Tuesday, April 3, 2007

Not Merely a Suggestion from one District Court...

Jeez, I wish every day could be April Fool's Day. Thanks to everyone who dropped by the last two days, hope everyone got the joke...

Back to business. Friday evening, while continuing to struggle through the long promised first-in-a-series of posts for the small and medium reorganization case, a district court opinion from the Southern District of Indiana, Indianapolis Division (and home of many Top Fuel and Funny Car race teams) provides some interesting insight into the judiciaries view on the practical effects of ESI in the area of federal proceedings.

In Wellman Thermal Systems Corporation v. Columbia Casualty Company, et al, District Court Cause No. 1:05-cv-1191-JDT-TAB, (related Bankruptcy Court Case No. 03-01934-JKC-7A)Judge John D. Tinder issued an opinion in a bedevilling case originating in bankruptcy court. For our purposes here the existence and role of, and story behind, a court ordered electronic document repository are noteworthy.

Being a child of television, the bankruptcy itself was just confusing enough that I had to diagram the background. The bankruptcy in question related to an outfit (Wellman) involved in some form of heating systems, who was renting space from a former DIP landlord. The landlord eventually wound up in receivership. Chase had two notes secured by the building occupied by Wellman. Chase sold the notes, presumably at a significant discount, to a third-party. The bankruptcy trustee sued Wellman's insurers to recover on expected environmental claims. The real thrust of the case was to obtain judgment such that no less than 10 insurers might face liability on the costs of the cleanup.

WARNING - PRACTICE TIP AHEAD: Some District Judges take a dim view of bankruptcy cases in general. We ought not go out of our way to irritate them. Judge Tinder, as you will readily understand, was not happy with the parties. The insurers alleged that the law firm representing the Trustee should be conflicted out for representing a creditor with an environmental claim prior to the adversary. The insurers had withdrawn the reference from bankruptcy court, and had filed a motion to dismiss in the district court. The Trustee opposed the motion to dismiss, but filed a new proceeding alleging the same claims in state court, and also asked the court for leave to dismiss the district court proceeding. The insurers removed the state litigation to the bankruptcy court (having previously withdrawn the reference in the original matter). Any damages recovered by the Trustee were loosely earmarked as follows: 1) Attorney's fees, 2) Attorney's fees, 3) Attorney's fees, 4) Cost of Remediation, 5) Distribution to Creditors if any money left over after Remediation. One could reasonably infer that the District Court may have viewed this arrangement as questionably providing a return to the estate that it really wasn't entitled to.

In deciding whether the case should be heard in federal court, as opposed to state court, one of the issues discussed by the judge was an electronic document repository the court had ordered, apparently sua sponte, as part of the case management order. The purpose of the repository was to provide the court and the parties one central location for document images. The repository was ordered to be maintained by the insurers, given their sheer numbers. The court also ordered that a uniform numbering system be put in place for document identification purposes. The court noted that DVD's containing at least 20,000 pages of documents had been processed and made available under the order. The investment in time of resources, including the naming of lead defense counsel for purposes of managing the depository, hiring a vendor, and processing the documents was sizeable. The risk that the time and effort put into streamlining discovery, even if a limited factor, was a factor worth reviewing in determining whether or not the district court should keep the matter. Ultimately, the court allowed the "conflicted" firm to stay in the game, but also ruled that the game would be played in the District Court.

In reviewing the docket, there seems to have been some delay on the part of the insurers in deciding how to implement the Court's ruling concerning the care and feeding of electronic documents. Ultimately, the insurers developed a protocol that was approved by a magistrate judge in May 2006.

The protocol named a single provider to scan, Bates number, source code [document author, date, etc], OCR and logical document determination (LDD) for all the documents submitted by the insurers. Bates numbers are alpha-prefixed identifying the party providing same. Once the vendor completes its pass, a CD with the documents is provided to lead counsel, who then imports the data into its Summation system.

Pleadings and related documents are also sent to the vendor for the same treatment, but those documents receive a more generalized Bates number.

Once the vendor sends the docs to lead counsel, lead counsel has 15 days to review all the documents and determine whether or not any duplicates exist. Once that review is completed, then the uniform document numbers are assigned to the remaining documents. Lead counsel creates an "authentication set" and distributes a copy of all documents on CD to counsel of record. Interestingly, the order does not seem to address privilege and other related issues.

For the purposes of bankruptcy, the implementation of an electronic document repository has some interesting appeal. In fact, creditor's committees in larger bankruptcy cases have already implemented some variations of this approach in order to meet their new obligations under sec. 1102(b)(3). As allows, a primary factor is going to be the cost of doing so.

Although the United States Trustee does not have me at the top of their "Things to Do" list, I have wondered aloud about the possibility of having the US Trustee serving in this function where appropriate. Some of the costs could be defrayed by a bump in the Trustee's quarterly fee. Alternatively, this might be an ideal function for the next generation examiner/discovery referee. Such a court-appointed professional, knowledgeable in technology, discovery and bankruptcy, would serve a tremendous service to the Debtor, to the Court and to all other parties in interest. I know that litigators will be repelled by such a suggestion, but remember the starting assumption of this blog... ESI ain't just for litigation anymore (indeed, for bankruptcy lawyers, it is likely more a continuation of pre-existing obligations/considerations).

The Wellman approach does not truly address the entire scope of ESI, and instead should be viewed more as the bar's "first generation" approach to dealing with ESI. This approach, which is the focus of most general practitioners, only differs from traditional discovery in that paper is being substituted for zeros and ones. Through OCR and coding, searching documents for certain key words is much easier, but this approach to ESI only tells the user the same essential information that a reader of a paper document would receive.

Lets say that the Wellman plant used some type of integrated sensor and alarm system that was computer controlled, that recorded real-time data, kept a log of system failures or of events leading to pollution. A "document" repository might only contain a written incident report summarizing the incident, and perhaps noting the fact that the sensor and alarm system registered the incident. Unless counsel thinks through all the levels of this transaction, the data and information available through the data files of the alarm system might not be considered. For either party in litigation, or in a contested matter over a proof of claim, or in a motion determined by management's inability to handle such events, the data from the alarm system is exponentially more valuable than a summary report, which might "omit" certain details.

In many cases, this "Wellman approach" is unnecessarily expensive in comparison to its actual benefits. In smaller cases in particular, documents can be scanned and ocr'ed in house by support staff. Hell, most photocopiers allow a user to scan and ocr a document (when I am not busy printing off NHRA ladders for upcoming weeks). If a matter is small enough to be photocopied in-house, why can't it be scanned and ocr'ed in house? In addition, Summation can prove to be expensive for some firms, and in my opinion, is not always terribly user-friendly. (Yes, I also know how to make coffee, send faxes, locate the key to the storage closet, and validate clients' parking. Several wise lawyers have reminded me that, if I ask support staff to do it, I need to know how to do it myself as well.)

The Wellman approach will also prove less and less effective for bankruptcy purposes, once creditors and courts require us debtor's counsel to move into "second generation" ESI. Not only do we need to understand the use and importance of software products that make up the "books and records" of the debtor, we need to understand the data files supporting the "documents" spit out by those programs. Our experts will need the data, and we have to be able to provide that data to other experts, to the US Trustee, and to the committee. We have to understand that the data constitutes property of the estate, and in many forms. And we have to know our limitations, so that we know when to call the Jack Sewards of the world so as not to screw up our client's ESI.

Now, um, if anyone in the greater Indianapolis area has any pull with any of the NHRA teams that call Indy home... you know, um, maybe put in a good word for me. I don't know anything about completely rebuilding a 7,000 h.p. engine in an hour, nor can set up a clutch to handle 320 mph speeds. I did watch a kid on Ron Capps crew last year spend all morning preparing rear tires... I think I could do that while providing valuable insights to fans in the pit area about legal developments and technology... anyone?

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