American Bar Association
General Practice, Solo, and Small Firm Division

The Compleat Lawyer


Summer 1997 copyright American Bar Association. All rights reserved.

Bankruptcy Litigation

BY VICKI S. PORTER

Vicki S. Porter is a sole practitioner in Denver, Colorado. Her general practice includes bankruptcy law. She is a member of the editorial board of The Compleat Lawyer.

While most of bankruptcy practice falls into the genre of litigation, the procedures of the Bankruptcy Court differ from those of general civil litigation. Lawyers whose clients have either filed for bankruptcy protection or are trying to get around such protections to reach a debtor need to know the ins and outs of contested matters and adversary proceedings in the Bankruptcy Court.

The Rules of Bankruptcy Procedure apply to all forms of Bankruptcy Court litigation. These rules define "action" or "civil action" to mean "an adversary proceeding or, when appropriate, a contested petition, or proceedings to vacate an order for relief or determine any other contested matter" (Rule 9002).

Contested Matters
Rule 9014 establishes the procedures for contested matters. The Advisory Committee's comments to this rule state: "Whenever there is an actual dispute, other then an adversary proceeding, before the Bankruptcy Court, the litigation to resolve that dispute is a contested matter."

The bankruptcy rules refer to "applications" for certain matters; for example, hiring legal counsel (Rule 2014) or removal of a civil action to the Bankruptcy Court (Rule 2016), and to "motions" for some others, for example, relief from automatic stay (Rule 4001).

Rule 9014 provides that relief for a contested matter should be requested by motion and that reasonable notice and opportunity for hearing shall be given to the party against whom the relief is sought.

Notice and a hearing. Notice and a hearing is an important concept in the Bankruptcy Code. Section 102 defines "after notice and hearing' or a similar phrase" to mean after such notice as is appropriate under the particular circumstances. An action may be authorized without an actual hearing, if notice of the action is given properly and if a hearing is not requested in a timely fashion by a party in interest or where there is insufficient time for a hearing.

The time requirements for giving notice may be specified in the Bankruptcy Code, the Rules of Bankruptcy Procedure, or in the local rules. Notice must be given to parties in interest, which may be different entities for different actions. The parties to receive notice may be specified in the statute and/or may be those to whom the court directs notice be sent.

Relief from stay. The filing of a bankruptcy petition creates an automatic stay (§362) of (a) the commencement or continuation of a judicial, administrative, or other proceeding against the debtor; (b) the enforcement against the debtor or against property of the estate of a judgment obtained before the commencement of a case; (c) any act to obtain possession of property of the estate; (d) any act to create, perfect, or enforce any lien against property of the estate; (e) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case; (f) any act to collect, assess, or recover a claim against a debtor; and (g) the setoff of any debt owing to the debtor that arose before the commencement of the case.

Any act in violation of the automatic stay may be grounds for a contempt proceeding before the Bankruptcy Court. Thus, if there is litigation pending when a bankruptcy petition is filed, one must obtain relief from the automatic stay to continue the litigation. Relief is granted for cause, including lack of adequate protection of an interest in property or, with respect to an act against property of the estate: (1) the debtor does not have any equity in such property, and (2) such property is not necessary to an effective reorganization.

Relief from the automatic stay is sought by the filing of a motion. Local bankruptcy rules should be consulted for the filing fee and the notice that must be provided. The Bankruptcy Code provides that relief under certain circumstances may be granted ex parte (§362(f)). The Bankruptcy Code provides that relief will be granted if the court fails to enter an order continuing the stay within 30 days of the filing of the motion (§ 362(e)). This latter provision requires that either a preliminary hearing or the final hearing be scheduled within 30 days of the filing of the motion. If the court's procedure is to conduct a preliminary hearing, the court must find that there is a reasonable likelihood that the party opposing relief from such stay will prevail at the conclusion of the final hearing, or the relief must be granted.

Assumption or rejection of executory contract. Another area ripe for litigation by a lawyer who does not specialize in bankruptcy are motions to assume or reject unexpired leases or executory contracts. An aggressive creditor who is a party to either a lease with the debtor or an ongoing contract that requires performance by the creditor and the debtor may file a motion to force the issue of how the debtor is going to treat that lease or contract.

Once the motion is filed, the debtor's time to decide whether to continue with the lease or contract is limited. The creditor may benefit by having the lease or contract assumed even if the debtor later rejects the lease or contract, for at least during the time while the contract was assumed the debtor is liable to perform. Since this time period is post-petition, the creditor gains some priority status for repayment of any amounts unpaid for post-petition services provided by the creditor.

Adversary Proceedings
Adversary proceedings are usually more extensive bankruptcy litigation. Rule 7001 defines the types of matters that fall into the realm of adversary proceedings, including most actions to recover money or property; determine the validity, priority, or extent of a lien or other interest in property; object to or revoke a discharge; determine the dischargeability of a debt; or determine a claim or cause of action removed to the bankruptcy court.

Rules of procedure. Adversary proceedings are subject to most of the same procedural rules applicable to civil litigation in the federal courts. However, certain rules are not incorporated into bankruptcy proceedings, and some rules are modified for bankruptcy cases.

  • Issuance of summons. Rule 7004 provides that the clerk of the court must issue a summons in an adversary proceeding. The time for response is tied to the date the summons is issued, not to the date of service. Rule 7004 requires that service of the summons be made within ten days of its issuance.
  • Service. Rule 7004 allows for service of process in bankruptcy matters by first-class mail, postage prepaid, and service of process is completed upon mailing (9006(e)). Rule 7004 permits service of a summons and complaint nationwide. This rule also provides that if service is to be made upon the debtor, a copy must be served upon the debtor's attorney of record.

    Counsel first should consult Part VII of the Rules of Bankruptcy Procedure to determine if a federal rule has been made applicable to bankruptcy proceedings. Counsel should also consult the local bankruptcy rules, including any general orders adopted by the court, before getting involved with any litigation in the Bankruptcy Court. There are several adversary proceedings in which a non-bankruptcy lawyer could participate:

  • Preference actions and trustee's avoiding powers. One of the fundamental policies of bankruptcy is to ensure equality of distribution among creditors. Although rights of the parties are fixed for most purposes as of the date the bankruptcy case is commenced, the fair distribution principle would be undermined if nothing were done about actions of the debtor or a creditor before bankruptcy that have the effect of allowing one creditor to obtain an advantage at the expense of others. For this reason, bankruptcy laws grant to the trustee or other representative of the estate the power to avoid certain transactions or transfers occurring before the commencement of the case. Judicial liens or other preferences, and actual or constructively fraudulent or similar transfers, which if allowed to stand would be disruptive of the intended bankruptcy distributional scheme, are avoidable in bankruptcy if they occurred within specified pre-petition periods.
  • Objections to discharge and objections dischargeability. The court shall grant the debtor a discharge, unless
    1. The debtor is not an individual.
    2. The debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under the Bankruptcy Code, has transferred, removed, destroyed, mutilated, or concealed (a) property of the debtor, within one year before the date of the filing of the petition; (b) property of the estate, after the date of the filing of the petition;...or (h) the debtor has been granted a discharge...in a case commenced within six years before the date of the filing of the petition....
    The trustee or a creditor may object to the granting of a discharge. The trustee or the creditor who files such an objection has the burden of proof to show that the debtor should not be granted a discharge.

    A discharge of a debtor releases the debtor from all debts that arose before the date the petition was filed. If an objection to discharge is filed, and if the court decides in favor of the party filing the objection, no debts are discharged in the bankruptcy proceeding.

    Rather than object to discharge, creditors often file an objection to dischargeability. In such a situation, a creditor is asking the court to find that its claim should not be discharged in bankruptcy (for example, it is a claim for alimony payments). If that creditor is successful in its objection to dischargeability, that debt is not affected by the bankruptcy. The debtor may nonetheless be discharged in bankruptcy and all other debts of the debtor may be discharged.

    A complaint objecting to the debtor's discharge or a complaint objecting to the discharge of a specific debt must be filed: (1) no later that 60 days following the first date set for the meeting of creditors held pursuant to Section 341(a) in a Chapter 7 case; (2) when the court order fixes the time in a Chapter 13; and (3) no later than the first date set for the confirmation hearing in a Chapter 11 case.

  • Objections to claims. The Bankruptcy Code provides that a proof of claim, if filed in a timely manner, is deemed to be allowed, unless a party in interest objects. The lawyer may have the opportunity to either file the objection to the claim or defend against it. Once an objection is filed, the court must determine the allowed amount of the claim. The Bankruptcy Code specifies several bases for disallowance of a claim (for example, the claim is for unmatured interest) (§ 502).

These are just a few of the areas in which you may encounter litigation in the bankruptcy context. By adhering to all the applicable Rules of Bankruptcy Procedure and the Bankruptcy Code, many of the pitfalls of bankruptcy litigation can be avoided by the general practitioner.

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