Monday, September 24, 2007

Will the Coming Flood in Commercial Bankruptcies Look Like 0's and 1's?

The piece below summarizes the dearly held beliefs of many bankruptcy practitioners throughout the country: that commercial bankruptcy is about to experience a huge up-tick in its cyclical progression. The continued onslaught of the sub-prime mortgage industry, coupled with $80 oil seems to have everyone on edge. That commercial credit, until recently, had been nearly as loose as the sub-prime mortgage industry, has been a poorly kept secret.

Last week, the Bombay Co. filed for Chapter 11 protection in Ft Worth, Texas. The Bombay bankruptcy may very well be the tell-tale leak in the failing dike from which will spring forth this expected wave of business bankruptcies nationwide. As the next generation of commercial bankruptcy presumably gets underway, the crack staff here at E-Everything will endeavor to watch more dockets and see how, or if, bankruptcy lawyers and judges handle electronically stored information (ESI) in the bankruptcy context. (Understand that comments on the Bombay case will likely taper off based on the involvement and client representation of those lovely folks at Forshey & Prostok that provide me a day job!)

According to my good friends at SiteMeter, this blog has been viewed by at least 2 surfers from the Department of Justice, my good friend Steve Jakubowski, my new friends at Texas Law Blog (who rumor has it will be starting their own podcasts soon), and by my Mom who checks in just to make sure I am not using any untoward language. At the very least, practitioners ought to be acknowledging their client's digital enterprise in Schedules, SOFA's, cash collateral orders, or even in related first day pleadings. However, if lawyers cannot recognize the thinly veiled reference to binary in the title of this post, we still have so far to go...

In the mean time, here is where the rest of the "insolvency press" is focused:

Monday, September 10, 2007

Phoning it in has a Whole New Meaning

The good folks at the recently established Small Scale Digital Device Forensics Journal might have some interest in this development over the summer. Further proof that counsel can never get too far behind the latest technological and forensic developments. Check back here later in the fall for a good article regarding "experts" and ESI.

Thursday, September 6, 2007

District Court Jumps in Front of E-Discovery: Maryland Protocol Cooler than the Matrix

A joint bar-court committee, headed up by the obviously talented Magistrate Judge Paul W. Grimm, in the District of Maryland has produced a Suggested Protocol for Discovery of Electronically Stored Information (ESI), which some have referred to in short hand as the Maryland Protocol. The Maryland protocol is available as a .pdf download here.

While the Maryland Protocol apparently has not been formally adopted by Maryland courts, it presents a very complete and technologically sound blueprint for attorneys and courts alike in suggesting parameters for dealing with the 2006 FRCP amendments. Indeed, the introductory section makes clear that the suggested protocol is not a binding document, nor is it necessarily final or complete. From the outset, the tone of the protocol suggests that it is best suited for "run of the mill" ESI cases, and does so without some of the wide-eyed, breathless predictions that even occasionally creep into this blog.

The scope of the protocol is specifically restricted to the "ESI provisions" of the FRCP. The first phrase or term defined by the protocol is metadata ("Meta-Data" in the protocol), and stretches far beyond the trite description of "data about data." Instead, the protocol describes metadata as "(i) information embedded in a Native File that is not ordinarily viewable or printable from the application that generated, edited, or modified such Native File; and (ii) information generated automatically by the operation of a computer or other information technology system when a Native File is created , modified, transmitted, deleted or otherwise manipulated by a user of such system. Meta-Data is a subset of ESI." In a special section designated solely for metadata, the protocol also distinguishes between System Meta Data, Substantive Meta Data and Embedded Meta Data.

The protocol goes on to designate Static Images as the cornerstone for the form and format of ESI discovery. In essence, the protocol establishes up front that the form of production of ESI (unless the parties agree otherwise or unless the court so orders) that ESI should be produced as Static Images in the format of either a Tagged Image File Format (.tif files) or Portable Document Format (.pdf files).

Properly, the first substantive area addressed by the protocol is the Conference of Parties (see Rules 16 and 26). The protocol suggests, against the common current, that the parties might even indicate to the court that no ESI discovery is desired. One interesting suggestion, though reasonably framed, is that on-site ESI inspections be conducted by agreement of the parties, or "in circumstances where good cause and specific need have been demonstrated...". The protocol also allows for the possibility, as many cases have, that on-site inspections be conducted by independent, third party experts.

Another of the protocol home runs is the gentle reminder that "prior planning and preparation is essential for a Conference of Parties...". If this concept isn't quite clear, scroll down and read the three Blue Light Special posts. This planning includes the exchange of information prior to the meet and confer. One of the pleasing suggestions relates to the participation of an "ESI coordinator". An ESI Coordinator, by the way, is one parties' tech guru (not the technical definition within the protocol by the way). The protocol indicates that where one party requests that the other parties' ESI coordinator attend the meet and confer, and the other party agrees, the requesting party needs to commit its justifications for requesting the coordinator to writing. If the court ultimately decides that the meet and confer was unproductive, and was unproductive in part because of the absence of the requested ESI coordinator, that fact may be considered in future sanctions proceedings.

The protocol also addresses such matters as redaction, bates numbering and other more pragmatic concerns that often get overlooked.

The real victory of the Maryland Protocol is the gentle, yet thorough, guiding hand of the "technical consultants" who were involved in developing the protocol. The protocol offers a basic "To Do" list of areas of inquiry and preparation for counsel in approaching ESI discovery. The technical aspects are addressed in a broad, plain language fashion. At the same time, very specific areas of concern are described in enough detail, or addressed within a context such that most attorneys will find significant value an understanding in the protocol.

The three part KMart posts on this blog are replete with examples of counsel not having the benefit of a protocol such as that suggested by the Maryland court. After reading the Maryland Protocol, wise counsel may never again approach ESI discovery in the same light again. Simply put, the Maryland Protocol should be a standard feature of any trial notebook.

Now if we could just find someone smart enough to generate an accompanying Bankruptcy ESI Protocol...!

Tuesday, September 4, 2007

Blue Light Special in the Boot and Nuke Department - Conclusion

Finally, after detailing Timeline #1 and Timeline #2, comes some of the points to be considered and lessons to be learned from a recent KMart discovery opinion. To be certain, these issues were developing prior to the 2006 amendments to the Federal Rules of Civil Procedure and hindsight is largely 20/20. (Anyone poking around in the archives of this blog knows that there are those, including yours truly, who believe that e-obligations for bankruptcy practitioners arose long before the amendments kicked in). KMart is however, a blueprint for the future, so the points raised here are not intended as criticism of counsel on either side, or of the good judge. Rather, KMart offers some hard learned lessons from members of the pioneering group blazing new trails for the rest of us. Having said that, let the pole-axing and filleting begin...

1)Preserving Responsive Evidence - This item overlaps with a number of others, but in the context of KMart v. Global Property Services, the issue arose after KMart made its first paltry production. After receiving only 66 pages of responsive documents, Global's attorneys apparently corresponded with KMart's lawyers in order to make certain that KMart was preserving responsive evidence, undoubtedly including any electronically stored information (ESI). Given the current apparent trend of bankruptcy judges being somewhat conservative in establishing dates that a duty to preserve arises, potentially adverse parties ought to be quick to pull the trigger in sending out preservation letters, in order to make sure that preservation duties arise as early as possible.

2)Stipulations and Timelines - A July 11 order reflected the parties' stipulation that responsive corporate emails would be produced on July 8, with responsive emails from the individual stores to be produced by July 31. While clearly the attorneys had to have "met and conferred" to the extent necessary to enter into the stipulation, the facts of the case make it clear that the stipulation was ill-conceived, at least as to KMart. There was too much ESI, stored in too many places, controlled by too many people, to have made such a stipulation either reasonable or possible. Even under the new "meet and confer" requirements of the FRCP, the likelihood that such a deadline could have been met is slim. Internally, KMart probably didn't have the horses to fulfill such an onerous burden; and outside counsel may not have had a heavy enough whip hand to keep the GC on course. In any event the stipulation was likely, at the very least, counsel agreeing to something that they really didn't understand. An e-discovery stipulation is not one of those on-line licensing agreements that we all click on without reading, the technical side has to be as well understood by counsel as the legal impact.

3) Determining Corporate protocols for ESI - 6 months after the "friendly reminder" to preserve relevant documents, KMart produced another 83 pages of documents concerning email access and related document protocols. There truly are two sides to this particular coin. By this time, deposition #1 of KMart's IT goon squad should have already taken place. After KMart produced 150 pages (paper documents apparently), and well beyond the stipulated time frame, something clearly stinks in Des Moines. As for KMart, this is the poster child for why counsel must know from day one the breadth, scope and basic workings of their client's digital enterprise. At the outset, such knowledge focuses the minds of GC. Long term, this learning exercise educates outside counsel as to what questions ought to be asked. Otherwise, we don't know that which we do not know.

4) Trigger dates - The KMart opinion has some fact specific quirks which support the trial court's determination of the debtor's trigger date as to when the duty to preserve documents should arise. Depending in part on the existence or absence of a document retention policy, strong arguments exist both in the bankruptcy code and as a matter of public policy, to push the accrual of the preservation duty farther into the past than current bankruptcy opinions seem to do. At best, bankruptcy is sometimes ill-fitted to the FRCP (and the attendant bankruptcy rules). The same documents that are relevant in bankruptcy litigation also comprise books and records, and perhaps property, of the estate. While not necessarily true in this particular instance, it seems likely that the best interest of the creditors will often be best served when the debtor is required to preserve such documents, much like Chicago voters, early and often.

5) Document retention and destruction policies - For any number of reasons, document retention policies may be just as valuable to a Debtor in Possession as the automatic stay. Without re-hashing all of those reasons, the bottom line is that pre-petition, bankruptcy counsel needs to know if the client has a document retention and destruction policy, and if so, what it is and how it works. It might even be a good idea to have the judge say grace over an existing policy post-petition. If no policy exists pre-petition, an early order of business may be to encourage the client to develop a satisfactory retention and destruction policy, and have the court bless that pleading. The answer in some cases has been to include document retention language in cash collateral orders. A satisfactory retention and destruction policy wont fit, and probably doesn't belong, in a cash collateral order.

Specific to the KMart case, and from the IT perspective, KMart employees simply had too much discretion as to the storage locations of their emails. The employees' ability to defeat the automatic purge feature through manipulation of the "date sent" metadata also exposed a hole in the KMart retention policy.

6) Evading the retention policy - In the KMart case, there were at least two storage areas exempt from automatic purging. One was a "public" drive, and the other was the C: drive of each individual desktop or laptop computer. At the very least, this means that employees were largely free to store ESI indefinitely, free of the periodic house-cleaning attempts of KMart's IT department.

7) The Discovery Scourge of Email Grows - Those on the KMart payroll testified that email cannot be stored on the public drive referred to as P:. That ain't true on at least one level. Recently faced with the revelation that 6 years worth of accumulated emails, which were being backed up each night on the Exchange server, was entirely TOO much, I converted all my email folders from closed cases to .pdfs, deleted the emails from their native format, and saved the converted emails to a folder on a different public drive. (Yes, even though the file still resides in the exchange server, I am no longer getting yelped at because my email folder is too large). The point here is, that while email might not be stored in its native format on a separate drive or other location, that certainly would not prevent a target from saving their emails in some other format, and storing them where IT believes they otherwise do not exist.

Microsoft Exchange also creates some additional layers that most attorneys may not be accustomed to considering. For instance, in order to help me wade through the continuous deluge of email, we recently set up my assistant so that she has full access to my firm email. Whereas a common theme in the KMart case was to have individual employees look on their own computers for their own emails, counsel needs to recognize that multiple individuals may have access and control over one person's email account.

8) Model Rules for Model Counsel - Despite the "discount retail" approach that KMart may have made internally regarding Global's discovery requests, outside counsel has many puppeteers to answer to. While the old saw that "The Buck Stops Here" may not apply to counsel's invoices, it still applies to the hardy boys and girls that sign their names to pleadings. While learning about a client's digital enterprise might rank right up there with signing up for a drug-free root canal, it is an increasingly necessary evil that counsel cannot avoid.

9) Hired Guns and Contract Killers - KMart GC first looked to a contract attorney to handle the Global discovery responses. While there may be absolutely nothing wrong with contract attorneys (some of my best friends and neighbors are contract attorneys), it might not be a good idea to turn over an ESI intensive project to a hired gun. They might not know the company structure, culture, or politics so that they cannot get the requisite cooperation from tenured employees. As such, a contract attorney may not have the buy in and commitment necessary to seek and find all the responsive ESI. Worse, they may move on in 6 months, or even in 6 weeks, and a good bit of institutional knowledge is lost.

For all these reasons, and more, the KMart/Global Property opinion serves as a valuable educational tool for those who believe ESI is someone else's problem that is subject to an easy fix. Instead, the KMart opinion should be viewed more like a Clancy novel, in that minor, seemingly unconnected events and oversights can rapidly coalesce into an uncontrolled outbreak of armed litigation.