Protecting Your Rights as a Creditor Through the Use of Adversary Proceedings in Bankruptcy

If you should find yourself in the position, as a judgment creditor, of needing to pursue an adversary proceeding against a Chapter 11 debtor, it is important to understand that there are many procedural rules involved in the process. While the courts may allow parties a bit of leeway because the law favors decisions made on the merits as opposed to procedural technicalities, some procedural flaws can have disastrous results. By working with a skilled Georgia creditors’ rights lawyer, you can make sure that you are doing everything possible to avoid falling into procedural pitfalls.

One example of a case in which a procedural imperfection led to considerable federal litigation was a dispute that arose between two business partners, Gary and David. In the 1990s, Gary and David developed a plan to establish a business that dealt in discount home improvement and building supplies. The plan seemed strong, but the business never took off. By 2007, with business still poor, Gary sued David, and David countersued. Eventually, in 2011, a jury ruled for David and awarded him damages in the amount of $318,025.

The next year, Gary filed for Chapter 11 bankruptcy. David sought to file an action within that bankruptcy, asking the bankruptcy judge to declare the damages award handed down a year earlier to be a non-dischargeable debt in accordance with 11 USC 523. The bankruptcy judge gave David until Oct. 12, 2012 to file a complaint and initiate an adversary proceeding under Section 523. However, David didn’t file a complaint and initiate an adversary proceeding, at least not at first. He filed a “Motion to Dismiss or for Determination of Non-Dischargeability of His Debt” prior to the deadline. Then, on Oct. 17, he filed an adversary complaint.

This allowed Gary to challenge David’s pursuit of a declaration of non-dischargeability. Gary’s argument was that the first filing wasn’t proper because it was a motion to dismiss, rather than an adversary complaint, and the second filing, the adversary complaint, wasn’t proper because it was filed after the Oct. 12 deadline. David argued that the request for an adversary proceeding, made after the deadline, should be constructed by the court to “relate back” to the motion he made, which was filed before the deadline.

Both the bankruptcy court and the 11th Circuit Court of Appeals, whose rulings affect Florida, Georgia, and Alabama, ruled against Gary and allowed David’s adversary proceeding to go forward. The appeals court explained that the federal rules, including Bankruptcy Rule 7008, simply did not intend to create a system of hyper-technical rules compliance that prevents disputes from being adjudicated on the merits in place of dismissals granted on technical procedural grounds.

David’s motion counted as a valid complaint for the purposes of the relation back rule. The motion clearly indicated that he sought an order from the court declaring the judgment debt to be non-dischargeable under Section 523(a)(6) of the bankruptcy code. That was enough, even if he didn’t entitle the document as a complaint.

While David was ultimately successful in keeping his adversary action alive, the case is still a useful warning about the importance of making sure that you are meeting all of the procedural rules that apply to your Chapter 11 adversary action. To make sure your rights are fully protected, talk to the knowledgeable Atlanta creditors’ rights attorneys at Poole Huffman, LLC. Our attorneys have been working with business clients for many years to ensure that their legal rights and business interests are protected. Contact our attorneys online or by calling 404-373-4008 to schedule your confidential consultation.

More blog posts:

New Garnishment Ruling: What You Should Know, Atlanta Business Litigation Attorneys Blog, Sept. 29, 2015

Commercial Real Estate Broker’s Liens, Atlanta Business Litigation Attorneys Blog, Sept. 23, 2013