What is Bankruptcy Litigation?
As the name suggests, bankruptcy litigation encompasses disputes arising from, or connected with, a bankruptcy proceeding. Such disputes can involve businesses, individuals, government agencies, or organized groups. The attorneys at Marshack Hays represent clients in all aspects of bankruptcy litigation.
What Are Common Examples of Bankruptcy Litigation?
Common examples of bankruptcy litigation include:
- Preferential transfer lawsuits. When a bankruptcy case is filed, the trustee can recover all payments made by a debtor during the 90-day period leading up to the bankruptcy petition. Creditors have various defenses to these claims, the most common of which include an ordinary course of business defense, a new value defense, and a contemporaneous exchange for value defense.
- Fraudulent transfer lawsuits. A bankruptcy trustee can also recover a transfer made by a debtor during the four years before the bankruptcy case was filed if the transfer was made (i) with the intent to “hinder, delay, or defraud” any creditor or (ii) while the debtor was insolvent and the debtor did not receive reasonably equivalent value for the transfer. Creditors have various defenses to these claims, including good faith and the payment of fair value.
- Dischargeability lawsuits. Typically, a debtor is able to discharge debts through the bankruptcy process. There are, however, circumstances under which a debt cannot be discharged. For example, a debt resulting from fraud cannot be discharged as long as the creditor takes steps to have the bankruptcy court declare the debt to be non-dischargeable.
- Objections to plan. When a debtor is using a plan to reorganize, creditors can object to plan and argue that certain aspects should be changed. Some of the most common objections relate to the plan’s feasibility (the debtor’s ability to make the proposed payments), the amount offered to creditors (whether the debtor is using its “best efforts”), and whether the debtor is unfairly attempting to retain valuable assets without paying creditors in full (the absolute priority rule).
- Cash collateral disputes. After a bankruptcy case is filed, a debtor cannot use cash or cash equivalents that are subject to a lien without a court order authorizing the use. To obtain such an order, the debtor must “adequately protect” the creditor against the risk that the value of the collateral will be diminished by the use.
- Lien-priority disputes. When a debtor offers the same property to multiple creditors as collateral, disputes can arise with respect to the priority of the creditor’s liens. The senior position is the most valuable.
- Lien-stripping disputes. Under certain circumstances, a debtor can force a creditor to remove a lien from the debtor’s property if the property is over-encumbered (the value of the property is less than the value of the creditor’s lien plus senior liens). If a creditor can show that the property is not “under water,” then the lien cannot be stripped away
- Proof of Claim/Objection to Claim. Creditors are entitled to file a proof of claim against the debtor, explaining the amount and basis for the debt owed. When a proof of claim is properly filed, the underlying debt is presumed to be valid. A proof of claim can be disputed if the challenger presents evidence regarding the validity of the debt. When a proof of claim is challenged, the ultimate burden of persuading the court that a debt is valid is on the claimant
Although resolution of disagreements without legal action is always preferable, it is not always possible. Resolving disputes involving insolvency is challenging because finite resources mean that some parties will not be fully compensated. It is important to choose skilled attorneys capable of maximizing your recovery and protecting your right.