Discovery Cracker sold to CT Summation

I wonder if Don Imus had anything to do with naming that product...?

Sub Prime Carnage Continues with Lehman Bros.

I hope that, in all of the layoffs taking place, Lehman doesn't can all of the IT folks...

E-Everything... Meet eWorld!

Long time readers know that this blog was intended to be more than just an insomnia curing repository for discussions of sec. 541 of the Bankruptcy Code in the digital era. Those same long time readers (thanks Mom!) also should have figured out by now that music is a big part of the forces motivating yours truly. To that end, E-Everything was placed to see the announcement of the formation of eWorld Properties and eWorld Entertainment, with Russ Regan being the first named to the Board of Advisors for the enterprise. Thanks to the forward thinking and creativity of Russ Regan, and other like-minded individuals, it is now possible for me to obtain a CD quality copy of a Black Crowes concert just minutes after the final encore. One offshoot of this new venture is the Boomerang Media Station, detailed in the story below.

Now if I can just avoid getting sued for using the phrase E-Everything...

Blue Light Special in the Boot and Nuke Department - Part 2

When last we visited our friends at KMart, we reviewed the procedural background and also had a go at the digital enterprise.

Time Line #2

During the 2003 audit of Global's books by KMart, Debtor's management knew that Global was less than happy that KMart had apparently started contacting Global's subs, the very thing KMart was asked not to do. Quoting from the opinion:

"Global is seeing the writing on the wall and realizing that their business with KMart is slipping away.

The only thing we have to be careful of is not using their sub contractors. As the business melts away on them I am certain they will take legal action."

The court, without citing any authority other than KMart's proposed conclusions, stated that "it would be impractical and illogical to hold that the claim filing date triggers a preservation duty." The court decided that the Debtor's obligation to preserve ESI arose sometime after June 19, 2003. As was also absent in the Krause opinion from a Kansas bankruptcy court, the Court did not consider sec. 521 of the Bankruptcy Code, nor did the Court appear to consider any of the elevated standards or duties of a debtor-in-possession. (While your gonna have to wait for the book to see the full analysis, remember that you heard it here first. This type of conclusion ultimately is harmful to creditors, and to the bankruptcy system in general...).

The testimony before the Court indicated that KMart in-house senior counsel was responsible for "helping to resolve outstanding bankruptcy claims..." which included attending to KMart's response to the February 2005 discovery requests. For the first of many bites at the discovery apple, the response was apparently left in the hands of a contract attorney. [ISSUE 9]

It was the contract attorney whose efforts, it appears, led to the initial production of just 66 pages of documents in response to the discovery requests. From the court's opinion, it seems that no one really knows who the contract attorney talked to, or what the contract attorney did, in terms of locating responsive ESI.

When Global appropriately started it's slow burn over the initial production, in-house counsel apparently started spending some summer fun time towards the ESI. According to the testimony, in-house counsel apparently provided no guidance to individual employees as to where they should look within the company's digital enterprise for responsive ESI, because "I don't know where any individual employee would keep their specific information." In-house also testified having no recollection as to telling employees not to delete ESI, nor could In-house recall tee-ing up a litigation hold as to the Global claims.

Finally, in the fall of 2005, In-house involves the IT department in the search for responsive ESI, although the results of that involvement were not reviewed by KMart lawyers until February of 2006 (a full year after the initial request) and were not produced to Global until March 2006 when Global filed its spoliation motion.

The ESI resulting from IT's initial involvement resulted in 1.45 gigabytes of information being reviewed by KMart's counsel, and some additional 456 pages of documents later being produced to Global.

This search however, was limited to the ESI of 25 former employees. By this time, current employees were instructed to conduct their own search of their own ESI. As a related matter, KMart counsel indicated to the court that the first round of ESI review included both the .pst files (email) and the "H-Drive" files. KMart counsel later learned that the first round of ESI included only the .pst files, and not the H-Drive files. According to In-house, KMart had no policy for ESI review of former employees "H Drive" files until October 2005, which was the same month that IT got involved with this proceeding.

More after the break....

The H Drive issues notwithstanding, KMart also discovered that it had other problems related to the care and feeding of its ESI in relation to previous employees. Former Employee proved to be a source of ESI for Global, as Former Employee had at home an old computer that had been replaced by KMart, and that Former Employee had kept after his termination. When he had still been gainfully employed, Former Employee had the ability to work remotely, and also had the ability to download emails onto his laptop. The court pointed out that, had the emails not resided on Former Employee's laptop, they likely would have been automatically deleted sometime in May or April 2003. Despite the auto-delete policy, Former Employee's emails were part of the 456 pages produced in March 2006.

Testimony from existing employees was not much better. Regional Manager testified in February 2006 that his search for ESI was, "Just a search of any documents that I stored on my computer." However, the computer that Regional Manager had apparently been using during some of the relevant time periods was a laptop that had been stolen at Detroit Metro Airport.

Although the opinion doesn't seem to cover what or why, there is some humor in noting that, at some point, KMart had the cajones to file a motion for production, seeking ESI in its native format. The Court granted KMart's motion January of 2007.

In Part 3, one geeky lawyer's opinion on at least 9 fundamental points illustrated by the KMart opinion...

Those Pesky Debtors and Their Technology...

The company in the news piece below, PubliCARD, Inc., develops the "smart cards" that are all too familiar to today's college students. The applications can include cashless cafeteria transactions, tracking attendance, etc. Those attorneys for the Debtors in this case must be pretty folks, being able to wrap their "reorganizing arms" around the technology involved in this case...

Blue Light Special in the Boot and Nuke Department - Part I

I can remember all too well as a child hearing the KMart PA announcement that there was a blue light special in the children's shoes department... the pushing, clawing, and biting... running over poor little old ladies standing in line at those horrid KMart snack bars, leaving in our wake a tangle of wrinkled skin, bent and battered walkers intermingled with Cherry Icees and nacho cheese. Oh, the humanity!

The more things change, the more they stay the same, as yet another KMart special leaves me both breathless and impervious to the immediate short-term safety of any little old ladies that might wander into my path. An opinion in KMart bankruptcy released July 31 is nearly as precious to me as those white metallic Christmas trees with (you guessed it) blue plastic bulbs for ornaments. The opinion is related to certain claims objections as to the claims of Global Property Services, and the opinion (notated as being released for electronic publication only) is being reported at 2007 Bankr. LEXIS 2541. In the interests of full disclosure, William J. Barrett is listed as counsel for KMart in this matter. So far as I am aware, there is no relationship between myself and Mr. William J. Barrett, nor am I aware that he ever experienced the joy of leg-wrestling a complete stranger for the last set of Blue Light special high tops.

The opinion alludes to many topics that I have wanted to discuss previously, but never really had the proper vehicle. So many in fact, that this post may only topically point out those areas of interest, with more in-depth discussions being fleshed out in a more formal forum.

Timeline #1

KMart filed its bankruptcy on January 22, 2002, and it s plan of confirmation was entered on or about April 23, 2003. In June of 2003, Global filed admin claims, and filed an amended claim in September of 2003.

KMart filed an objection to Global's claims in February 2004, which Global responded to in March 2004.

In February 2005, Global served out discovery requests related to the claims objection. Two month later, in April 2005, KMart responded by producing 66 pages of documents. Global corresponded with KMart's attorneys the following week, to get some assurance that KMart was preserving responsive evidence. [ISSUE ONE]

On July 11, 2005, the bk court entered an order reflecting the parties' stipulation that KMart would produce all responsive documents, including e-mail, from the corporate office by July 8, 2005, and from all the individual stores by July 31, 2005. In July 11 correspondence, KMart counsel represented that all the corporate head quarter's documents had been produced. [ISSUE TWO]

By mid-August 2005, KMart had produced 2,614 pages from headquarters. In September of 2005, another 287 pages trickled in. Additional documents were also produced in relation to the subsequent depositions of KMart's senior commercial attorney and from the highest ranking member of management to have dealt with the Global issue before it became an issue.

In January 2006, KMart produced 83 pages of documents concerning, or at least tangentially related to, email access and other corporate protocols. [ISSUE THREE] In February 2006, an additional 5600 pages of documents from corporate were produced. Throughout February, additional depositions led to the production of additional documents.

On March 7, 2006, Global filed a motion for sanctions, for spoliation, to compel discovery and an application to force KMart counsel to wear last season's discontinued line of blue light special off the rack men's suits. Six days later KMart produces more documents, including electronically stored information (or ESI). Included in Global's list of grievances was that KMart had only recently started digging through its own ESI.

One of the issues raised in KMart's response was that Global did not identify a "trigger date" for KMart's preservation duty. [ISSUE FOUR]. KMart argued that the date to trigger its obligations to preserve evidence would not have occurred until February 2, 2004, and that any destruction of documents under its document retention and destruction policy [ISSUE FIVE] would have occurred prior to that point.

The court heard two days of evidence on the matter, April 25 and 26, 2006.

The Digital Enterprise

Global had been acting as a general contractor for KMart nationwide, by coordinating the subcontractors responsible for exterior cleaning and landscaping services, or "white and green service" as referred to throughout the court's opinion. In Spring of 2003, Kmart indicated it intended to do an audit of Global's books, to which Global apparently responded positively, so long as KMart executed a non-disclosure and confidentiality agreement, to prevent KMart from cutting Global out as the middleman and dealing directly with the subs. The agreement was executed March 20, 2003. According to Global, within weeks it learned that KMart's agreement lasted only about as long as the typical blue light special, as KMart was reportedly doing the very thing it had promised it would not. The admin claim that Global filed that same year alleged a $25 million claim against KMart for muscling in on the white and green subs.

At trial on the sanctions motion, a KMart IT employee testified as to the system architecture. According to the testimony, KMart used Microsoft Exchange and 5 email servers. Employees had the option of storing email on the email server, on an "H-drive" that was also a server location. E-mails could also be stored on their local hard drive in their workstation. Finally, e-mail could be stored on any other medium, including CD or sushi-shaped USB drives. [SEE ISSUE FIVE]

Exchange based emails were subject to KMart's retention policies, which included automatic deletion guidelines (i.e. emails in the Inbox are deleted after 90 days). Emails could remain in Exchange longer though, in part through the mere act of moving an email from the Inbox to a user-defined file (the user defined files had 180 day deletion schedules), but also through, well, the mere act of moving an email from the Inbox to a user-defined file (the deletion date was triggered by the "date sent", but when a user moved an email from the Inbox to a user defined file, the metadata concerning that email was changed, and modified the "date sent" parameter). [SEE ISSUE FIVE]

The ESI stored on the H: and C: drives was not subject to any automatic deletion date. [ISSUE SIX]

Part of KMart's document retention and destruction policy is also based on, get this, unwritten, policy. A second IT type testified that the computers of former employees would be collected and stored for 2 weeks in an "asset cage", before they cleansed and recycled by an open source "boot and nuke" utility. Reportedly, boot and nuke over-rights to DOD standards, which makes me wish, just this once, I had the artistic ability to draw a cartoon of the prez wearing boots and a cowboy hat... The computers of former employee's who were identified as being on "legal hold" were stored under lock and key rather than being subjected to boot and nuke (that sounds like a hip, happening new kind of adult beverage).

The court also addressed the steps taken to back-up the various segments of KMart's digital enterprise, which I don't feel possessed to address here.

In addition to the H: drive, employees also had access to P: and W: drives, the former being a "public" drive, and the latter being a "working group" drive. The P: drive was accessible by all KMart employees, and hosts Word, Excel, and lord knows what else. The employee's testimony, according to the opinion, indicated that employee email could not be stored on P: drive. [In point Seven, I will Explain Why that just Ain't True]

The W: drive is "more secure", whatever that might mean. Again, the testimony seems to reflect that e-mail cannot be stored on the W: drive. [SEE ISSUE SEVEN]

An interesting side note, one of the KMart attorneys indicated that she was not aware of the existence of either of these two drives until the day before the hearing on Global's motion. Based on timeline #1, I can imagine that the paint on the inside of counsel's office needs to be replaced after the whithering anger and frustration she must have experienced upon learning of yet another digital landmine so late in the game. [NEVERTHELESS, SEE ISSUE EIGHT]. While there is no automatic deletion of either the P or W drives, KMart IT folks do have some ability to prevent employees from deleting data stored on those drives.

In the next post, look for Timeline #2, which was the cause of both incredulity and an embarrassing string of expletives, and we will cover the 8+ fundamental issues the KMart case raises. (Sorry, but billable work beckons).

Finally, for those keeping score, Judge Sonderby denied the spoliation motion, but granted sanctions. I promise this is not a plot spoiler though, because you don't want to miss Timeline #2!

The Sedona Principles and Bankruptcy

My wife and I recently brought home a kitten for our children. Our youngest, the well-intentioned but maniacal three year old, has showered the kitten with so much attention and tough love that the poor kitten spends a lot of time with me in order to gain reprieve from the three year old. This morning, I watched, with no small amount of my own maniacal pleasure, as the kitten perched on the edge of the shower and tried to decide whether to stay on the ground he had already claimed, or let natural curiosity get the better of him and jump into the running shower. Having leaned too far in, and belatedly realizing now the obvious problem of the running water, the kitty scrambled back on to his perch. In his panic, he over-corrected and nearly fell backwards onto the floor, forcing him to scramble, leading to another over-correction that nearly caused him to fall into the shower. Sometimes that is how I feel about e-discovery issues in bankruptcy. (I also feel that way about my paltry retirement account the last several weeks, but that is a topic for another day).

Thanks to the Sedona Conference, I have found something of a counter-balance to keep me from falling from my narrow perch. After perusing The Sedona Principles: Second Addition Best Practices, Recommendations & Principles for Addressing Electronic Document Production [or Electronic Document Discovery if Appendix B of the publication is to be believed] (The Sedona Conference Working Group Series, 2007), a profound sense of calm came over me. I know that all of you, still bleary eyed from celebrating Barry Bonds' individual accomplishment last night will share in my relief. The Sedona Principles, which without a question are THE authoritative guidelines to electronic discovery, say nothing at all about bankruptcy. Surely this means by implication that the bankruptcy bar has nothing to fear from the December 2006 amendments to FRCP. Proof positive that e-discovery is just another way for our litigation colleagues to bulk-up against their opponents, finding another means to "juice up" as the kids all like to say.

On the other hand, maybe my own sense of calm is bred in the approach that the Sedona Working Group has taken establishing the suggested framework for dealing with digital information. More importantly, maybe there really are some good lessons to be gleaned from the recent publication.

The preface of The Sedona Principles boldly proclaims that the FRCP has not supplanted the group's efforts, rather than the principles continue to be the authoritative guide as to how lawyers ought to act in the digital age. The Working Group's claim to authority is well placed, given the straight-forward, easy to comprehend organization that seems to be one of the hallmarks of The Sedona Principles. Although the publication is anchored by the 2006 amendments, one gets the sense that the working groups are looking well beyond just the FRCP in terms of addressing policy and best practices for dealing with electronically stored information. This inference is reinforced by the scope of the different Working Groups, the publications already available through the Sedona Conference, and the seminars that the group is hosting.

In looking beyond just the FRCP, this brings us back to bankruptcy practice and "e-discovery." So far, the bankruptcy bar seems to have given something of a collective shrug to the notion of adopting an updated set of standards for technological competence and in addressing modern business practices. Given that ESI is not defined, or mentioned, in the bankruptcy code, the consensus seems to be that ESI, and all of the attendant concepts and issues, are collectively a litigation problem, not a bankruptcy problem.

If for no other reason, sec. 521 and sec. 541 of the bankruptcy code suggests otherwise. (For all the other reasons, take another look at any of the articles from my friend and un-indicted co-conspirator Jack Seward). Although the Sedona Principles don't address bankruptcy outside of the litigation arena, the working group has framed key foundational premises in much the same way as Seward, and more recently myself, have. See generally The Sedona Prinicples, pp. 2-10.

The one key foundational difference between the role of ESI in bankruptcy and ESI as a litigation issue is summed up by the working group's conclusion that, "The Rules and Guidelines are not self-executing." Id p. 10. Section 521 and 541, being substantive law rather than procedural rules, are certainly "self-executing" within the context of bankruptcy, and woe be unto the debtor who believes otherwise. The point is that the concepts of ESI do exist outside of the shark tank of litigation, and bankruptcy lawyers, consumer and commercial, will likely soon find themselves farther into the "twilight zone" of ESI than even their litigation counter-parts. Fortunately for all of us, The Sedona Prinicples is the best written, authoritative and easy to comprehend publication I have yet seen on the subject.

The other "must-have" publication from the Sedona Conference that every bankruptcy judge, lawyer and academic ought to have on their desk is The Sedona Guidelines for Managing Information and Records in the Electronic Age (Sept 2005 Version), which is also available from the Sedona Conference as a free download. Especially in the case of commercial bankruptcy lawyers, this publication is vital.

Now, if I can just get the three year old to leave that damn cat alone...