In United States corporate bankruptcies, much of the action happens outside the spotlight of the main reorganization plan in a parallel but crucial track: the adversary proceeding. These separate litigation proceedings can address important issues like claims against third-parties or which vendors may be liable to return funds to the estate, and whether claims against the estate are subject to offset.
Adversary proceedings carry real and sometimes decisive consequences for all sides involved. For non-U.S. creditors and vendors, particularly those unfamiliar with the aggressive litigation style of U.S. bankruptcy courts, these proceedings are not only different but also daunting, fast-moving, and deeply consequential.
What Is an Adversary Proceeding?
An adversary proceeding is essentially a lawsuit within the bankruptcy case. It is more than just a contested motion; an adversary proceeding involves an adversary complaint filed against a creditor, vendor, or another third party. An adversary proceeding follows a specific set of procedures, much like a standalone lawsuit. It will have its own docket number, pleadings, discovery process, and trial. Trustees or debtors often bring these proceedings to resolve sensitive and valuable legal disputes, such as when a debtor seeks to recover assets through a fraudulent transfer claim or when a trustee seeks to “claw back” pre-bankruptcy payments made to a vendor or creditor. In short, these proceedings can affect the financial interests of creditors, the integrity of the debtor’s estate, and the balance of power in negotiations over a reorganization plan.
The Debtor’s Perspective
Debtors initiate adversary proceedings to recover value for the estate, most commonly by pursuing clawback actions. A clawback action is where the estate seeks a judgment ordering the creditor or vendor to return funds or assets received before the debtor filed for bankruptcy. These clawback claims ordinarily assert theories of fraudulent conveyance, voidable transfer, or statutory recovery for payments made in “preference” to the adversary proceeding defendant. Sometimes an adversary proceeding will also challenge creditor claims against the estate.
For a U.S. debtor trying to restructure, adversary complaints can be strategic tools used to pressure counterparties, delay enforcement actions, or neutralize problematic contracts or liens.
At the same time, debtors may find themselves defending against actions brought by creditors or committees. The timing and framing of these proceedings can have a direct impact on plan negotiations, voting dynamics, and ultimate distributions.
The Creditor’s Perspective
For a non-U.S. creditor or vendor, a U.S. adversary proceeding can seem counterintuitive and even unfair, especially where the non-U.S. vendor is still owed amounts for unpaid invoices. Adversary proceedings can determine whether the creditor’s claims are honored, subordinated, or wiped out entirely. Sometimes, a vendor could be sued to return payments it received shortly before the bankruptcy filing. A secured lender might find its lien challenged. An investor might find itself facing allegations of insider conduct or improper transfers.
While domestic U.S. creditors are typically familiar with these risks, foreign creditors and vendors may be blindsided. Many are unfamiliar with the U.S. rules that allow aggressive clawback litigation, or they assume their jurisdictional distance provides protection. It doesn’t. For instance, even vendors or lenders based in Asia, Europe, or Latin America may be pulled into an adversary proceeding if they have done business with the debtor or received payments during the “preference period.” These parties must respond quickly, or risk default judgments that can be enforced across borders.
Some of the most common adversary proceedings against creditors relate to:
Preference claims, or those payments paid within 90 days before the bankruptcy filing. In these instances the debtor may seek to ‘claw back’ those funds.
Fraudulent transfer claims, or those payments or transfers the debtor made before the bankruptcy that may have disadvantaged other creditors. Even if you did not know the debtor was insolvent, you might still have to defend against the claim.
Turnover actions, or those claims made by the debtor that you are holding property that belongs to the estate, such as goods, funds, or equipment.
Claim objections, or challenges made even after filing a proof of claim, are made more complicated if your contract relies on non-U.S. law or the absence of detailed records.
Another Key Player in Litigation Strategy: The Official Committees
In significant cases, official committees of unsecured creditors play a central role in overseeing or even initiating adversary litigation. When the debtor is unwilling to pursue claims against insiders or affiliates, the committee may step in and file adversary complaints on behalf of the estate. These actions are often the means by which value is added to the estate and distributed more equitably.
Non-U.S. creditors with substantial claims against the estate should keep in mind that they also may have the right to serve on an official committee.
Timing and Forum Considerations
The timing of adversary proceedings often reflects strategic considerations. Filing early may give a party leverage in negotiations. Filing later may preserve claims while avoiding early conflict. Forum matters too. While adversary complaints are generally heard in bankruptcy court, parties sometimes seek withdrawal to the district court for strategic reasons. A U.S.-based party might know exactly what to expect when sued in a New York bankruptcy court. A German or Brazilian vendor, however, might not understand the implications of a summons – or the speed with which deadlines can approach.
Non-U.S. Creditors and Vendors
For companies based outside the United States that sell goods and services to U.S. businesses, a customer’s bankruptcy filing can come as a shock, accompanied by a wave of confusing legal procedures. Many international vendors assume they are protected by their contracts, local laws, or even geographic distance. But that may not be the case. U.S. bankruptcy litigation carries risks that foreign creditors may not anticipate, particularly when adversary proceedings unfold within the case itself.
If you shipped goods to the United States, received payments from a U.S. company, or entered into a contract with a U.S. entity, you may still be subject to U.S. bankruptcy law. This means you may be barred from trying to collect what you are owed outside the bankruptcy process. One of the most powerful features of the U.S. Bankruptcy Code is the automatic stay, which immediately freezes all collection efforts.
A customer bankruptcy in the U.S. doesn’t just affect domestic vendors. Creditors worldwide can find themselves subject to complex and sometimes costly legal obligations.
Whether you’re a supplier in Asia, a vendor in Europe, or a professional service provider in Latin America, if you’ve done business with a U.S. customer, you need to understand how the U.S. bankruptcy process works.
Act early. Get legal advice. And be prepared. The more you know, the better positioned you’ll be to recover value—and avoid being blindsided by unexpected litigation.
