What Is an Adversary Proceeding in Bankruptcy?

Most bankruptcy cases move through the court system without anyone filing a lawsuit. Debts are scheduled, a trustee reviews the case, creditors file claims, and the debtor receives a discharge. But some disputes are too significant to be resolved through ordinary motion practice. When that happens, the Federal Rules of Bankruptcy Procedure require the parties to litigate the dispute in a separate lawsuit filed within the bankruptcy case. That lawsuit is called an adversary proceeding.

A Lawsuit Inside a Bankruptcy Case

An adversary proceeding is, in nearly every respect, a full civil lawsuit. It begins with a complaint, receives its own case number separate from the underlying bankruptcy case, and proceeds through service of process, an answer, discovery, motions, and—if it does not settle—a trial before the bankruptcy judge. Part VII of the Federal Rules of Bankruptcy Procedure governs adversary proceedings and incorporates most of the Federal Rules of Civil Procedure, so the litigation looks much like a case in federal district court, only on a faster timeline and before a judge who already knows the underlying bankruptcy.

The parties are called the plaintiff and the defendant, just as in any other lawsuit. Depending on the dispute, the plaintiff may be the bankruptcy trustee, a creditor, the debtor, or the United States Trustee, and the defendant may be any of the same.

What Disputes Require an Adversary Proceeding?

Bankruptcy Rule 7001 lists the types of disputes that must be brought as an adversary proceeding rather than by motion. The most common include:

• Recovering money or property for the bankruptcy estate, including preference and fraudulent transfer claims;
• Determining the validity, priority, or extent of a lien or other interest in property;
• Objecting to the debtor's discharge as a whole;
• Determining the dischargeability of a particular debt;
• Obtaining an injunction or other equitable relief;
• Subordinating a claim or interest; and
• Revoking an order of confirmation or a discharge previously entered.

If a dispute does not fall within Rule 7001, it is usually handled as a “contested matter” through motion practice under Rule 9014—a faster, less formal process. Knowing which track applies is one of the first strategic questions in any bankruptcy dispute.

Common Adversary Proceedings in Practice

Nondischargeability Complaints (Section 523)

A creditor who believes its specific debt should survive the bankruptcy may file a complaint under Section 523 of the Bankruptcy Code. The most frequently litigated grounds are debts obtained by fraud or false pretenses, debts arising from fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny, and debts for willful and malicious injury. If the creditor prevails, that debt is excluded from the discharge and remains collectible after the bankruptcy ends.

Objections to Discharge (Section 727)

More drastic than challenging a single debt, a Section 727 complaint asks the court to deny the debtor's entire discharge. Grounds include transferring or concealing property with intent to hinder, delay, or defraud creditors; making a false oath in the bankruptcy case; failing to keep adequate financial records; and failing to satisfactorily explain a loss of assets. Because the stakes are so high, these complaints are heavily litigated.

Preference Actions (Section 547)

A trustee may sue to recover payments the debtor made to a creditor during the ninety days before the bankruptcy filing—or within one year, if the creditor was an insider such as a family member or business partner—where the payment allowed that creditor to receive more than it would have in a Chapter 7 liquidation. Creditors served with a preference complaint often have meaningful defenses, such as the ordinary course of business and new value defenses, so a demand is not the end of the conversation.

Fraudulent Transfer Actions (Section 548)

A trustee may also sue to unwind transfers the debtor made within two years before filing, either with actual intent to hinder, delay, or defraud creditors or for less than reasonably equivalent value while insolvent. In Georgia cases, trustees frequently reach further back by invoking state law—the Georgia Uniform Voidable Transactions Act, O.C.G.A. § 18-2-70 et seq.—which generally allows claims on transfers made within four years.

Other Common Claims

Adversary proceedings are also used to compel turnover of estate property, to resolve competing lien priorities on real estate, and to seek redress for willful violations of the automatic stay. In our real estate practice, lien priority and title-related adversary proceedings arise regularly when property with disputed encumbrances lands in a bankruptcy estate.

Deadlines Are Short and Unforgiving

The deadlines in this area are among the strictest in bankruptcy practice. A creditor's complaint objecting to dischargeability of a debt for fraud, fiduciary defalcation, or willful and malicious injury, and any complaint objecting to the debtor's discharge, must generally be filed no later than sixty days after the first date set for the meeting of creditors. A party who needs more time must ask the court for an extension before the deadline expires—not after. Creditors who wait until the discharge is entered have usually waited too long.

How the Process Unfolds

The plaintiff files a complaint and the clerk issues a summons, which is typically served by mail along with the complaint. The defendant generally has thirty days from issuance of the summons to answer or file a motion. From there, the case proceeds through discovery—document requests, interrogatories, and depositions—followed by dispositive motions and, if necessary, trial before the bankruptcy judge. Many adversary proceedings settle, often through mediation, because both sides face real litigation costs and genuine risk. Appeals go to the United States District Court or, in some cases, directly to the Eleventh Circuit.

What to Do if You Are Served with an Adversary Complaint

Do not ignore it. An adversary proceeding is a real lawsuit, and failing to respond can result in a default judgment—which may mean a debt that survives your bankruptcy or a money judgment in favor of the trustee. Calendar the response deadline immediately and speak with counsel experienced in bankruptcy litigation. Many claims that look alarming at first have strong defenses, and early engagement often produces a favorable settlement.

Experienced Bankruptcy Litigation Counsel

Rountree Leitman Klein & Geer regularly prosecutes and defends adversary proceedings in the United States Bankruptcy Courts for the Northern and Middle Districts of Georgia—representing debtors, creditors, and trustees in dischargeability litigation, preference and fraudulent transfer actions, and lien priority disputes. If you have been served with an adversary complaint or believe you may need to file one, contact us for a consultation.