Common Causes of Bankruptcy Litigation

Table Of Contents

What Causes Preferences in Bankruptcy?

Preferences in bankruptcy cause litigation when a debtor favours certain creditors over others before filing for bankruptcy. A debtor makes a preferential transfer when the debtor pays one creditor more than other similarly situated creditors within a specific timeframe. The bankruptcy code defines this timeframe as 90 days before the bankruptcy filing for ordinary creditors. The timeframe extends to one year for insider creditors, such as family members or business partners.
A bankruptcy trustee often reviews the debtor's financial transactions leading up to the bankruptcy filing. The bankruptcy trustee identifies any preferential transfers. The bankruptcy trustee then brings an action to recover these funds for the benefit of all creditors. This recovery action is called an avoidance action. Creditors who received preferential payments often dispute the trustee's claims. This dispute leads to bankruptcy litigation.

Why Do Fraudulent Transfers Lead to Litigation?

Fraudulent transfers lead to litigation because a debtor attempts to hide assets or transfer assets for less than fair value. A fraudulent transfer involves a debtor transferring property with the intent to defraud creditors. The debtor transfers property to delay creditors. The debtor transfers property to hinder creditors.
A bankruptcy trustee investigates suspicious transfers made by the debtor before the bankruptcy filing. The trustee looks for transfers made for insufficient consideration. The trustee also looks for transfers made to insiders. The trustee initiates litigation to avoid these fraudulent transfers. The trustee seeks to bring the transferred assets back into the bankruptcy estate. This action makes sure a fair distribution of assets among all creditors.

What Bankruptcy Litigation Causes Objections to Discharge?

Objections to discharge cause litigation when a creditor or trustee believes a debtor does not deserve a fresh start. A debtor seeks a discharge to eliminate personal liability for certain debts. A creditor or trustee files an objection to prevent the discharge of those debts. The bankruptcy code lists specific grounds for objecting to a discharge.
The grounds for objection include the debtor making false statements on bankruptcy forms. The grounds for objection include the debtor concealing assets. The grounds for objection include the debtor failing to cooperate with the bankruptcy trustee. The grounds for objection also include the debtor destroying financial records. The objecting party must prove the debtor engaged in these actions. The debtor must then defend against these serious allegations. This dispute becomes a significant part of the bankruptcy litigation process.

When Do Bankruptcy Litigation Causes Arise?

Non-dischargeability actions arise when certain debts are specifically excluded from a bankruptcy discharge. The bankruptcy code specifies categories of debts that are not dischargeable. These categories include certain taxes. These categories include student loans. These categories include debts incurred by fraud.
A creditor files a complaint. The complaint determines the non-dischargeability of a specific debt. The creditor proves the debt falls into one of the non-dischargeable categories. The debtor disputes the creditor's claims. The debtor argues the debt is discharged. This dispute leads to litigation within the bankruptcy court. The court decides whether the specific debt survives the bankruptcy process.

What Bankruptcy Litigation Causes Breaches of Fiduciary Duty?

Bankruptcy litigation causes breaches of fiduciary duty when corporate debtors or trusts are involved. A fiduciary holds a position of trust. A fiduciary acts in another party's best interests. Corporate directors owe fiduciary duties to the corporation. Corporate directors owe fiduciary duties to shareholders. Estate trustees owe fiduciary duties to beneficiaries.
When a corporation files for bankruptcy, a bankruptcy trustee or creditors often allege breaches of fiduciary duty by the corporation's officers or directors. The trustee alleges the officers or directors mismanaged the corporation's assets. The trustee alleges the officers or directors engaged in self-dealing. The trustee alleges the officers or directors made decisions that harmed the corporation's financial health. Such allegations lead to litigation to recover damages for the bankruptcy estate.

How Do Lien Avoidance Actions Lead to Litigation?

Lien avoidance actions lead to litigation when a debtor seeks to remove a security interest on property. A lien gives a creditor a legal claim over a debtor's asset. The lien serves as collateral for a debt. Debtors in bankruptcy sometimes have the power to "avoid" or eliminate certain liens.
A debtor typically avoids liens that impair an exemption. An exemption protects certain assets from creditors. The debtor files a motion with the bankruptcy court to avoid the lien. The creditor holding the lien often objects to the debtor's motion. The creditor argues the lien is valid. The creditor argues the lien does not impair an exemption. This dispute requires the court to determine the validity and enforceability of the lien. This determination results in bankruptcy litigation.

FAQS

What role do executory contracts play in bankruptcy litigation?

Executory contracts play a role when a debtor has unperformed obligations under a contract. The bankruptcy trustee decides to assume or reject the contract. This decision often leads to litigation. The non-debtor party disputes the trustee's decision. The dispute arises over the terms of the contract.

How do reclamation claims contribute to bankruptcy litigation?

Reclamation claims contribute when a seller attempts to recover goods delivered to a debtor shortly before bankruptcy. The seller argues the debtor received the goods while insolvent. The seller must follow specific legal requirements for reclamation. The bankruptcy trustee often challenges reclamation claims.

What are the common disputes regarding automatic stay violations?

Common disputes regarding automatic stay violations involve creditors attempting to collect debts after a bankruptcy filing. The automatic stay prevents creditor collection actions. A creditor violating the stay faces sanctions. The debtor brings litigation to enforce the automatic stay. The debtor seeks damages for violations.

When do disputes over proofs of claim cause litigation?

Disputes over proofs of claim cause litigation when a creditor files a claim for payment in bankruptcy. The trustee objects to the claim. Other creditors object to the claim. The objecting party believes the claim is inflated. The objecting party believes the claim is baseless. The court resolves these disputes through litigation.

Which types of post-petition transfers often lead to litigation?

Post-petition transfers often lead to litigation when a debtor transfers property after the bankruptcy filing without court approval. These transfers are generally voidable. The bankruptcy trustee seeks to recover the transferred assets. The recipient of the transfer often disputes the trustee's actions.

Related Links