Bankruptcy court judges have essentially the same powers as district court judges. Not only do they decide bankruptcy issues but they also decide other issues such as Fair Debt Collection Practices Act (FDCPA) issues or issues which involve the debtor. Adversary lawsuits are lawsuits separate from the bankruptcy. These adversary cases often involve issues of fraud or the failure to keep records. But, the adversary complaint may involve a personal injury lawsuit. Adversary lawsuits involve the debtor or his property often called “assets of the estate”.
Adversary Fraud Complaints in Bankruptcy
The most common adversary lawsuit is a complaint that the Debtor runs charges on his accounts just prior to filing or that the debtor obtains funds under fraud. However, it’s hard to prove fraud in bankruptcy court under 11 USC 523 a 2. The strong pleading standards in fraud cases are a requirement to prevent harm to the Debtor’s reputation. It’s also to prevent creditors from extorting the Defendant.
If the lender fails to prove fraud the debtor is allowed to sue the lender back for actual damages, attorney fees, and possibly punitive damages. There is a section under 11 USC 523 a 2 which easily allows the creditor to recover charges on a credit card when the charges for luxury goods or cash advances are made just before filing. Creditors only have a limited time to file these adversary complaints about fraud. Unless the adversary complaint is filed prior to that date on the 341 notice the discharge will be granted and the creditor loses any right to ever litigate fraud.
Fed.R.Civ.P. 9(b) requires a party “state with particularity the circumstances constituting fraud or mistake.” This rule requires the “who, what, when, where, and how of the alleged fraud” be plead in detail to survive a motion to dismiss. Stavros v. Exelon Corp., 266 F. Supp. 2d 833, 841 (N.D. Ill. 2003) (citing DiLeo v. Ernst & 9 Young, 901 F.2d 624, 627 (7th Cir. 1990). The purpose of requiring a plaintiff to allege specifics is to require the plaintiff to perform pre-complaint investigation “to assure that the charge of fraud is responsible and supported, rather than defamatory and extortionate.” Ackerman, 172 F.3d at 469.
Adversary Stay and Discharge complaints.
Another popular adversary lawsuit is when a creditor ignores the stay or discharge and attempts to improperly collect a debt either while the stay protects the debtor or after the discharge order is issued. Violations of the stay or discharge allow the debtor to sue the lender back for actual damages, attorney fees and punitive damages when appropriate.
⎆ Stay Violations
The stay is the temporary court order which is issued at the start of the case. The debtor may only want the stay and may not need the discharge. Cases involving a foreclosure or student loans are filed as Chapter 13 to obtain a 5–year stay and prevent the sale of the home or garnishments. If the creditor attempts to collect during the case while the stay is in place the creditor faces the strongest protections the court has. The creditor who acts improperly while the case is going on not only interferes with the debtor but also interferes with the court itself while the court is administrating the estate.
⎆ Discharge Violations
The Discharge is the permanent court order which is issued at the end of the case. The debtor wants this to permanently prevent collections. If the creditor attempts to collect during the case while the discharge is in place the creditor faces penalties and protections that are still very strong. The court is no longer administrating the case but it still requires that creditors honor the court orders.
Other Related Information
If you are facing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.