrary to each other.

How can you convert property that could be taken from you, into property you can exempt and keep, without transferring the property with the intent to keep the BK trustee and your creditors from getting it. Wouldn’t this be a transfer with the intent not only hinder and delay, but to specifically prevent them from getting it.

This is why it is critical to retain attorneys who have long and varied experience not only in bankruptcy cases, but also in the specific courts, and with the specific judges that your case will be heard by. The law is not a big black and white lettered book in the sky. It is full of circumstances where the specific judge handling your case has very considerable latitude (the legal term is judicial discretion) in determining various issues, and deciding whose testimony or evidence to believe, or not believe. Judges are no different than you and I, we all have particular prejudices or attitudes through which we filter what we are told or believe. There are some factual circumstances, that I would be quite confident to try in front of some local judges, but there are other judges in the same court building, that I would be exceedingly worried about trying in their courtroom. By way of an example, there is a relatively well known saying in bankruptcy attorney circles, that goes like this. “Pigs get fat, and hogs get slaughtered”.

The point is, that in doing pre bankruptcy planning, and converting nonexempt assets into exempt assets, it is exceedingly critical to be very careful in treading the fine balance between what the court will consider as a fraudulent transfer, or permitted exemption planning. Unfortunately, that line can, and does change, from court to court, and judge to judge. It isn’t that the judges can’t read the law, it’s because they each have their own personal attitudes in what is proper and improper conduct, and substantial latitude (judicial discretion) to decide factual issues.

Some of the other grounds to totally deny discharge are: Knowingly and fraudulently making a false oath or account in the bankruptcy case, withholding from an officer of the court certain financial records, failure to satisfactorily explain losses of assets, concealing, destroying, etc, records relating to financial circumstances, unless justified under the circumstances, and failure to obey certain court orders,

Common Adversary Litigation in Chapter 11 cases:

In addition to the above adversaries against individuals, the types of litigation that can arise in a Chapter 11 are unlimited.

Many times at the time of filing the Chapter 11 petition, there is litigation pending in state courts, such as specific performance, breach of contact, personal injury, malpractice, unlawful detainer, construction defects, real estate disputes, and numerous other types of commercial disputes, or pending foreclosures of valuable commercial property. Many times it is the suit itself that has created the problems necessitating the Chapter 11 filing. Sometimes Chapter 11’s are filed to hold off creditors until a lawsuit can be concluded. Once the case is filed, depending on many and varied considerations, you might prefer the litigation go forward in the state court, while holding off other creditors. Sometimes you will want to remove the case from the state court, and bring it into the Bankruptcy Court, particularly when you want to speed up the trial and resolution, because the bankruptcy court is usually going to move faster than the state court. Many times, moving faster translates to lower attorney fees.

Under the right circumstances, you may litigate the ability to modify or terminate union contracts, or assume or terminate leases, value property because a secured creditors claim is generally limited to the value of the collateral, with the excess treated as unsecured, which you may only be paying a small fraction of the actual amount due.

If you are involved in complicated litigation and do not want to switch attorneys, your bankruptcy lawyer can usually arrange for your existing attorney to be hired as special counsel to continue the litigation whether in the state court, or if removed, in the bankruptcy court, while the bankruptcy lawyer handles only the bankruptcy issues.

We offer a free conference of up to one hour with an experienced (a minimum of 10 years) bankruptcy, tax problem, foreclosure and debt resolution attorney (not a junior associate or paralegal) who will fully analyze your specific financial situation, and advise you as to your available options, likelihood of success, and the costs and procedures involved in each alternative.

If you would like someone to contact you regarding your problems or concerns, please choose the appropriate choice below, or call us at 951-686-6432 and mention that you visited our web site for a free, no-obligation conference.