Most people think of filing for bankruptcy to stop lawsuits, but it is possible to get sued in a bankruptcy – or to do the suing. I’ve written recently about people who have been sued in the GMX Resources bankruptcy for fraudulent transfers for receiving dividends on preferred stock and people who have been sued for the recovery of what are called preferential transfers; but there is a lot more litigation than just this going on at the bankruptcy court.
For most people who file for bankruptcy the process looks a lot more administrative than it does judicial. Most people who file never see their Judge, for instance. No, the person who presides over the First Meeting of Creditors is NOT a Judge. Some standard rules of thumb – if there is no court room, no black robe and no standing when the person enters and leaves the room – you are probably not dealing with a Federal Bankruptcy Judge.
Just because most debtors never see them, doesn’t mean that the Judges aren’t staying busy. Bankruptcy litigation comes in two flavors: Adversary Proceedings and Contested Matters. An Adversary Proceeding is essentially a full-scale lawsuit filed within the context of a Bankruptcy case. It begins with a Complaint and a Summons, followed by an Answer, discovery, motions, evidentiary hearings and finally concludes with a trial.
Adversary Proceedings are required to determine the nature or extent of a lien, revoke a discharge or plan confirmation, object to a discharge, recover property of the estate, provide injunctive relief, declaratory relief or subrogation; and certain sales of property must be approved by an Adversary. Essentially anything else in the Bankruptcy Court where two people are arguing or disagreeing qualifies as a Contested Matter, which is quite useful; because in a contested matter you have full access to discovery and other litigation tools that are generally considered part of a lawsuit rather than just a motion hearing.
Some things can be the subject of either an Adversary Proceeding or a Contested Matter. A violation of the automatic stay, for instance, may be brought by either procedure. A violation of the discharge, however, generally is brought by a Contempt Citation, which is a Contested Matter.
So, what is the difference? Adversary Proceedings have greater procedural and due process protections built into them. They must be served like a lawsuit. They have a longer answer time. They have more structure to them which helps to manage greater complexity, a larger number of parties, more witnesses, more complicated issues. Contested Matters are procedurally more flexible. A Contested Matter may be a simple motion – motion with brief filed, fourteen days later a response with brief is filed, hearing set and heard generally in an hour or less. Of course, a Contested Matter may also have a long period of discovery, with related motions filed and culminate in a day or multi-day trial with lots of witnesses and exhibits. So, Contested Matters are inherently more flexible. The Court is expected to adapt procedures to fit the matter at hand. Adversaries are expected to be complex issues and so are treated that way automatically.
For something like a violation of the automatic stay, which may be brought in either form, I consider the following in making my choice: has the defendant appeared in the case, otherwise, the formal service procedures of the Adversary Proceeding will afford greater due process protections. How many facts will be in dispute? What is the nature of my client’s damages? How much post petition discovery will I want? How much time will I want to prepare the case? Even after considering all of these things, I may still file a case and have the Judge adapt the procedures for it as if it were the other. Judges can do that, and they will if they think it is necessary either for due process considerations, to protect the rights of a party or to make the case easier to manage.
So, there you have it. Bankruptcy lawyers may not empanel a jury too often (or ever), but they are still litigators.