Start with the “case.” Litigators trycases. But in bankruptcy, the “case” isn’treally a litigation matter. A chapter 11“case” is better thought of as a forum inwhich many smaller pieces take place. Someof those pieces involve contests in court;many more involve negotiation amonginterested parties.

Although lawyers do not litigate“bankruptcy cases” themselves, there can beplenty of litigation inside the case. First,there may be lawsuits within the bankruptcycase. For example, the trustee may sue non-debtors to collect assets for the estate, or toundo avoidable transfers. Less frequently,someone may sue the debtor, or even thetrustee. These proceedings will look liketraditional litigation, but if you spend muchtime in bankruptcy court, you will seedifferences. Some of these differences aresubstantive, while others involve ter-m i n o l o g y .

The first difference of terminologyinvolves the name of the action. Thebankruptcy name for a lawsuit filed in thebankruptcy case is “adversary proceeding.”You will see this on the face of thecomplaint. For example, if Smith is thedebtor and Jones is the trustee, suing Brown,the caption will say: In re Smith (the casename) and Jones v. Brown (the adversaryproceeding name). The pleading will bear a“case” number (referring to the bankruptcycase) and an “adversary number” referringto the lawsuit-within-the-case.

Aside from adversary proceedings, thereare plenty of instances where a bankruptcycase may generate conflict and litigation thatdoes not result in an “adversary proceeding.”For example, a creditor might seek relieffrom the automatic stay to foreclose on itscollateral. Or the trustee or debtor-in-possession (DIP) might want to assume (orreject) an executory contract. Or a chapter11 debtor may seek to confirm a plan towhich creditors are objecting.

The bankruptcy term for these situationsis “contested matters.” Again, you can tellthe difference from the face of the pleading.Adversary proceedings begin with a“complaint” just like a “case” under theFederal Rules of Civil Procedure. “Con-

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An Overview ofBankruptcy Litigation

Contributing Editors:Prof. John D. Ayer

University of California at Davis; Chico, Calif.j d a y e r @ u c d a v i s . e d u

Michael BernsteinArnold & Porter; Washington, D.C.

m i c h a e l _ b e r n s t e i n @ a p o r t e r . c o m

Jonathan FriedlandKirkland & Ellis LLP; Chicago

j o n a t h a n _ f r i e d l a n d @ c h i c a g o . k i r k l a n d . c o m

Editor’s Note: This month’s columnprovides an overview of some of thedifferences between bankruptcy “litigation”and litigation in a non-bankruptcy forum,highlighting some pitfalls that traditionallitigators may encounter when they ventureinto the bankruptcy arena.

They say that the difference between alitigator and a bankruptcy lawyer isthat the bankruptcy lawyer goes to

court. This is true for one good, practicalreason: The debtor in bankruptcy is sick, andif you fight too long over the patient, you’llhave nothing left but a corpse. Thus, thingsgenerally move at a much faster pace inbankruptcy than in non-bankruptcy liti-gation. The upshot is that bankruptcy is inmany ways a livelier and more dynamicforum than the non-bankruptcy realm.

But for the experienced litigator,practicing in bankruptcy can be like trying tospeak Italian when you studied Spanish inschool. You keep thinking you speak thelanguage, but every so often you get anunexpected, and often nasty, surprise.

In short, general civil litigation andbankruptcy litigation may appear at firstblush to be largely the same, but when youlook beneath the surface, there are importantd i f f e r e n c e s .

tested matters” begin with a motion or,occasionally, an application. They don’t gettheir own number, and they don’t get thatspecial two-headed caption.

So if the trustee in Smith’s case wants toassume an executory contract, the captionwill say “In re Smith” and will bear the title“Trustee’s Motion to Assume ExecutoryContract” (or words to that effect). Contestedmatters tend to proceed more quickly—andsomewhat less formally—than adversaryproceedings, although they can still result indiscovery and in trials before the bankruptcyj u d g e .

Some proceedings go before the courtonly if an interested party objects. Thetrustee or DIP notifies parties of its intention,and if nobody objects, it can go ahead anddo what it proposes. For example, the DIP ortrustee may abandon property of the estateon “negative notice” to parties in interest.Similarly, the Code provides that the trusteeor DIP may sell property of the estatewithout court order if they have given theright kind of notice and no one objects.

But many lawyers and clients find theycan’t live with that uncertainty (what will thetitle company say?). So in many places, thecourts will issue orders ( e . g . , “ O r d e rApproving Sale”), even though there is nocontest before it, and even though the Codedoesn’t seem to require a court order.

This describes the basic framework.Now, for the law. Where do we find the rulesthat govern bankruptcy litigation? Theanswer is—not in the Bankruptcy Code. Forthe most part, the Code sidesteps questions ofmechanics. Instead, it directs, repeatedly, thatsomething or other may be done “after noticeand a hearing.”

Section 102(1) of the Code defines thephrase “after notice and a hearing” to meana f t e r —

such notice as is appropriate in theparticular circumstances, and suchopportunity for a hearing as isappropriate in the particular circum-s t a n c e s ; . . .

This doesn’t tell you anything helpful. Butthe point is that the Code doesn’t pretend totell you anything specific on the point:Rather, matters of procedure are handled

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outside the Code in the Bankruptcy Rules(of which more i n f r a) .

But it is a little trickier than that. Notethat the rule doesn’t require a hearing.Rather, “hearing” actually means “o p p o r -t u n i t y for a hearing.” The drafters intendedmatters to go without hearing if it was“appropriate” to do so. Subsection (1)(B)fleshes out the point. This subsection saysthat “after notice and a hearing”

(B) authorizes an act without anactual hearing if such notice is givenproperly and if—

(i) such a hearing is notrequested timely by a partyin interest; or(ii) there is insufficient timefor a hearing to be com-menced before such actmust be done, and the courtauthorizes such act.

As a practical matter, a lot of things inbankruptcy happen just this way: Someonegives notice of an intention to do something,no one objects, and so the moving party goesforward without a hearing. (A classicexample of this is a trustee’s notice ofintention to abandon property, referred toa b o v e ) .

Beyond this somewhat slender principle,we must look outside the Code for answersto our procedural questions. Your first stopshould be the Federal Rules of BankruptcyProcedure (often referred to as the“Bankruptcy Rules”). And here again, weencounter a potential language barrier. TheBankruptcy Rules look like the FederalRules; indeed, the Bankruptcy Rulesincorporate a good many of the FederalRules, but not all, as we shall see. And this iswhere the neophyte can run into trouble ifshe looks at the rules on a cursory basis andassumes she already speaks the language.

The easiest way to approach the rules isin the framework we sketched out above.Start with “adversary proceeding”—thelawsuit-within-a-case. For an adversaryproceeding, the governing rules are in PartVII (or as some say, the “7000 Series”) ofthe Bankruptcy Rules, starting with Rule7001. Here, mercifully, litigators are onlargely familiar territory: The BankruptcyRules bear considerable similarity to theRules of Civil Procedure. Indeed, theAdversary Rules simply “adopt by refer-ence” many of the Rules of Civil Procedure.

Rule 7001 lists forms of relief thatparties may only obtain through adversaryproceedings. The list includes actions to:

• recover money or property• determine discharge or discharge-a b i l i t y• determine the validity or priority ofl i e n s

• get an injunction• subordinate a claim.

Some matters “not on the list” have theirown rules framework—e . g . , the rulesgoverning the process of confirmation for achapter 11 plan (Rules 3018 through 3021).Some fall under the more general rubric of“contested matters” governed by the rules inPart IX of the Bankruptcy Rules, particularlyRule 9014.

The distinction can seem arbitrary—why, for example, is an action to assume orreject an executory contract a mere“contested matter,” while an action to avoida lien is an “adversary proceeding?” Butthere may be less here than meets the eye.Rule 9014 specifies a number of adversaryproceeding rules that apply to contestedmatters as well as adversary proceedings.And it provides that the judge may applyany of the other Adversary Rules if shec h o o s e s .

One noteworthy provision in these rules,provided in Bankruptcy Rule 7004, allowsnationwide service of process. T h i sprovision is a good deal more liberal thanthe parallel one contained in non-bankruptcyr u l e s .1 The practical effect of Rule 7004 isthat a plaintiff commencing an adversaryproceeding can just drop the summons andcomplaint in the mail to the defendant—anyplace in the United States—and this willconstitute adequate service.

Oddly, the rule governing “service ofprocess” does not extend to the issuance ofsubpoenas. Rule 9016 governs subpoenas,incorporating by reference Federal Rule 45,which is much less expansive. As litigatorswill recognize, Rule 9016 limits service ofsubpoenas (in most instances) to the districtof issuance or to within 100 miles of theplace designated for response to thes u b p o e n a .

Another point of familiarity to thegeneral litigator is the matter of evidence.Bankruptcy Rule 9017 provides that theFederal Rules of Evidence apply in bank-ruptcy cases. And Bankruptcy Rule 9014(d)provides that “testimony of witnesses withrespect to disputed material factual issuesshall be taken [in contested matters] in thesame manner as testimony in an adversaryp r o c e e d i n g . ”

As a matter of history, bankruptcy has atradition of laxity about matters of evidence.There is a tradition in bankruptcy wrylynicknamed “testimony from the podium,”describing situations in which the judgebases her decision upon attorney profferrather than sworn testimony (“Your honor, ifcalled to testify, my client would say...”).

Our observation is that practice hastightened up some in recent years, and thatthe judge will often compel counsel inbankruptcy proceedings to comply withbasic evidentiary rules just as in any othercourt. In fact, a litigator who has a firm graspof the rules of evidence will often have adistinct advantage over her bankruptcycounterparts, simply because bankruptcylawyers tend to be less familiar with therules of evidence.

Nevertheless, practice remains a bitmore fluid and informal in many bankruptcycourts compared to what you wouldencounter in federal district or state trialcourts. One possible reason for this is thegeneral absence of juries; because there is nojury to poison, the judge may simply permitwitnesses to tell their stories, confident in hisability to later disregard any inadmissibleportions. Another explanation is thatbankruptcy judges tend to look for practicalbusiness solutions and may be moreconcerned about reaching a commerciallyappropriate result than being bogged downwith a “technical” dispute about theadmissibility of any particular piece ofe v i d e n c e .

As you might expect, lawyers willencounter substantial variation amongjudges with regard to the level of formalityin their courtrooms and the extent to whichthey require strict compliance with the rulesof evidence or demand complete evidentiaryrecords to support factual findings. Anunderstanding of the courtroom proceduresand practices of the judge in your case ise s s e n t i a l .2

Aside from the Adversary Rules and theMotion Rules, there are a number of otherrules that may apply to particularbankruptcy-related matters. Many of thesegovern bankruptcy-specific issues, such asfiling schedules or filing and objecting toproofs of claim. An indispensable (but by nomeans exhaustive) set of deadlines is setforth in Rule 2002. Another important rulerelating to dates and deadlines thatbankruptcy litigators should be aware of isRule 9006, particularly subsections (b) and(c), which dictate what other deadlines in theBankruptcy Rules may be modified by thejudge, and which ones may not.

One Bankruptcy Rule of particularnotoriety is Rule 2004, with the anodynetitle of “examinations.” Rule 2004 gives“any party in interest” the right (on courtorder) to examine “any entity.” Theexamination “may relate only to the acts,conduct or property or to the liabilities andfinancial condition of the debtor, or to anymatter that may affect the administration of

1 Of course, service of “process” does not necessarily confer“jurisdiction”; there is a good discussion of this issue in North v.Winterthur Assurances, 279 B.R. 845 (D. Ariz. 2002).

2 Counsel must also consult Local Bankruptcy Rules. In most instances,these are available on the court’s web site.

the debtor’s estate, or to the debtor’s right toa discharge.” The inclusion of the word“only” strikes your authors as somewhatP i c k w i c k e a n .

The rule prohibits us from asking for aprediction as to the Red Sox’s chances ofwinning a World Series, but it is hard toimagine much else that would fall outsidethe scope of such a broadly worded rule. (Infact, parties seeking broad Rule 2004examinations are fond of citing languagefrom some published decisions referring to such examinations as “fishinge x p e d i t i o n s . ” )

Rule 2004 might appear unnecessarygiven that the Bankruptcy Rules alreadyincorporate the discovery rules that havebeen transplanted in their entirety from theFederal Rules of Civil Procedure. Why dowe need both? Well, Rule 2004 appears toauthorize examination outside the context ofan adversary proceeding or contested matter.

Indeed, when there is a pendingadversary proceeding, the judge may deny aRule 2004 order relating to the subject of theadversary proceeding, telling the parties touse ordinary litigation discovery proceduresinstead. Sometimes a party will use Rule2004 to obtain information necessary todecide whether to bring an adversaryproceeding. This sort of pre-complaintdiscovery is rarely available in non-bankruptcy litigation.

One Bankruptcy Rule that is central tochapter 11 practice is Rule 4001, dealingwith three matters that are common sourcesof contention in chapter 11 cases:

• relief from the automatic stay• use of cash collateral• obtaining credit

Of these, perhaps the most interestingportions of the rule are those governing useof cash collateral. Imagine this scenario: 24hours after the chapter 11 case begins, thedebtor appears before the judge, arm-in-armwith the secured creditor. The debtor says heneeds instant authorization to use cashcollateral in order to stay in business. Thesecured creditor says he will consent, butonly if the judge signs an order grantingbroad protections for his priority position, asto both pre- and post-bankruptcy claims.

The judge is necessarily in something ofa bind: She can believe the sincerity of bothpresentations, but she is likely to worry thatthe debtor and secured party are actingtogether at the expense of unsecuredcreditors. Seen in this light, it is notsurprising that Rule 4001 sets criteria fornotice to other parties, for time limits and(perhaps not least important) for ex parter e l i e f .

Perhaps the most common point ofunfamiliarity for non-bankruptcy litigators

allow the case to be tried by the district courtin the district where the bankruptcy case isp e n d i n g .

Bankruptcy litigation is a complicatedtopic and we have just begun in thiscolumn to outline some of the importantissues. Our next few columns will continueour discussion of the litigator in thebankruptcy forum. But we leave you withthis thought: Bankruptcy litigation isimportant, and it is difficult to be a goodbankruptcy lawyer if you are not acompetent litigator.

But chapter 11 is mostly about nego-tiation, rather than litigation. And manymore successful reorganizations are theproduct of skilled negotiation rather thanhotly contested litigation. In other words,you should know how to protect yourclient’s interests in the courtroom, but youmay do your most important work in thehallway or the conference room. ■

Reprinted with permission from the A B IJournal, Vol. XXIII, No. 1, Febru a ry 2004.

The American Bankruptcy Institute is am u l t i - d i s c i p l i n a ry, non-partisan org a -nization devoted to bankruptcy issues.ABI has more than 10,000 members,re p resenting all facets of the insolvencyfield. For more information, visit ABIWorld at www. a b i w o r l d . o rg .

appearing in bankruptcy court is thedisposition of claims.

For the moment, consider the case of theplaintiff whose defendant files for bank-ruptcy in the middle of the lawsuit. Whathappens next? The plaintiff’s first impulsewill be to continue the lawsuit. But hecan’t—he is barred by the automatic stay,which prohibits a creditor from taking actionagainst a debtor to collect claims. He mightseek relief from the stay to continue thelawsuit, but if the debtor is deeply insolventand will ultimately get a discharge, thencontinuing the lawsuit may just be throwinggood money after bad.

The Bankruptcy Code and Rulescontemplate something more stripped-downand simple. The creditor (plaintiff) may filea “proof of claim,” as set forth in 11 U.S.C.§501 and Rules 3002 and 3003, after whichtime the trustee or DIP may object to theclaim as provided by Rule 3007. At thispoint, “the court, after notice and a hearing,shall determine the amount of such claim...”11 U.S.C. §502(b). But note that this bringsabout a contested matter and not anadversary proceeding, because such aproceeding is not one of those enumerated inRule 7001.

But suppose the claim involves somemore elaborate matter, such as a suit allegingpatent infringement, with a prayer fordamages sufficiently large that in itself itwould be enough to put the debtor out ofbusiness. How will a bankruptcy forum goabout resolving such a complicated matter?

One answer will shock a good manylitigators, especially patent litigators. Thebankruptcy judge m a y have the power toadjudicate the matter right there in thebankruptcy court. This assertion is bound togenerate a good deal of sputtering about therole of the specialized court. But from atleast one perspective, the assertion ofjurisdiction is perfectly straightforward:The point of bankruptcy is to get all theissues relating to the debtor into one forum,where one judge can effect a globalr e s o l u t i o n .

Practically speaking, this result isn’tlikely. Most bankruptcy judges have plentyto do without trying patent cases. A moreconventional strategy would go somethinglike this: The claimant will move for relieffrom the stay to continue with the lawsuit ina non-bankruptcy forum on the question ofliability and damages, while stipulating thatthe bankruptcy court retains control over theamount ultimately distributed on account ofthe damage claim, and the priority of theclaim in bankruptcy. Another option for aclaimant who finds himself in this situationis to seek “withdrawal of the reference,”under 28 U.S.C. §157(d), which would

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