An adversary proceeding is essentially a civil complaint filed in the bankruptcy court. There are three parties in a bankruptcy court case who can file an adversary proceeding:  a creditor, the Trustee, or the debtor.  The filing of an adversarial proceeding requires the Bankruptcy Judge to make a decision about the issues presented.  When a creditor files an adversary proceeding, it is typically because the creditor believes that a debt owed to the creditor should not be discharged.  An adversary proceeding can also be filed by the Trustee; such cases usually involve allegations that the schedules were not filled out accurately and were intentionally fraudulent. Finally, a debtor may file an adversary proceeding against a creditor. These cases are often initiated to recover damages for a creditor’s actions taken in violation of the U.S. Bankruptcy Code, in violation of the automatic stay or the discharge injunction.

Although adversary proceedings are litigated in the bankruptcy court, they are (once initiated) very similar to any other civil claim filed in federal court. This concept is reaffirmed in Ferguson Enterprises, Inc. v Hardy (In re: Hardy), an opinion recently issued by a Michigan bankruptcy court.  In this case, Plaintiff Ferguson filed a complaint against the Debtor-Defendant Scott Hardy, seeking an order excepting its claim from discharge under 11 U.S.C. § 523(a)(4) and the Michigan Building Contract Fund Act (“MBCFA”), M.C.L. § 570.151 et seq.  11 U.S.C. § 523(a)(4) provides that a bankruptcy discharge does not discharge an individual debtor from any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” M.C.L. § 570.151 provides that, “[i]n the building construction industry,” the “contractor or subcontractor shall be considered the trustee of all funds so paid to him for building construction purposes.”

Before Mr. Hardy’s deadline for answering the complaint and before any formal discovery had taken place, Ferguson filed a motion for summary judgment.  Mr. Hardy responded to the motion with an unsworn document, entitled “Affidavit of Scott C. Hardy,” explaining that Mr. Hardy’s defense depends upon access to the books and records of his former company, Arms & Cole, Inc., which is itself a debtor in bankruptcy. The records were not in Mr. Hardy’s custody, and he believed he books and records would show that Arms & Cole is not indebted to Ferguson, and therefore Ferguson does not have a claim against him as a fiduciary under the MBCFA.

In deciding the motion, the bankruptcy court looked to Federal Rule of Civil Procedure 56.  This Rule, as amended effective December 1, 2009, no longer bars a plaintiff from moving for summary judgment during the twenty-days following commencement of the action.  However, the court retains considerable control over the timing of such motions. Because the motion filed by Ferguson was properly supported with documents and an affidavit, Rule 56 required Mr. Hardy to respond by affidavit (or otherwise as provided in Rule 56), setting forth specific facts showing a genuine issue of material fact warranting trial. Fed. R. Civ. P. 56(e)(2). If the responding party is unable to respond in this fashion, he may prepare an affidavit in accordance with Rule 56(f).

The bankruptcy court noted that Mr. Hardy’s supposed “affidavit” was not subscribed under oath before a notary, nor did it include the special language prescribed in 28 U.S.C. § 1746 for treating an unsworn declaration as an affidavit.   Had the affidavit been properly sworn, the court noted that it very likely would have denied the summary judgment motion on the grounds that Mr. Hardy required discovery.

By filing an unsworn statement, Mr. Hardy’s response fell technically short of what Rule 56 required.  When a summary judgment motion is supported and not opposed in the manner in which Rule 56 provides, “summary judgment should, if appropriate, be entered against that party.” Fed. R. Civ. P. 56(e). The court exercised its discretion under the “if appropriate” language of Fed. R. Civ. P. 56(e) and denied the motion for summary judgment, even though the opposing party did not technically oppose it in the proper manner, because the court believed that granting the Motion at this early stage of the case would be “hasty and ill-considered.”  The court indicated that it might consider such a motion again once adequate discovery has been completed.

This opinion clarifies that, in order to competently handle a bankruptcy adversary proceeding, a debtor or bankruptcy attorney must be familiar with the procedural rules that apply generally in civil litigation, as well as the rules of bankruptcy procedure.  In this case, Mr. Hardy’s failure to follow relatively basic procedural requirements in his affidavit was nearly fatal to his defense. If you have been served with, or are thinking about filing, an adversary proceeding, talk to an experienced bankruptcy attorney in your jurisdiction.

-Drew Broaddus