WHAT ARE ADVERSARY AND CONTESTED PROCEEDINGS DURING CHAPTER 7 BANKRUPTCY ?
The bankruptcy court plays an important judicial role in a Chapter 7 bankruptcy case, but it does not ordinarily supervise every administrative step of the case. Much of the day-to-day administration of a Chapter 7 estate is undertaken by the Chapter 7 trustee, while the United States Trustee Program provides oversight of the trustee system. The trustee is responsible, among other things, for investigating the debtor’s financial affairs, identifying and administering non-exempt assets, examining claims, and, where assets are available for distribution, liquidating those assets and distributing the proceeds to creditors. The bankruptcy court primarily functions as the judicial forum in which disputes are adjudicated and in which court authorization is required for particular transactions or relief.
The distinction between an asset case and a no-asset case is particularly important when considering the practical role of the bankruptcy court. In an asset case, the trustee determines that the estate contains non-exempt or otherwise realizable property that can be administered for the benefit of creditors. The trustee may therefore be required to collect, preserve, sell, or otherwise administer property of the estate and ultimately distribute the proceeds according to the Bankruptcy Code. In a no-asset case, by contrast, the trustee determines that there are no assets available for distribution to unsecured creditors and files a Report of No Distribution. The U.S. Trustee Program recognizes these as separate categories of Chapter 7 administration.
Role of the Court in a No-Asset Case
In a typical no-asset Chapter 7 case, the bankruptcy court’s practical involvement is relatively limited. The debtor files the petition and schedules, the automatic stay arises, and the trustee conducts the meeting of creditors under § 341. The bankruptcy judge does not ordinarily preside over the § 341 meeting. Instead, the meeting is conducted by the trustee, who examines the debtor concerning the debtor’s financial affairs, assets, liabilities, exemptions, and other matters relevant to the administration of the estate.
After examining the debtor and reviewing the schedules and financial information, the trustee may determine that there are no non-exempt assets from which a meaningful distribution can be made to creditors. In that situation, the trustee files a Report of No Distribution, commonly referred to as a no-asset report. The U.S. Trustee Program’s guidance explains that the report signifies that the trustee has reviewed the schedules, investigated the relevant facts, and determined that there are no assets to liquidate for the benefit of creditors.
The absence of assets does not, however, mean that the bankruptcy court has no role. The court remains available to determine any contested legal issue that arises in the case. For example, the court may be required to hear a creditor’s request for relief from the automatic stay, an objection to the debtor’s exemptions, an objection to discharge under § 727, a proceeding concerning the dischargeability of a particular debt under § 523, a disputed claim, or a request for dismissal or conversion of the case.
Consequently, a no-asset case may proceed without any substantial hearing before the bankruptcy judge if no contested matter arises. The court’s role in such a case is largely adjudicative rather than administrative. The trustee administers the case, determines that there is nothing to distribute, and files the appropriate report, while the court remains responsible for resolving any matters that require judicial determination and for the formal closing of the case.
This distinction is important because the filing of a Chapter 7 petition does not necessarily mean that the debtor will repeatedly appear before the bankruptcy judge. In a routine no-asset case in which there are no objections, disputes, or requests requiring judicial determination, the debtor may have little or no direct interaction with the bankruptcy judge.
Role of the Court in an Asset Case
The role of the bankruptcy court can become substantially more significant in an asset case. The bankruptcy court has jurisdiction to hear both adversary proceedings and contested matters arising in a Chapter 7 case. An adversary proceeding is a separate lawsuit commenced by a complaint, whereas a contested matter generally arises from a motion, application, or objection within the bankruptcy case. The distinction is primarily procedural, and the Bankruptcy Rules determine which disputes must be brought as adversary proceedings and which are handled as contested matters.
The principal distinction is that an adversary proceeding is a separate lawsuit within the bankruptcy case, ordinarily commenced by a complaint, whereas a contested matter is a dispute arising from a motion, application, or objection within the bankruptcy case. Matters specifically required by Rule 7001 to be brought as adversary proceedings must follow the adversary-proceeding procedure. Other disputes that arise through contested motions or objections are generally dealt with under Rule 9014 as contested matters.
ADVERSARY PROCEEDINGS
An adversary proceeding is essentially a separate lawsuit within a bankruptcy case. It is commenced by filing a complaint and is governed principally by Federal Rules of Bankruptcy Procedure 7001–7087. Rule 7001 specifies the types of disputes that must be brought as adversary proceedings. In a Chapter 7 case, adversary proceedings are commonly used where the bankruptcy court is required to make a judicial determination concerning the dischargeability of a particular debt, the debtor’s right to receive a discharge, the recovery of property or money, the validity or priority of a lien, or the subordination of a claim.
Determination of Dischargeability of a Debt
One important category of adversary proceedings involves determining whether a particular debt is dischargeable. A creditor or trustee may ask the bankruptcy court to determine that a debt is not dischargeable under §523(a). Examples include debts arising from fraud or false pretenses under §523(a)(2), debts arising from fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny under §523(a)(4), and debts for willful and malicious injury under §523(a)(6). The purpose of such a proceeding is to determine whether the particular debt in question survives the debtor’s Chapter 7 discharge.
Denial of the Debtor’s Discharge
Another important category is an action for denial of the debtor’s discharge under §727. A trustee, creditor, or other authorized party may commence an adversary proceeding seeking denial of the debtor’s entire discharge. This is fundamentally different from a proceeding under §523. A §523 proceeding concerns the dischargeability of a particular debt, whereas a §727 proceeding challenges the debtor’s entitlement to a Chapter 7 discharge altogether. If the court denies discharge under §727, the debtor generally receives no Chapter 7 discharge.
Recovery of Property or Money
Adversary proceedings may also be used for the recovery of property or money. Certain actions by the trustee to recover property or funds for the benefit of the bankruptcy estate are required to be brought as adversary proceedings. This may include actions involving the avoidance and recovery of certain transfers. For example, an action to recover a preferential transfer under §547 may be brought as an adversary proceeding, subject to the applicable Bankruptcy Rules and statutory requirements.
Determination of Validity, Priority, or Extent of a Lien
An adversary proceeding may also be required where the bankruptcy court must determine the validity, priority, or extent of a lien or other interest in property. Such a dispute may arise where the debtor, trustee, or another party challenges the existence, enforceability, priority, or scope of a creditor’s lien against property of the bankruptcy estate. The determination of such rights may have a significant effect on whether property can be administered and distributed by the Chapter 7 trustee.
Subordination of Claims
Similarly, an action seeking subordination of a claim under §510 is an adversary proceeding. Subordination may affect the order in which a claim participates in distributions from the bankruptcy estate. Because such a proceeding can materially affect the rights and priorities of parties in the bankruptcy case, it is handled through the formal adversary-proceeding process.
Procedure in an Adversary Proceeding
An adversary proceeding normally follows a procedure similar to ordinary civil litigation. It generally begins with the filing of a complaint, followed by issuance and service of a summons, service on the defendant, filing of an answer, and, where appropriate, discovery, motions, hearings, and trial, followed by entry of a judgment. The adversary proceeding receives its own adversary proceeding number, even though it arises in connection with and remains related to the underlying Chapter 7 bankruptcy case.
For example, suppose a debtor files a Chapter 7 petition and a creditor alleges that the debtor obtained a loan through fraud. The creditor may commence an adversary proceeding under §523(a)(2) seeking a determination that the debt is nondischargeable. The bankruptcy court will then determine, through the adversary proceeding, whether the requirements of §523(a)(2) are satisfied and whether the particular debt will survive the debtor’s Chapter 7 discharge.
Adversary Proceeding and the Main Bankruptcy Case
Thus, although an adversary proceeding arises from a bankruptcy case, it is procedurally distinct from the main bankruptcy case. The Chapter 7 case deals with the administration of the bankruptcy estate, claims, exemptions, distribution, discharge, and other matters arising in the bankruptcy case, whereas an adversary proceeding provides a formal lawsuit-like mechanism for resolving specific disputes identified by the Bankruptcy Rules as requiring that procedure.
CONTESTED MATTERS
A contested matter is a dispute that arises within a bankruptcy case but does not require the commencement of a separate adversary proceeding. The principal rule governing contested matters is Federal Rule of Bankruptcy Procedure 9014. A contested matter generally arises when a party files a motion, application, objection, or other request for relief, and another party opposes that request. Unlike an adversary proceeding, a contested matter generally does not require the filing of a separate complaint or the commencement of a separate adversary proceeding with its own case number.
Objection to Exemptions
A common contested matter in a Chapter 7 case is an objection to the debtor’s claimed exemptions. The debtor claims property as exempt under §522, and the trustee or a creditor may object to the claimed exemption. The bankruptcy court may then determine whether the property qualifies for the claimed exemption. Such an objection is ordinarily dealt with as a contested matter rather than through an adversary proceeding.
Motion for Relief from the Automatic Stay
A secured creditor may file a motion under §362(d) seeking relief from the automatic stay. The debtor or another interested party may oppose the motion. The bankruptcy court then determines whether the creditor has established grounds for terminating, annulling, modifying, or conditioning the automatic stay. Such a dispute is ordinarily handled as a contested matter under Rule 9014, rather than as an adversary proceeding.
Objection to a Proof of Claim
A dispute concerning the allowance of a proof of claim is another common contested matter. A creditor may file a proof of claim under §501, and the trustee, debtor, or another party in interest may object to the claim. The bankruptcy court then determines whether the claim should be allowed or disallowed under §502. An objection to a proof of claim is generally resolved as a contested matter under Rule 9014.
Motion to Sell Estate Property
A Chapter 7 trustee may seek authority to sell property of the bankruptcy estate under §363. If the debtor, a creditor, or another party in interest objects to the proposed sale, the dispute may be resolved through a contested matter. The bankruptcy court may consider issues such as the terms of the proposed sale, objections by interested parties, and whether the trustee should be authorized to complete the transaction.
Motion to Dismiss the Chapter 7 Case
A party may seek dismissal of a Chapter 7 case under §707. If the debtor or another interested party opposes the request, the resulting dispute is generally handled as a contested matter. The bankruptcy court may consider the statutory grounds for dismissal and the circumstances of the particular case before entering an order dismissing or refusing to dismiss the case.
Motion to Convert the Case
A debtor or another party may seek conversion of a Chapter 7 case under §706, where conversion is permitted by the Bankruptcy Code. If another party objects to the proposed conversion, the dispute may be treated as a contested matter. The bankruptcy court will determine whether the statutory requirements for conversion have been satisfied and whether conversion should be permitted.
Procedure in a Contested Matter
A contested matter generally begins with the filing of a motion, application, or objection seeking relief from the bankruptcy court. The opposing party is given notice and an opportunity to respond. The court may conduct a hearing and consider evidence, affidavits, declarations, documents, and legal arguments before determining the dispute. The procedure is generally less formal than an adversary proceeding, although Rule 9014 incorporates a number of procedural protections and, in appropriate circumstances, provisions of the Federal Rules of Bankruptcy Procedure governing adversary proceedings may apply.
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Mukesh Suman is a lawyer based at Delhi, India. He also provides bankruptcy paralegal services to clients based in USA. He may be contacted at mukesh_suman@outlook.com.
