Bankruptcy Litigation

There are three types of bankruptcy litigation: 1)adversary proceedings, 2) contested matters, and 3) appeals.

An adversary proceeding is a lawsuit within a bankruptcy case.  An adversary proceeding is commenced when someone files a lawsuit in the bankruptcy court. That lawsuit must be associated with an existing bankruptcy case.

A contested matter is similar to an adversary proceeding, except that it deals with case administration.  For example, objections to confirmation in chapter 13 or chapter 11 are contested matters.

A Bankruptcy appeal is a review of a bankruptcy court decision by a different court.  A bankruptcy appeal is brought before either the US District Court, the 9th Circuit Bankruptcy Appellate Panel (BAP), or 3) the United States Court of Appeals for the Ninth Circuit.

Adversary Proceedings

The most common bankruptcy specific adversary proceedings brought against debtors are for the denial of the bankruptcy discharge, either for a specific debt or for all of your debts.  Any adversary proceeding affecting your discharge is extremely serious.  If the discharge is denied in your current case, you can not ever discharge that debt in bankruptcy.  This means that even though you filed bankruptcy one or more of your debts can follow you, even after the bankruptcy is complete.

The debtor can also bring an adversary proceeding to determine the dischargeability of a debt, recover money or property, to complete a state court lawsuit, or determine lien validity.

Nondischargeable Debts

The Bankruptcy Code provides that certain types of debt are automatically nondischargeable, for instance child support obligations and student loans.

Other debts, however, are presumed dischargeable and a creditor bring an adversary proceeding and prove that the debt cannot be discharged.  The most common are:

  • Credit card debt that you accrued in the period before you filed bankruptcy.  This is why it is important to stop using your credit card when you decide to file bankruptcy; and why it is important to tell your attorney about all of your credit card usage.  Just because you used a credit, does not exclude you from bankruptcy; but, you need to hire a bankruptcy lawyer who is experienced in dealing with credit card usage in the pre-bankruptcy period.
  • Debts for willful and malicious injuries.  The bankruptcy courts require a high standard of proof for a creditor to prevail on these claims.  Just because someone got a personal injury judgment against you does not mean that it is non-dischargeable.
  • Theft, conversion, or breach of fiduciary duty.

It is also common to see nondischargeability proceedings come out of old disputes.  Perhaps you owe a former business partner some money or there is a judgment against you.  The creditor realizes that the only way for their debt to survive your bankruptcy is to file an adversary proceeding against you.

Denial or Revocation of the Discharge

The United States Trustee or a creditor may bring a lawsuit to deny your entire discharge.  If your discharge is denied or revoked, then none of the debts in your bankruptcy will be discharged and none of those debts can never be discharged in a future bankruptcy.

A denial of discharge adversary proceeding is based upon:

  • Hiding, concealing, or moving property of the estate with the intent to hinder, delay, or defraud in the one year before filing of the petition or anytime after filing the petition.
  • Destroying records, unless such action was justified under all the circumstances of the case.
  • Knowingly and fraudulently making a false oath or account, presented a false claim, bribery, withholding records from a trustee, auditor, or examiner.
  • Failing to explain a loss or deficiency in the debtor’s assets.
  • Refusing to comply with an order of the court or claiming the Fifth Amendment privilege, after a grant of immunity.

The discharge can be revoked based upon:

  • The discharge was obtained through the fraud of the debtor, and the plaintiff did not know about the fraud until after the bankruptcy.
  • The debtor acquired property that would be property of the estate – for instance an inheritance or tax refund – and kept it for himself.
  • Refusing to comply with an order of the court or claiming the Fifth Amendment privilege, after a grant of immunity.
  • Making false statements or failing to provide information during a bankruptcy audit.

These are extremely serious issues, but they are also difficult to prove in many cases.  A skilled bankruptcy litigator can defend your discharge.

Determination of Dischargeability

Certain debts that are automatically non-dischargeable such as student loans, certain taxes, and domestic support obligations can still be disputed.  In certain cases it makes sense for the debtor to file an adversary proceeding to determine dischargeability.  The most common example is student loans.  Student loan discharges are difficult, but not impossible, to obtain.

Voiding a Lien, Recovering Money or Property, and Continuing a State Court Lawsuit

If you believe that a lien is invalid, you must file an adversary proceeding to void the lien.

The Bankruptcy Code has a form of adversary proceeding called an avoidance action.  An avoidance action allows you to recover money or property given to or seized by a creditor.  The decision to bring an avoidance action is made on a case by case basis.  You should discuss with your bankruptcy attorney any money or property that a creditor has seized from you.  Additionally, the trustee can bring an avoidance action against a person or business that you transferred money or property to.  If they are brought against a friend, family member, or business associate, you may want to stop the trustee from bring the action.  Sometimes these avoidance actions can be stopped or your attorney can setup your filing so that the trustee can’t bring an avoidance action.

If you file bankruptcy while litigation is ongoing in the state courts or another federal court, you can use a process called removal to bring the litigation into the bankruptcy court.  This is pretty rare.  Most lawsuits against you are stopped and discharged by the automatic stay.  There are times when it makes sense to bring a removal action, but you should consult with both your bankruptcy attorney and your other litigation attorney.

Contested Matter

A contested matter often seems like a lawsuit, but it is not.  This is because the Federal Rules of Bankruptcy Procedure draw a line between adversary proceedings and motion practice in an ordinary bankruptcy case.  The three most common contested matters that get litigated are motions for relief from the automatic stay, chapter 13 or chapter 11 plan confirmation, and objections to claim.  These are handled by the attorney who filed your case, unless you want a new lawyer.

You only defend a motion for relief from the automatic stay if two conditions are met: 1) you want to keep the property, and 2)  you can make the payments.   If you believe the debt is invalid, then your attorney must file an objection to claim to contest the debt.

Bankruptcy Appeals

EXTREMELY IMPORTANT – You only have 10 days to file a notice of intent to appeal after the bankruptcy court issues the final order.

A bankruptcy appeal allows you to challenge the ruling of a bankruptcy court by taking the case to a higher court.  Seattle is located in the Ninth Federal Circuit.  That means you can elect to have your appeal heard by either the US District court or the Bankruptcy Appellate Panel (everyone calls it the BAP).  Then, if you wish to appeal further, you may appeal to the Ninth Circuit Court of Appeals.

I encourage anyone who believes that the bankruptcy court made an error to exercise their privilege to appeal.  However, it is important for you to understand that an appeal is not a cure all for when the court rules against  you.  In my experience as a clerk to a bankruptcy appellate judge and as an appellate lawyer, I have learned that a good appellate lawyer gives their client careful counsel before taking the case. It is very hard for a to know when to appeal.  You should take the case to an experienced appellate lawyer and let him give you an assessment of the risks and rewards of filing an appeal.

The decision to bring the appeal is based on several issues:

  • Do you actually have an appellate case?  A bankruptcy appeal is not a chance to re-litigate an issue.  For example, it is extremely difficult to get an appellate court to overturn a bankruptcy’s courts determination of fact.  It is best to bring an appeal that is based on a matter of law.  It is best if your appellate attorney can find a possible legal error to support the appeal.
  • Can you support your interpretation of the law?  This is important, because an appeal is a long and involved process.  You do not want to waste your time and money on an appeal that lacks merit.  Before you make the decision to appeal, your appellate lawyer should carefully review the theory of the appeal and compare it to existing precedent.
  • What effect will the appeal have on your case?  It is possible for an appeal to have no meaningful effect on your case.  Bankruptcy cases move fast.  Your lawyer should discuss whether the appeal will help anything by the time it is done.
  • Are you patient and prepared to pay for an appeal?  Appeals to the district court or BAP generally take about 9 months.  Appeals to the Ninth Circuit generally take at least a year.   That means that if you end up going all the way to the Ninth Circuit, your appeal could take anywhere from 18 to 30 months.  Finally, most appellate lawyers require either a flat fee or a deposit of around $5,000 per appeal.

I do not mean to sound discouraging, but I believe that people should have a realistic expectation for a case.  If you’re not sure whether you have a good case for appeal, you can always call to schedule a free consultation.

 

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