Does Dismissal of A Bankruptcy Dismiss Any Adversary Proceedings?

Dismissal of Adversary ProceedingsIf a debtor files Bankruptcy, whether a Chapter 7 or Chapter 13 Bankruptcy, does an adversary proceeding filed against the debtor, subsequently result in the dismissal of the adversary proceeding? Some debtors who file a consumer form of bankruptcy, such as a Chapter 7 or Chapter 13, may expectantly or unexpectantly find themselves a defendant in an adversary proceeding.

An adversary proceeding is an action filed in the bankruptcy court in which a creditor objects to the dischargeability of a certain debt based upon either the nature of the conduct or arising from the conduct of the debtor in reference to such debt. For example, a creditor may object to the discharge of a debtor’s obligation pursuant to a property settlement obligation contained in an order of dissolution of marriage, or divorce, or a property settlement agreement, may in fact be a domestic support obligation. If a bankruptcy court judge finds that the character of a property settlement is in the form of a domestic support obligation, then such debt cannot be discharged in bankruptcy.

A debt may also be found to not be dischargeable based upon the conduct of the debtor. For example, if the debt was incurred because of willful or malicious actions or conduct of the debtor, or based upon fraudulent conduct, such debt may be determined not dischargeable.

In both instances, generally, an adversary proceeding must be filed in order for such debts to receive a finding of non-dischargeability.

Some creditors may file an adversary proceeding based upon a spurious basis. Although there may be no merit to the adversary brought by the creditor, the debtor is placed in an uncomfortable position. If the debtor decides not to defend the adversary proceeding, a default judgment may be entered against the debtor, and the debt will be deemed unworthy of discharge. If the debtor defends the adversary proceeding, the attorney fees necessary for such defense may be beyond the financial capabilities of the debtor.

May such a debtor escape the ramifications of a judgment of non-dischargeability of the debt subject to such an adversary proceeding by simply dismissing the bankruptcy? Section 349 of the bankruptcy code will provide for the dismissal of the adversary proceeding unless sufficient cause is shown.

In a Chapter 7 bankruptcy, dismissal of the bankruptcy is much more difficult than in a Chapter 13 bankruptcy. In a Chapter 7 bankruptcy, one must generally seek approval of the bankruptcy judge in order to receive a dismissal of the bankruptcy.

In a Chapter 13 bankruptcy, a debtor may achieve dismissal simply by electing not to make payments to the Chapter 13 Trustee. In such an instance, any adversary proceeding brought within the Chapter 13 bankruptcy would be dismissed along with the dismissal of the Chapter 13, unless the bankruptcy judge determines there is cause to continue the adversary proceeding.

Many bankruptcy courts, including those in the 11th circuit, will follow a three-part test to determine whether cause exists to continue the adversary proceeding, and therefore, whether the jurisdiction of the bankruptcy court should be retained. Such courts will examine firstly; the judicial economy, secondly; the fairness and convenience to the litigants, and then, the degree of difficulty of the related issues involved.

The 11th circuit ruling in In re Morris (950 F 2d 1534) recognized that dismissal of a bankruptcy case will generally result in dismissal of related proceedings, such as adversary proceedings, based upon the nexus between the bankruptcy case and the related proceedings.

In the case of Morris, the bankruptcy court decided that retention of jurisdiction was appropriate based upon such factors of judicial economy, fairness, and convenience of the litigants, as the adversary proceeding was presided over by the court for over four years at the time of dismissal. To force the litigants to begin anew in another jurisdiction or court, in a matter of complex litigation that has consumed a considerable period of time in the bankruptcy court would frustrate the principles expounded above.

In a case in which a debtor is seeking the protection of bankruptcy but is concerned about the possibility of the bringing of an adversary proceeding, it may be advisable to file a Chapter 13 bankruptcy. If a creditor brings an adversary proceeding against the debtor, and the debtor is not in a position to defend the adversary, the debtor may then quickly seek the dismissal of the Chapter 13 bankruptcy. A quick dismissal means that the litigants and the court have not invested significant time in the litigation of the adversary, and consequently, it is more likely that the court will consider the adversary dismissed following the dismissal of the bankruptcy.

Such may be a helpful strategy to employ, especially in the case of creditors who are individuals as opposed to institutions. Individual creditors, or persons, who are former associates, spouses, or intimates of the debtor, sometimes will bring adversary proceedings in the bankruptcy court not because their claim is meritorious but to spite or frustrate the debtor. Such a creditor, especially one with significant financial means may simply be seeking to “bleed” the debtor financially through protracted litigation. It is this form of a creditor for whom such a strategy may be appropriate to employ.

An institutional creditor such as a bank or lender will rarely bring an adversary proceeding based upon such emotions, or the seeking of revenge. Generally, an experienced bankruptcy attorney, who has properly examined the facts and issues related to the debtor, can often predict whether an adversary proceeding brought by an institutional creditor, is likely. Such a creditor will tend to act rationally, not seek endless and expensive litigation, and be willing to negotiate, and even settle with the debtor.

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