What is an adversary proceeding used for?

When a bankruptcy case is filed, there is a debtor, creditors, a trustee, and other such parties. While the interests of these parties may diverge, there may not be any direct one-on-one adverse relationship between any two parties. The hallmark of a direct adverse relationship is a disagreement over an issue, where each party has a position, and the bankruptcy judge must determine the outcome.

Such adverse matters come before the court in several distinct ways. The most formal is an adversary proceeding, which has the characteristics of a typical civil lawsuit (e.g. Summons, complaint, answer, formal discovery, motions, and perhaps a trial). Everything else is grouped under the label "contested matter." Motions and objections filed in the main bankruptcy case are generally labeled contested matters.

The bankruptcy code and bankruptcy rules recognize that certain types of disputes ought to have more formal procedural protections in place. Oftentimes this is due to the serious effect the adverse lawsuit might have on the defendant, however, such must be balanced against the importance of quick resolution that a motion or objection may provide.

Bankruptcy Rule 7001 provides a list of the types of issues an adversary proceeding is used to resolve. Some notable ones include:

  1. Recovery of property, such as the avoidance of a fraudulent transfer or a preferential transfer.
  2. Suits which impact the validity, priority, or extent of a lien
  3. Obtaining authorization to sell property co-owned by a non-debtor
  4. Objection to or revocation of a bankruptcy discharge
  5. Revoke confirmation of a plan, including a chapter 13 plan
  6. Determine whether a particular debt is discharged (a dischargeability determination)
  7. Certain kinds of declaratory and injunctive relief

As you can observe, such are generally fairly serious matters concern things such a property rights (even property rights of a non-party) and some of the core benefits of a bankruptcy proceedings such as the bankruptcy discharge. Some adversary proceedings are dispensed with quickly, while others can become serious litigated undertakings.

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