Adversary Proceedings 101

Here at Shenwick & Associates, our summer is busy with (among other matters), representing clients in adversary proceedings. An adversary proceeding is a lawsuit that is brought within a bankruptcy proceeding and based on conflicting claims, usually between the debtor (or the bankruptcy trustee) and a creditor or other interested party. Adversary proceedings are governed by special procedural rules under Part VII of the Federal Rules of Bankruptcy Procedure.

Typically, an adversary proceeding is commenced when a business files for reorganization under Chapter 11 of the Bankruptcy Code, and then the case is voluntarily or involuntarily converted to a liquidation under Chapter 7 of the Bankruptcy Code. A Chapter 7 bankruptcy trustee is then appointed. Under § 546(a) of the Bankruptcy Code, the bankruptcy trustee has until the earlier of: (1) the later of two years after the entry of the order for relief, or one year after the appointment or election of the first trustee if the appointment or election occurs before the expiration of the two year period after the entry of the order for relief, or (2) the time the case is closed or dismissed, to commence an adversary proceeding.

Typically, the claims a trustee makes against a defendant in an adversary proceeding are for fraudulent transfers (transfers of the debtor's assets to a third party, with the intent to prevent creditors from reaching the assets to satisfy their claims) under § 548 of the Bankruptcy Code and state law (i.e. New York Debtor and Creditor Law, which has a six year statute of limitations) and preferential transfers (transfers made prior to a bankruptcy filing to a creditor by a debtor to the exclusion or detriment of its other creditors) under § 547 of the Bankruptcy Code and state law. A trustee will usually send the defendant a demand letter for recovery of the debtor's assets to voluntarily settle the claims before filing a complaint and commencing the adversary proceeding.

Adversary proceedings are highly specialized in both their procedural rules and the analysis of the merits of the substantive claims for relief against a creditor or other party. If you're involved in bankruptcy litigation or think you may be (i.e. one of your vendors appears to be having financial difficulty), please contact Jim Shenwick.