Motions and Complaints

What You Should Know About Bankruptcy Procedure and Litigation

Adversary Proceedings vs. Contested Matters

Issues are brought before the Court as either a contested matter or a adversary proceeding.

Adversary Proceedings Handled like regular civil lawsuit under FRCP

Rule 7001 10 kinds of disputes that must be brought as adversary proceedings

• Recover money or property subject to exception
• Determining validity, priority, or extent of a lien
• Obtain approval pursuant to §3636(h) for sale of an interest of both the Estate and of a co-owner of property
• Object to or revoke a discharge
• Revoke Plan confirmation under Chapter, 11, 12 or 13
• Determine dischargeability of a debt
• Obtain and injunction or other equitable relief

More disputes that must be brought as Adversary:

• Subordinate allowed claim or interest, except when subordination provided in Chapter 9,11,12 or 13 Plan
• Obtain declaratory judgment relating to the foregoing
• Determine a claim or cause of action removed pursuant to 28 U.S.C §1452

NB: Must bring adversary to determine dischargeability of fraudulent payments and divorce payments.

NB: In Chapter 7 the Creditor must file adversary not more than 60 days after first meeting of creditors.

Contested Matters Includes all disputes not set forth by Rule 7001 Governed by FRBP not FRCP Deadlines, discovery, witnesses et al. determined by Court

Summary

Discovery in Bankruptcy Proceedings

• Governed by FRBP 7026-7037 and FRCP 26-37
• Rule 2004 allows for examination of the debtor to determine dischargeability – subject to permission of the Court and limited to: (1) finances of the debtor or the Estate (2) matters affecting administration of the Estate (3) the right to receive a discharge

DIS: Unlike Federal District Courts, the Bankruptcy Court may issue rulings concerning the practical application of discovery to fit the circumstances of Bankruptcy litigation

Preference Actions

Preferential Transfers

• Payment to debtor or creditor within specific time period or under certain conditions prior to debtor’s filing.
• Creditor receives a “preference” over others
• §547(e) defines the date of the transfer and mirrors the Illinois UCC rules such as perfection, etc.
• Even if avoided, interest is allowed on the transfer from the first time demanded by the creditor

Avoiding Preferential Transfers §547 of the Code grants Trustees the ability to recover preferential transfers on behalf of the Estate, which gives the Trustee the power to avoid the preferential transfer Limits and Characteristics of Adversary §550 of the Code: Trustee must file an action to recover the preferential transfer on the earlier of the following:

(1) within 1 year after the transfer; or (2) by the end of the case.

Burden of Proof: Trustee must prove voidability, Creditor must prove non-voidability

Prima facie elements §547(b): 5 conditions

Transfer of;

• Property of the Estate;
• On account of an “antecedent debt”;
• Within 90 days of filing (or 1 year for an Insider);
• That allows the creditor to receive more than they would have in a Chapter 7 distribution

§547(e) determines when transfer is made: (1) When debtor acquires rights in the property; (2) When transferred if perfected within 10 days Definition: Preference is a transfer made

• To or for the benefit of a creditor;
• On account of an “antecedent” debt
• While the Debtor was insolvent (rebuttable presumption)
• Within 90-days prior to filing or 1 year if an “insider” DIS: Insider must have had reasonable cause to know debtor was insolvent at time of transfer
• That enables the recipient to receive more than if the transfer had not been made and Debtor were liquidated

Defenses to the “Preference” Rule §547(c) provides 8 exceptions or defenses to the Trustee’s ability to avoid a preferential transfer

(1) Substantially Contemporaneous Exchange Example: Say debtor takes delivery of widgets and remits cash (C.O.D.). This exception presumes Estate is no worse off because it received what it paid for at the time.

Note: Even if debt were created on day 1 and repaid on day 7 it may qualify for this defense if the parties intended for the transaction to be contemporaneous

(2) “New” Value Example: Say the Debtor owes $1000. 25 days before Bankruptcy and pays Creditor in full. 2 days later Creditor ships another $1,000 in goods to the debtor. Debtor never pays for that shipment. Then, debtor’s original payment technically constitutes a preference, however this section excepts that payment because of the “new value” extended to the Debtor.

Note: There is a split among Federal Circuits as to how “new value” should be calculated (7th Circuit requires that the new value remain unpaid)

(3) Ordinary Course of Business Transfers made

• To pay obligations incurred in ordinary course of business;
• Actually made in the ordinary course of business;
• On ordinary business terms

will not be recaptured

While Courts vary in their articulation of the standards, generally payments are protected if consistent with:

Industry-wide terms; Terms within that area (course of dealing); Parties’ actual dealings (course of performance)

When analyzing “industry standards,” Courts compare the practices of firms similar to the Creditor.

Note: extraordinary or idiosyncratic dealings are usually outside the scope of this section and hence recoverable.

End Result of a Successful Preference Action

• If Trustee prevails, debtor’s interest in property transferred must be returned to the Estate and the Creditor receives an unsecured claim for the same amount
• Court will grant the Creditor interest on the transferred amount as of the date of the transfer, unless there no sound reason to do so