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
More disputes that must be brought as Adversary:
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
Discovery in Bankruptcy Proceedings
DIS: Unlike Federal District Courts, the Bankruptcy Court may issue rulings concerning the practical application of discovery to fit the circumstances of Bankruptcy litigation
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
§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
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
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