Nearly a month has passed since my promise to, once and for all, solve the problems of debtor's counsel in regards to ESI and the small Chapter 11 filing (not necessarily to be confused with a "small business" Chapter 11, pursuant to section 1121(e) of the Code). Despite the lack of case law to support me (or maybe gleefully free of the constraints of existing case law), I dreamed of going farther and faster than any practitioner before me. This post was to be my Magnum Opus. As typically happens at the buffet, my eyes were larger than my appetite. Instead, I am going to break this down into smaller, more digestible parts.
My previous post, absent any case law or other direct support, concluded without saying as such that a small chapter 7 business bankruptcy filer may be able to "get by", at least relative to ESI issues, by inventorying, securing and disclosing the debtor's ESI and electronic enterprise to, and on behalf of, the Trustee. In the most general and innocuous of business 7's, the argument can be made that the Bankruptcy Code requires nothing more from the debtor. That same argument, perilously thin in Chapter 7, simply cannot be made by even the most adventurous of commercial debtor's lawyers.
For weeks, I have struggled with how to approach this topic. Jack Seward, who has long sounded the clarion call to bankruptcy practitioners, and for whom I have the utmost respect, has suggested to me that currently it really is not ideal, or perhaps even possible, for the vast majority of practitioners to meet their duties as officers to the court. By implication, every case requires the hiring of a real-life, come to Jesus type of ESI forensic professional. I wince when reading some of Jack's most recent article, as headlines such as "Horsing Around" seem to hit close to home. I have had a month long "wincing" though, given that the practical reality for many smaller and some medium sized commercial 11's just won't support the expenses of someone with Jack's experience and expertise (at least in the days and weeks leading up to the filing.
Between my annual bout of spring time respiratory distress, and the prolonged feeling of continuing to disappoint Ft. Worth's local gem Ted Mack, I have been moping around in a bit of a mental fog. (In the week following the death of NHRA star Eric Medlen, I was unable to even look at this post). Sadly, clarity of thought is usually obtained in the shower, and my notes keep getting all soggy. It was in this mind-clearing escape that I remembered a long ago revelation about bankruptcy law, as passed along to me by the eternally calm and unusually patient Prof. Dean Pawlowic at Texas Tech School of Law. His explanation of bankruptcy itself can be applied to dealing with ESI in bankruptcy. As Prof. Pawlowic patiently explained so long ago, bankruptcy is so fascinating because, from the outside looking in, any number of other substantive legal disputes and implications present themselves in more traditional practice areas. Bankruptcy however, can be layered on top of all of those other legal conundrums and mental complexities.
ESI issues (that means electronically stored information for all my readers in Mangum Oklahoma), "layer" onto bankruptcy practice just as bankruptcy layers onto most other practice areas. ESI is not just for discovery anymore, and the care and handling of ESI must figure into every area of Chapter 11 stewardship, with the same level of importance as cash collateral, valuation and making sure that each committee member has a different colored lollipop.
This is true, not because of the December 2006 amendments to the Federal Rules of Civil Procedure, but because of sections 105, 341, 363, 502, 503, 505, 506, 507, 510, 521, 541, 542,543, 544, 545, 546, 547, 548, 549, 550, 553, 554, 558, 1103, 1104, 1106, 1107(a), 1112(b)(4), 1116 (for true small business cases), 1125(a)(1), and 1129 of the bankruptcy code. The list is not exhaustive, but should be thought of more as a minimum standard.
And so it is that addressing ESI as a component of the business enterprise begins with the initial client consultation, continuing through intake and the frenetic build-up to petition day, and physically manifesting in the schedules and statement of financial affairs. How then, can we find a practical application for all of these big words that make my mother so proud of me?
Based on non-bankruptcy case law, and the proliferation of CLE presentations on ESI/EDD, most bankruptcy lawyers should already be generating an ESI check list that looks something like this:
1. Obtain a copy of the Debtor's document retention policy. If the Debtor has a policy to begin with, this is an additional clue as to the level of sophistication of the Debtor. From the retention policy, at the bare minimum, counsel ought to be able to get a sense of the size and scope of the data enterprise, the extent to which the debtor relies on technology to perform its core business functions, the type, form and location of archival storage, as well as resources available to operate in case of some form of business interruption. (An interesting question here - Many companies, in light of Hurricane Katrina are evaluating their loss/recovery strategies. From the insolvency perspective, one wonders if data lost through some insolvency-related matter might be covered by business interruption/recovery type insurance policies.)
2. Determine if the company has been following its document retention policy. Many commentators have suggested it is worse to have a retention policy and not follow it, than to have no policy at all. As has been discussed in this forum before, that is certainly the case in a litigation context. It is just a matter of time before someone tees up this issue in a motion to convert or dismiss, or perhaps a contested plan confirmation.
3. If the debtor does not have a document retention plan, urge them to consider seeking the Bankruptcy Court's approval of a well-constructed plan. Aside from demonstrating management's commitment to instituting the changes necessary to make the debtor a lean, mean 21st century competitive machine, there may also prove to be some tactical advantages to having the court approve a document retention plan when later, inevitable discovery disputes erupt.
4. Identify the key IT staff (or vendors) most knowledgeable of the digital enterprise. The weeks leading up to a filing can be hectic, and it is no time for debtor's counsel to be picking up a copy of "Dummies Guide to Digital Voodoo and Modern Insolvency Practice". Over time, it is likely that counsel will spend as time with IT staff as they now do CFO/CPA/accounting types.
5. Obtain a complete inventory of the Digital Enterprise. I am not, of course, referring to some new generation spin-off of Star Trek. That is a different Enterprise. In just the same manner as Schedules itemize real and personal property, so to should the debtor be prepared to disclose hardware, software, proprietary data and methods, licenses, archival storage agreements, and the like. To the extent that such information is not gleaned from either the document retention policy, or time spent with IT staff, by the time counsel has the digital enterprise inventory (I would shorten the phrase to DEI, but I fear a certain NASCAR team of the same name would hunt me to the ends of the earth), they ought to be able to wrap their arms around the number and types of computers and other hardware used, the general structure and use of in-house servers and networks, third-party vendors, security procedures, and be able to identify potential problems faced by any employer, such as employee theft, the misuse of data of customers, etc. Counsel also needs to remember that often times, equipment containing ESI is leased, and in the months preceding bankruptcy, leased equipment is often abandoned, returned, or lost. Counsel needs to be aware of where the leased equipment is, and what steps have been, or need to be, taken to preserve the ESI. Consideration should also be given to identifying any ESI sources that have been, or are about to be, moth balled due to age. If such platforms may harbor data necessary for the reorganization, or that may be discoverable in litigation, steps should be taken to preserve, in a usable manner, such "legacy data." To the extent feasible, this inventory should be complete enough that it can sufficiently meet the debtor's disclosure requirements in the Schedules and SOFA.
6. Plan for preservation of current "books and records" data. With the exception of the Bedrock Quarry, it is unlikely that debtor's counsel will find any modern business that keeps its books and records in the form of hand-written ledgers. This is one of the most likely areas that debtor's counsel will have to face the "future of forensics", in that data (and meta data) will play an important role in any number of areas, such as preservation of the data in general compliance with the code, preservation of data reviewed by expert witnesses, preservation of data that the creditor's committee is likely to request, and preservation of data that is likely to be subject to discovery in litigation commenced by, or against, the debtor. This is also a good time to start thinking about hiring an ESI-guru, ala Jack Seward, to provide the necessary technical guidance in accomplishing this feat. If the data is subject to automatic archiving, or potential destruction from routine back-up procedures, consider the balance between the consequences of deviating from company retention policy against the duties and expectations of a DIP in terms of properly maintaining the books and records in the rarefied air of bankruptcy.
7. Pay special attention to email. To this very day, I am prone to putting things into email that I would not put into a letter, nor would I raise in public. During a recent ginormous review of emails, I spent far more time than I wanted to reviewing emails that contained nothing more than recipes, vacation stories, and inter-office gossip. Email is a funny thing that way, but it is funny in other ways to. Email might be stored on a client's exchange serve, might be stored on a Blackberry server, might be stored on the individual workstation, might be archived in .ost or .pst files, might be saved on some third-party web based storage, might be stored as a .pdf file on any applicable storage medium. Paper might be the Silly Putty of litigation, but email is the digital equivalent to the gelatinous substance that oozed out Stretch Armstrong when you finally manage to pull his arm off of his body. It oozes into cracks and pores, is hell to clean up, and can leave a stain for a long, long time.
8. Consider state and federal laws and regulations. Not all data is created equally. Some data is afforded more protection that other data. HIPPA and ERISA issues come immediately to mind. Also bear in mind that privacy laws, in many instances, are far more restricted overseas. This is especially true in Europe. If your debtor is involved in international transactions, special considerations need to be given to the oft-stringent, and literal application, of some foreign privacy laws.
9. Develop strategies in anticipation of future demands. Regardless of whether or not the debtor has a document retention policy, special circumstances may require solutions or relief well beyond the application of any retention policy. The Debtor needs to be prepared to seek court intervention or assistance in providing for a document repository. If a particular facet of the reorganization, or specific are of litigation, is expected to be ESI intense, the debtor may wish to seek the appointment of a referee or "ESI examiner" to assist all interested parties in dealing with the ESI issues and discovery disputes. At the very least, utilization of a third-party might diffuse discovery disputes and allegations of bad-faith. Most importantly, if a debtor in concerned that certain data is likely to be sought after by some party, and that data truly is too expensive or is truly inaccessible, the debtor ought to consider bringing the issue to the court's attention early in the proceedings. Debtors might consider a range of relief, from establishing procedures requiring other parties to pay for retrieval and on reasonable terms (so as not to disrupt the work flow of the debtor), to an absolute pass on the data, such that the debtor has no duty to retain or recover the data in question. Though it goes without saying, Debtor's counsel ought not hesitate to seek to utilize cost-shifting measures, even if the matter at hand is not a pure discovery/litigation question.
10. Get a document retention policy in place. Yes, this point is a repeat, but that is because it is a point worth repeating. Cash collateral motions require budgets, disclosure statements require liquidation analysis, ESI requires a document retention policy. As suggested before, there are tactical advantages to getting bankruptcy approval on the first day. From the enterprise perspective, the policy can survive the bankruptcy, can lend strength to the disclosure and confirmation process, and continue to serve and guide the reorganized debtor long after the Effective Date.
If you will all excuse me now, I am going to seek out Ted Mack and see if I did a better job of answering his question...