Will an Adversary Proceeding Survive the Dismissal of the Bankruptcy Case? Maybe.

Eight years ago (8 years! You are reading a law blog that has lasted for 8 years!), I talked about the difference between a bankruptcy discharge and a dismissal.

The tl;dr version for creditors? Discharge is bad; dismissal is good.

But, what if you’re a creditor and the debtor has filed an adversary proceeding against you, but then the bankruptcy case is dismissed?

The tl;dr version? It depends.

Generally, the dismissal of the underlying bankruptcy case results in the dismissal of related adversary proceedings because federal jurisdiction is “premised upon the nexus between the underlying bankruptcy case and the related proceedings.” But, there are exceptions.

One such exception is for proceedings to enforce sanctions and contempt for violation of the automatic stay. A Bankruptcy Court will retain jurisdiction “for the purpose of vindicating the court’s own authority and to enforce its own orders.” See In re Bankston, 1:12-BK-14022-SDR, 2015 WL 6126440, at *2 (Bankr. E.D. Tenn. Oct. 15, 2015)

Basically, the reasoning goes, an action for contempt of court resulting from a party’s blatant disregard of the Bankruptcy Code and the authority of the Bankruptcy Court is something that the Bankruptcy Court takes very seriously and will enforce, independent of whether the underlying case still exists.

The reasoning is different for other types of proceedings that are dependent on the underlying case, like actions to recover avoidance preferences.

 

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Creditor Essentials: The Difference between a Bankruptcy Discharge and a Bankruptcy Dismissal

Just as all rivers run to the sea, all bankruptcy cases run to a bankruptcy discharge. Unless they don’t…which probably means that the case has been dismissed.

If you are a creditor, there is a big difference between a bankruptcy discharge and a bankruptcy dismissal.

A discharge means there is no (or modified) liability for the borrower’s debts, usually under 11 U.S.C. 727, 1141, or 1328.  Simply put, a “discharge” means that the debtor wins and doesn’t owe the debt any more.

A dismissal generally means that something has gone wrong in the case (such as a payment default under a Chapter 13 Plan or some failure by the Debtor to comply with the Bankruptcy Code) and, as a result, the bankruptcy case is going to prematurely end…without a discharge.  Here, the creditor wins because the debtor doesn’t get a discharge, and the debt remains due and owing.

This may be an obvious distinction, but it wasn’t to me on the first day I practiced bankruptcy law. Considering the absolutely polar-opposite results the two outcomes have for creditors, however, I learned this important lesson quickly.