Causes Of Bankruptcy Litigation
Various issues can lead to litigating a bankruptcy case in Alabama. The most common cause is a non dischargeability action under Section 523 of the bankruptcy code. Those non dischargeability actions involve claims from a particular creditor that the debt owed by the debtor to that specific creditor should be excluded from the debtor’s discharge (i.e., that debt will not be forgiven). These actions could be initiated for several reasons, but those reasons are all specified in the statute. In these instances, the allegations are typically that the debt was obtained by fraud in some manner.
Another cause for bankruptcy litigation are “preference” actions. These are actions by either the trustee in a Chapter 7 case or the debtor acting as its own trustee, potentially in a Chapter 11 or a Chapter 13 case, seeking to recover payments made during the preference period. The “preference period” is a 90-day period for “outside” creditors and a year for “insider” creditors. Outside creditors are those creditors who are not affiliated to the debtor, while insiders are those with a connection or relationship to the debtor (i.e., family, friends, a related business/entity, etc.). A preference action allows the debtor or the estate to recoup those payments and share them among unsecured creditors. In essence, it prevents the debtor from preferentially paying a particular creditor instead of sharing those funds among all the creditors as intended in bankruptcy.
Some other common causes include two that go hand in hand with each other – relief from stay motion practice and automatic stay violations.
With a relief from stay motion, a creditor asks the court to exclude that creditor and its debt from the automatic stay. Typically, the automatic stay would prevent any creditor from pursuing a claim against the borrower. A motion for relief from stay does not require an adversary proceeding but is a motion by a creditor for relief within the bankruptcy itself. A creditor might ask the court for relief from the automatic stay because the creditor holds a secured debt and wants to recover that secured asset before it deteriorates in value, such as a car or a piece of machinery. There may also have been multiple bankruptcy filings, or the creditor believes that the bankruptcy was filed in bad faith only to stop the recovery by that particular creditor of either its debt or its asset that’s securing the debt.
Automatic stay or discharge injunction violations typically are adversary proceedings brought by the debtor against a creditor who the debtor believes violated the automatic stay or discharge injunction by attempting to collect the debt after the bankruptcy was filed or a discharge was granted. These actions can be filed amid the bankruptcy itself (for an automatic stay violation) or can be asserted years later if a creditor attempts to collect or recover a stale or discharged debt violating the discharge injunction.
Other bankruptcy litigation involves disputes over asset sales. Section 363 of the Bankruptcy Code allows for the sale of assets of the bankruptcy estate free and clear of any liens or claims. Asset sale disputes are relatively common where existing creditors who may have a security interest in the asset being sold object to that sale or try to obtain more favorable terms. After a sale, litigation may arise from a creditor who believes that the sale was improperly approved in the bankruptcy court.
Similarly, you may have claims brought for either fraud or breach of fiduciary duty by the debtor. This most often happens when an entity debtor asserts claims against non-debtor former officers or directors, or members of the company. The usual situation for this type of litigation is when either the debtor company and its new managers, owners, or operators, or the trustee, believes that the former managers or operators may have breached a fiduciary duty, perpetrated some sort of fraud on the debtor company, or misdirected funds to either themselves or someone else instead of using those funds for the benefit of the company.
Benefits Of Litigating A Bankruptcy Case
The benefits of litigating a bankruptcy case in Alabama depend on the type of litigation and whose interests are involved. As discussed above, one of the most common types of litigation is under Section 523. This litigation involves a creditor seeking to exclude his or her debt from the debtor’s discharge. Litigation of this type is of no benefit to the debtor. In fact, it is usually terrible for the debtor. On top of the potential for having certain debt be declared non dischargeable, the debtor will also face costs associated with lawyers, filing fees, depositions, and other general litigation costs.
On the other hand, the trustee in a Chapter 7 bankruptcy case or the debtor in a Chapter 11 or a Chapter 13 bankruptcy case may pursue litigation against others aimed at recovering funds that either belong to the debtor or can be included as a part of the estate in bankruptcy to pay unsecured creditors. That could greatly benefit the debtor by reducing the cost of the overall bankruptcy to obtain the discharge.