Thursday, June 14, 2007

The Arrogance of My Fleeting Youth

"Reluctanly crouched at the starting line

Engines pumping and thumping in time
The green light flashes, the flags go up
Churning and burning they yearn for the cup
They deftly maneuver and muscle for rank
Reckless and wild, they pour through the turns
Their prowess is Potent and secretly stern
As they speed through the finish, the flags go down
The fans get up and they get out of town
The arena is empty except for one man
Still driving and striving as fast as he can..."
The Distance
by Cake
For a brief moment, I was packing a bag and headed to Kansas in hopes of clerking for Judge Robert E. Nugent, Chief Bankruptcy Judge in the US Bankruptcy Court for the District of Kansas. (For those fans of the long-departed Seinfeld, you will recognize what was actually the beginnings of a serious man crush). Judge Nugent recently wrote what may be one of the first true "ESI meets bankruptcy" type opinion, in the case In re Krause, Case No. 05-17429, Adversary No. 05-5775. The opinion is currently being reported at 2007 Bankr. LEXIS 1937.

In the Krause case, the court was faced with an apparently unrepentant wiper of hard drives and scrubber of data necessary for the Trustee to discover assets of the estate, which appear to have been fairly significant in the recent past.
During the recent NYCLA panel presentation on Bankruptcy and E-Discovery, I warned the participants that the judiciary is educating itself about this ESI stuff a lot faster than most of the rest of the bankruptcy bar. Judge Nugent is, if I may be so bold, Exhibit A that demonstrates my point.

According to the opinion, the Debtor filed his bankruptcy in 2005. Throughout 2006, various interested parties, including the IRS, took some great interest in obtaining the Debtor's electronic documents. (Keep in mind, much of this was occuring post-Zubulake and pre-2006 FRCP amendments). If I am following the time line correctly, the Debtor turned two computers over to the Trustee on Oct 17, 2006. However, it was later discovered that the debtor allegedly installed, on October 4 and 16, 2006, respectively, a handy dandy little program called GhostSurf Platinum 2006. One of the functions of GhostSurf, as Judge Nugent abley explains, is to "wipe or purge files, thereby destroying electronic files...". The Judge also explains later that GhostSurf does more than a "Microsoft delete" which removes only certain markers telling the operating system where the data is stored.

As though this weren't enough, the Court found that GhostSurf had been installed on both machines after the ourt ordered that the requested electronic evidence be turned over. Poor Debtor, tricks are for kids!

Judge Nugent produced a thorough opinion exploring the spoliation, the computers the Debtor turned over (and those that he didn't), a techinical summary of how GhostSurf actually works, and the Debtor's imaged hard drives (as well as questions about the effect of booting up, or starting, the Debtor's computer prior to imaging the drives). At this point while reading the opinion, my heart is pounding, my hands shaking while trying to find the phone number to the bus station so I can buy my ticket to ride.

The Trustee and the IRS, aside from asking for a spoliation charge, also sought sanctions which pretty literally included throwing the Debtor under the jail. The opinion recites a litany of the shady dealings, questionable trusts, and off-shore accounts that the Debtor was alleged to have been connected to. First, the final chapter, because that isn't really what interests me. Judge Nugent essentially gave the Debtor 10 days to get his crap together and get all the ESI turned over (opinion was issued on June 4, can someone call Kansas for me?), otherwise, the Debtor is getting tossed under the jail until he can cleanse himself of his contempt.
Based on the judge's recitation of facts, this is exactly what needed to happen. But Judge Nugent broke my heart, and only gets 4.5 stars out of 5, and here is why. Relying on Zubulake, the Court found that the Debtor's duty to preserve his ESI arose when he had "notice that the evidence is relevant to litigation or should know that the evidence may be relevant to future litigation." Zubulake cited to the 2nd Circuit's Fujitsu Ltd. v. Federal Express Corp., 247 F.3d 423 (2d Cir. 2001) for that proposition. As such, the Court found that the Debtor might have had notice when the IRS started squeezing the Debtor pre-petition. Barring that, the Debtor surely had notice, says the Court, when the IRS filed its adversary complaint in November of 2005.
Although I haven't checked Fujitsu, I am guessing that it, like Zubulake, was not a bankruptcy opinion. I have said many times, and will continue to say until I am blue in the face (which is a real trick this week with sun burn I have), that bankruptcy ain't quite like litigation. When a Debtor, ESPECIALLY in a voluntary case, agrees to be probed and prodded by the bankruptcy system, certain duties and obligations arise on day one! It isn't really necessary to look beyond section 521 or 541 of the Bankruptcy Code to see that. Zubulake (and the amended FRCP), in a bankruptcy context, ought to be viewed as a damn good standard to look at when an adversary has commenced, but that should not ever mean that the Debtor is excused of all obligations of preservation until someone decides to sue. In a chapter 7, that ESI that the Debtor in Krause allegedly played fast and loose with belonged to the Trustee the moment the petition was filed.
No slight is intended to Judge Nugent, or to the lawyers involved in the case. God knows there is a reason that Judge is the Judge, and that the lawyers are out trying cases while I huddle in a dark office and play blogger-geek.
All I need is just one opinion, and if nothing else, Judge Nugent has significantly raised the bar for bankruptcy lawyers...
As a post-script, the opinion wasn't clear if the Debtor filed his BK pro se or not. If that was the case, all is forgiven, and my world is still in balance!

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