Magnum Opus and Bill the Cat...

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...

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?

Court permanently enjoins use of Electronically Stored Information in Bankruptcy!

For those late-comers still reviewing this post, please take note of the DATE of the post. I don't want to hear any unfortunate stories of overeager associates citing to the "opinion" referred to herein as demonstrative of why it is so important to verify citations before trotting your briefs down to the court house.

In a ground-breaking opinion certain to be readily adopted as a uniform rule by all bankruptcy courts in the nation, a Texas bankruptcy court has issued an order permanently enjoining the use of ESI, in any manner, in future bankruptcy proceedings.



In the matter styled Reverend Horton Heat, et al v. Zach's Club 54, (In re Club 54), 71 B.R. Supp. 666 (Bankr. N.D. TX 2007), Judge William "Chase" Roach, bankruptcy referee for the United States Bankruptcy Court, Northern District of Texas, Canyon Division, sent shock waves through the bankruptcy bar with Friday's ruling. According to Roach's acerbic opinion, the recent amendments to the Federal Rules of Civil Procedure regarding the role of ESI in discovery have disrupted a bar already rocked back on it's heels in the wake of BAPCPA. The Club 54 opinion cited many "dangerous, disruptive and damned uninformed web sites and blawgs [sic]", which included several less than favorable references to this "blawg", as proof that ESI has no place in the practice of modern bankruptcy.



Roach went on to explain that, rather than adapting to technology, technology will continue to adapt to the needs of the legal profession, even if such evolution is "retro in nature." According to Roach, this "retro technology" can best be proven by Google's decision to offer, free of charge , paper copies of all emails and attachments. Roach added that the newest service, known as Google Gmail Paper, provided debtor's counsel the ability to keep real documents in their possession, enabling them to focus on practicing "real law". In a footnote, Roach explained that if services such as Gmail Paper were good enough for Alberto Gonzales, it was not the court's place to "one-up" the nation's top lawyer. Roach acknowledged that his decision will "significantly shorten the careers of this new crop of techno-lawyer wannabe's and forensic snake oil salesmen", and went on to suggest that any lawyers or vendors displaced by his decision consider Baylor dental school as an alternative. In a shot apparently levelled at this author, Roach suggested a reality-television show on the Comedy Channel.



Roach, a known long-time supporter of NASCAR, likened the use of ESI in the courtroom to the introduction of the "Car of Tomorrow". In yet another footnote, Roach prophesied that, unless the march of ESI into the bankruptcy courtroom were stopped now, it would be the equivalent of "letting one of those damned hybrids on the track." It should come as no surprise to commentators familiar with the influence racing has among lawyers and judges in the South, that Roach is a die-hard supporter of the "Car of Yesterday".



Counsel for the parties involved were not certain of either was willing to appeal the court's ruling. One source close the matter stated, "This ruling is great for the lawyers, because it means we don't need to do anything that we haven't been doing for decades. Nothing new to learn, no changes to how we prepare for new filings, no one else to have to share fees with. Aside from having to suffer through a three day hearing with this Judge, who is kinda creepy, this really is a great outcome for us. I mean, for us as lawyers."

Intermission and New Disclaimer

In response to increasing scrutiny of blogs that just so happen to be written and maintained by lawyers, please note that the terms of the disclaimer at the bottom of this site will be changing. This site is NOT intended for the general public, nor is it intended to market or sell my services as a taker of the blood money. Rather, this site is, and has always been, geared towards serving as a collection point for resources, news, and developments in the arena of modern bankruptcy practice in the face of the ever-expanding use of technology. Rather than "hawking my wares", as some bar associations may fear, this site is intended to enrich and educate fellow bankruptcy attorneys and members of other bars. In essence, this blog should be seen as the modern and less formal version of the law review article, the CLE paper, or the newsletter of any of a thousand different professional associations that, peculiarly enough, happens to consist almost entirely of licensed attorneys. In the event that lawyers' blogs are ever forced fully under the watchful eye of state bar associations, the author of this blog reserves his right, and declares his intent, to seek CLE hours for all of the time spent researching, reviewing case notes, receiving and digesting email alerts, and writing these posts.

Now then. On that note, I have been working feverishly the last several days to prepare the first installment in a series of posts designed to solve the Ted Mack puzzle a/k/a What Do I DO about this ESI Stuff in a Small, Cash Poor Commercial Reorganization. That will post very, very soon. I promise. Really.

In between those posts, I will also roll in some of the fun "gadget-driven" posts that I have mostly ignored to this point.

Lastly, thanks are in order to some folks who have driven my traffic way, WAY up...

In roughly chronological order: 1) Thanks to the folks at ABI who have included this little collection of voodoo chants at the ABI Bankruptcy Blog Exchange. 2) Fellow DFW Metroplex resident Tom Mighell with the Inter-Alia blog. 3) Finally, thanks to Sam Hasler with the Indiana Civil & Business Law blog. Mr Hasler's kudos were a bit of a surprise, given that my involvement with the Indiana legal system has been limited to the group TRO that every major NHRA drag racing team (most of whom all have shops headquartered in Indiana) obtained to keep me from begging them daily to let me drive for one of them. Each will be added to my links, just as soon as I finish pontificating about the soon to be updated disclaimer language.

Debtor's Road Map

"Come on off of your roof top.
Come on down to the street.
I've got something to tell you.
Your secrets I will keep."

-- Miracle to Me
by The Black Crowes

The question was recently posed to me, and I am paraphrasing here, "Ok, Fatboy. You have made your point about ESI and bankruptcy practice. We get it. But for those of us actually preparing to file a small business Chapter 7 bankruptcy, or a small to medium sized Chapter 11, what are we really supposed to do?" This was a question I had hoped would wait for a few months, but alas, it is upon me now, and this is no time for a cut rate, second-tier kind of answer. Indeed, it is time to take stock of the situation, and face these practical questions head on.

For many reasons, the "best practices" type of answer is much easier to address in relation to the Chapter 7. This is largely true because, once the case has been filed, and certainly by the conclusion of the 341 creditor's meeting, the problem becomes one more for the Trustee. Thanks to the oft-cited Jack Seward article Debtor's Digital Autopsy, trustees, and to some extent creditors, have at least a starting point and a road map. For debtor's counsel, at first glance there is no such road map. However, deeper analysis of the debtor's (long-standing) duties regarding ESI reveals that, what is good for the trustee may be good for the debtor as well.

Even though phrases like EDD, ESI or e-bankruptcy do not appear in the Bankruptcy Code, the Code is probably still the best place to start. (PLEASE NOTE: Sections 332-333 and 351 of the Code may not be directly addressed, and those provisions ought to be consulted whenever appropriate).

Sec. 521 of the Code likely provides both a starting place and the loose outlines of that Debtor's Road Map. Sec. 521(a)(1)(B) requires, among other things, that the Debtor file a schedule of assets and liabilities. Sec. 521(a)(3) requires a Debtor's cooperation with a trustee, or an auditor hired by a trustee under 28 USC 586(f)(sec. 603 (e) as referenced therein is effective 18 months after the enactment of BAPCPA), so that the trustee can perform his or her duties under title 11. Note also that 28 USC 586(f) appears to require such an auditor to prepare a report for the Court which includes a clear and conspicuous determination as to whether or not the Debtor made a material misstatement of income, expenditures or assets. If the auditor makes such a finding, either the clerk of the district court, or the clerk of the bankruptcy court will notify creditors of such finding. Material misrepresentations concerning assets may also be reported to the Unites States Attorney under 18 USC 3057.

Sec. 521(a)(4) is a key provision in preparing the small business chapter 7 bankruptcy. This provision requires the surrender of "all property of the estate and any recorded information, including books, documents, records, and papers, relating to the property of the estate...". The provision, by incorporating sec. 344, requires that all such information be turned over, whether or not the debtor has been granted immunity as such may apply to title 18. 521(a)(4), by the way, appears unchanged from its pre-BAPCPA form, which of course pre-dates the ESI-related amendments to the Federal Rules of Civil Procedure. This means that, to the extent the bankruptcy bar has not been doing so, collectively we should have been accountable for ESI-related disclosures long ago.

Sec. 541(a) describes generally the property of the estate. As raised before in this forum, at the very minimum, bankruptcy lawyers must consider ESI in its various potential forms including: "books and records" of the estate, intellectual property of the estate, inventory, assets, etc. Aside from the esoteric, this also means the hardware that belongs to the debtor including servers, laptops, cell phones, digital cameras, zip drives, removable or external storage, voice mail systems, and so on. Keep in mind the limited exception found in sec. 541(f) regarding the assets of a 501(c)(3) organization.

Sections 542 and 543 address the requirements for turning property over to the trustee. Specific to sec. 543, such custodians of property may be Internet service providers, professional service providers, and online data storage providers. "Turnover" of this type of property, so long as the data is adequately secure and well-preserved, may be as simple as providing the trustee a new password in order to access the data. Given that much of this data may be usable only in proprietary software, this is likely a far more practical approach from the standpoint of both the Debtor and the trustee.

Section 554 addresses abandonment of property by the trustee. The implications of this issue are probably deserving of their own separate article. In order to preserve the collegiality of the bar, at the very least, debtor's counsel should at least be knowledgeable enough to alert a trustee when abandonment of estate property might cause unintended harm to third parties. For instance, if a chapter 7 debtor had been using on-line email accounts, such as GMail, what will happen to any confidential data once the trustee abandons the accounts? Who will be responsible for either securing, or destroying, the data of consumers so lovingly mined by vile identity thieves? Related concerns accompany the trustee's liquidation of estate property. Stories continue to run rampant even today of used, "re-formatted" disk drives that can be purchased from any auction or garage sale, where confidential or sensitive information can be easily recovered. If nothing else, professional courtesy demands that debtor's counsel alert the trustee to the location and nature of such information to reduce the chances of accidental disclosure of such information.

Section 704 outlines the duties of the chapter 7 trustee. As debtor's counsel preparing for the small business filing, sections 704(a)(2) and (4) are of particular importance. As we shall see, the key to (a)(2) is core competence and disclosure. Sadly, (a)(4) can sometimes be luck of the draw just as much as it is disclosure. Given the requirements of section 521, to the extent possible, debtor's counsel ought to consider preparing the ESI related schedules and disclosures as though actually working on behalf of the trustee. This approach will bring debtor's counsel full circle, in one sense, to Seward's Digital Autopsy article.

With these statutory obligations in mind, and incorporating by reference herein the more practical matters of the form and format of debtor's schedules and statements of financial affairs, how can the prudent debtor's attorney proceed with the small business chapter 7, making all the reasonable and necessary ESI related disclosures, and in fulfillment of counsel's duties as an officer of the court?

The first step likely begins in the initial debtor interview, and is a continuous process all the way through discharge. Most small businessmen and women, in fact if not in law, do tend to operate as though the person and the entity are one. This means that the company pays their cell-phone bill, company business is managed from a computer located at home, or worse, the company has purchased the owner a wonderful laptop computer with all design of wireless gadgets which the owner uses for all business, both personal and company related. Either the owner, a part-time book keeper, or a retained accountant have Quicken at one or more locations. Old, out of date computers are stashed in a broom closet, or were given to the secretary's college bound son last year. Even though the company may have an on-again off-again website, the employees all use web-based emails. Some of the employees communicate with family, friends, vendors or customers, through instant messaging (IM). Some, having no other real source of contact with their teenage children, maintain there own MySpace.com page, which gets flooded with email, comments and more instant messaging at the end of each school day. The universe of potential ESI sources of even the smallest company can be mind-numbing, and given the greater likelihood of reduced controls, the greater the likelihood of failing to meet one or more of the Debtor's duties.

The practitioner's first step then, likely ought to be the plain admonition and instruction that the computers, the laptops, the cell phone, the emails, the instant messages, E-EVERYTHING belongs to the company. The working assumption is that all these things, the E-Everything will also soon be in the control and possession of the trustee. Many will no doubt be surprised to discover that months worth of "deleted" emails and logs capturing word for word IM conversations will also, at first blush, be going to the trustee. To a great degree, this is merely an extension of bankruptcy lawyers have always done, by beginning the process of having the debtor accurately disclosing and accounting for the books and records, as well as the property, of the debtor. The inescapable duties simply require a greater degree of sophistication, and a collective advance in the bar's understanding of modern work processes and technological developments. If done correctly, Debtor's Schedule B will likely look more like an inventory from a Radio Shack store than the traditional debtor's schedule of assets.

Counsel must also establish early on, as has always been the case, that the company is the initial master to be served - not the owner. Aside from making the owner understand that "my laptop" is not really mine, the duties owed to the company and to the estate dictate that the owner, or perhaps his idiot brother-in-law the self-proclaimed computer guru, are absolutely prohibited from selectively destroying, altering or removing any type of file, email or other ESI-type data. In essence, the safest course may be to instruct the debtor to treat pre-petition data as though subject to a traditional "litigation hold". In this manner, even if the trustee is ultimately inundated with emails about last evening's American Idol, or IM's gossiping about the drunkard at the company Christmas Party, debtor's counsel has at least cut off one avenue of claims about failure to preserve, maintain or disclose the books and records. Even though the ESI turned over may prove damaging or embarrassing, in the long run preservation and disclosure may prevent spoliation/adverse inference/sanctions rulings. Disclosure and effective advocacy almost always trump destruction and deceit (except on the television program The Shield, which will almost certainly cut into the time I have set aside this year for "goofing off").

It is now imperative that debtor's counsel inquire as to whether or not the debtor has, or has had, a document retention policy (DRP). The reasons for this are many, and sound. A well-crafted DRP, at least initially, should provide counsel with a summary of the company's digital enterprise and at least a cursory explanation of how the internal systems work together. Additionally, if third-parties such as customers or vendors have external systems that interact with the debtor's digital enterprise, this should be summarily explained in the DRP as well. More importantly, a good DRP will include an inventory of the hardware and software used within the enterprise, and will further identify those individuals within the organization that know where all the digital skeletons are hidden.

From the perspective of the typical small chapter 7 business filer, the "new era" of ESI likely does not create any new or additional burdens on the debtor or on debtor's counsel. The emerging recognition and importance of ESI does mean that debtors, and their counsel, must exponentially improve their understanding of business practices and technological advances, and how those fit into bankruptcy jurisprudence.

True understanding of modern business practices and the attendant uses of technology make up that "core competence" that those who have gone before me have advocated. See Today's Bankruptcy Litigation Calls for Greater Technological Competency: Understanding Electronic Data Discovery, ABI Journal, Vol. XXVI, No. 2, March 2007. This knowledge, this core competency is vital because the ultimate answer to the small business chapter 7 is disclosure. We cannot fully or adequately disclose that which we do not understand.

In the vast majority of chapter 7 business cases, it is highly unlikely that pre-petition, either the debtor or debtor's counsel will be compelled to employ extensive forensic investigations or services to comply with their statutory obligations. Obvious exceptions include fraud, or any unauthorized use or transfer of estate property (you know, theft).

Generally, small commercial chapter 7 debtors must then satisfy modernized versions of the duties under the Bankruptcy Code that they have always had: 1) requisite knowledge of the debtor's affairs; 2) disclosure; and, 3) cooperation with the officers of the estate.

In the next post, we can explore how the small and medium Chapter 11 debtor cases can be so similar and so disparate at the same time.

E-Discovery and Bankruptcy: The Ties that Bind

What follows is a transcript, more or less, of a presentation I made before the Tarrant County Bankruptcy Bar. I say more or less, because I don't speak well from my own notes, preferring to ad lib from a prepared outline. Some in attendance may say this was not at all the same presentation... so be it. Nonetheless, most had fun, because of the ties incorporated into the presentation. I was, however, dissatisfied with an answer I gave to one of my favorite Tarrant County lawyers, Ted Mack. Future posts will correct that issue I hope. The ties all came from WildTies.com. You should be able to click on a picture and go straight to that site's ordering info.

Amended Rules – Effective December 1, 2006, certain amendments to the Federal Rules of Civil Procedure became effective. For any practitioner living in one of the last remaining spots in the world that does not have access to the Internet (one of those being Mangum, Oklahoma), those amendments primarily dealt with the care and handling of “electronically stored information”, or ESI. If it is stored on a hard drive, flash drive, cell phone, voice mail, email, instant message, iPod, PS2, GPS, laptop, blackberry, DVD, website, blog, MySpace, or any other device that requires the intervention of your child or grand-child to achieve functionality, it holds discoverable ESI.

Rule 16 – Pre-Trial Conferences; Scheduling; Management


Rule 26 – General Provisions Governing Disclosure; Duty of Disclosure

Rule 34 – Production of Documents, ESI, & Things for Inspection and Other Purposes

Anyone fortunate enough to have a pair of their own deep pockets, or work for a firm with sufficiently deep pockets, and the ability to afford membership to the American Bankruptcy Institute (ABI), may have seen the articles and contributions of Jack Seward, a digital forensic accountant. For three years or more, Seward has been warning those who cared to listen, about the impending changes now thrust upon the bankruptcy bar as a result of the convergence between commercial adoption of technology and the inevitable evolution of federal law. I had the opportunity to speak to you about this emerging issue some time ago. My timing was not the greatest though, as my last presentation was in November 2005, just a few short weeks after the effective date of BAPCPA. The impact of ESI-related rules was, for all practical considerations, the least of our collective concerns at the time.

That day that Jack Seward has been warning us about is here, and now the question is, what do we do about it? One of Seward’s masterpiece contributions to the modern practice of bankruptcy law was DEBTOR’S DIGITAL AUTOPSY in the Summer 2003 edition of NABTalk, the journal for the National Association of Bankruptcy Trustees. The article is worth its weight in gold for any panel trustee, and also serves as something of a road map for creditors and committee members about how best to untangle the web of a deceitful debtor. However, there appears to be a vacuum of published guidance, from the practitioners’ point of view, that serves to instruct each of us as to the best practices to be observed within the confines of bankruptcy court, regardless of who we represent.

Early on, I suggested in presentations and articles that there is a certain level of “do-it-yourself” types of remedies that practitioners might consider, in order to deal with one of the chief concern, COST.

Consider the following situations. After lunch today, a small, regional Internet service provider drops by out of the blue one day, and hires your firm to assist the company in a Chapter 11 bankruptcy. Remembering a few key words from those brief moments I hadn’t put you into a mid-day slumber, along with getting an engagement letter, a suitable retainer, accurate and certifiably verifiable schedules and SOFA, you also remember to ask the client about a document retention policy. Client confidently indicates that the company has a great retention policy, very thorough. In the words of that great Western Philosopher, Dale Gribble “WINGO, man. We are home free!” This bankruptcy is a slam dunk, adversary proceedings will be a breeze, and there is nothing to do really except to sit back and receive those well-deserved fees.

It may be appropriate here to STOP for a moment, and address my warm-fuzzies about document retention policies. For those of you fresh out of practice in Mangum, Oklahoma, a document retention policy is nothing more than another piece of paper that purports to create another corporate dictate, which may or may not be followed by the employees. A retention policy can address a wide gamut of issues, including how long documents are stored, where they are stored, how they backed-up, email policies, descriptions of the enterprise data system, identification of the individuals responsible for implementation of the policy and even more.

From the practitioner’s point of view, if there is indeed a pre-petition retention policy, this policy can be a tremendous aid by serving as a blueprint of what the Debtor purports to be doing with its data. THINK about why this might be important to us.

Even the least sophisticated potential debtor comes into our offices every day, seeking advice on a potential chapter 11 filing, with a stack of balance sheets and P&L’s printed off from the Quicken software. Not only is this ESI, these are the things that make up the books and records of the Debtor. As a commercial bankruptcy lawyer, it is incumbent upon each of us to have some minimum threshold understanding of how data systems work, what might be stored in them (both seen and unseen), and what the legal ramifications are for the practical realities of clients, large and small, regardless of the level of complexity of their respective digital enterprises.

For instance, if a debtor’s financial expert is emailed various drafts and amendments of financial projections, are those drafts and amendments saved under new names, or are the older drafts merely overwritten with a new file name? Are drafts and amendments saved only on the author’s desktop, or are drafts and amendments saved at a server level? Regardless of where they might be saved, are they being backed up? Are they being periodically and routinely destroyed at the administrator level? Is there an adequate procedure in place to protect data that, if not subject to a traditional “litigation hold”, is at least very likely to play a role in a contested confirmation battle? Is it even likely that a document retention plan developed pre-petition would contemplate and adequately provide for the “Alice in Wonderland” world of bankruptcy?

While a document retention policy will not suffice as the “end all and be all” to prevent ESI related malpractice (or at least, misfeasance), if indeed the Debtor and all of the worker bees are complying with the document retention policy, it can at least serve as a starting point for bankruptcy counsel.

The growing dilemma that will be faced by all practitioners, but especially bankruptcy lawyers is this good-news/bad-news proposition. How we use, implement, present, and object to this mysterious, ethereal ESI will largely fit into the rules of evidence and of procedure that we all are, to varying degrees, already familiar with. A document containing hearsay will still be hearsay, regardless of whether it is found in a letter, in an email, embedded as a hidden attachment to an encrypted file, or written on the wall in the men’s restroom at JJ’s Blues Bar. The fundamental problem with ESI in bankruptcy is that, WE DON’T KNOW THAT WHICH WE DO NOT KNOW.

Before settling for a thinly veiled Robin Phelan sight gag using ties as props, I spent several hours over the preceding weekend trying to learn all of the numerous ways to easily and readily insert, and then hide from plain sight, various types of metadata in an Adobe .pdf document. How many here are still under the mistaken belief that there is no metadata in .pdf documents? This is a fallacy I continue to hear, even from attorneys infinitely more experienced than I. Even after a just a few hours, the built-in features of Adobe Acrobat, that just beg the user to insert all types of metadata, was so overwhelming to me that spending $100 on these kitschy ties soon became far more appealing.

I suspect that many of us here today steadfastly rely on paper client files, have bushels of banker’s boxes and freight train sized file cabinets. Our ideal solution for document retention is, the malpractice free files get sent to XYZ offsite storage, until one of the partner’s accidentally sees the monthly storage costs, and orders the entire mess into the fires of oblivion. If we don’t know what we don’t know, and if our own document system is stuck in some circular worm hole originating in the 1950’s, how can we adequately advise our clients, and how can we adequately communicate with, supervise, and trust those professionals we hire to help with ESI issues? How much, if any “DIY” activities can we engage in before spending the money to bring a digital sleuth?

An entire SUPER SMART industry has developed almost overnight focused on digital litigation support. In Houston, right next door to every Starbucks you will find a vendor ready to clone a disk drive or recover lost email. These vendors are on the verge of becoming the equivalent of the 7/11 of litigation support.

To be certain, there are numerous individuals and companies that can provide solid guidance when it comes to tackling ESI issues. The primary focus of many of these vendors is on litigation support, or “forensics”. As much as even I wish everything in bankruptcy was decided in intensely and bitterly litigated adversary proceedings, there is a real DANGER in relying too much on third party vendors, especially whose primary focus is litigation support. Just as important, we have to at least have some basic awareness of third party ESI software or related products and services that our clients may have purchased an implemented before coming to see us.

I cannot stress enough that the bankruptcy bar has to view ESI as more than just ESI for its own sake. As competent practitioners, we must also view ESI as the books and records of the estate. We must view ESI as property of the estate. We must view ESI as a potential deciding factor in claims of bad faith or mismanagement. We must view ESI as inventory, assets and liabilities. We must view ESI as a component of the pre-petition business, as a functioning business component of both the DIP and the estate, and we must view ESI as a functioning business component of the reorganized debtor. Even more so than any other field of practice, we have more EYES on us on a day to day basis. We have committees (and now, under 1102 committees have other sets of eyes they must appease), examiners, trustees, CRO’s and even a CARP (Court Appointed Responsible Party).

Between the pressing interests of those interested parties in bankruptcy that we are already familiar with, and the rise of ESI and its own cottage industries, which we know relatively little about, the ability to perform as “debtor’s counsel” in commercial bankruptcy is doubly complicated. Ceding complete control of ESI issues to third party vendors, without having some modicum of understanding and supervision over the process is akin to stamping VOID on the face of your law license, because the eyes see everything!

Is there some saving grace, some SILVER BULLET to keep the malpractice monsters at bay? At the risk of creating the misguided belief that a piece-meal approach to a systemic issue is ok, there are some fundamental steps that counsel can take to fulfill their respective duties to the client, the court, and to their cardiologist.

1) Meet and confer – Just like turn of the century voting in Chicago, meet and confer should be done early and often. In our district, we have learned to rely heavily on the Alternate Scheduling Order, which sets up a number of pre-trial deadlines in case counsel fail to confer and propose their own scheduling order. When I first started practicing, one of my sleepless nights was attributed to my failure to contact opposing counsel under the terms of the Standard Scheduling Order, fearing that a public whipping was imminent. The only times I have ever been contacted by opposing counsel under the Standard Order have been when litigating against lawyers who don’t normally practice in the bankruptcy courts. It seems to have become standard practice to calendar pre-trial deadlines from the Alternative Scheduling Order as soon as PACER delivers it, with no real communication between counsel until discovery requests are served. Assuming that local practice continues to rely on the Alternative Scheduling Order, that means that counsel has just over a month to have substantive conversations about the ESI they have, the ESI they need, the ESI that won’t be produced to cost or availability, etc.
2) ESI by Agreement – The amended rules provide for one of the things that, I am proud to say, our bar does very well, and that is pre-trial by agreement. It just so happens that the amended rules contemplate that parties will use the opportunity of the “meet and confer” to enter into agreements regarding pre-trial deadlines, how ESI issues will be handled, confidentiality agreements, and procedures for identifying and returning confidential or privileged ESI. Instinctively, bankruptcy judges may express little sympathy, and be of little assistance, to parties in future ESI disputes who failed to take part in the “meet and confer” process.
3) New Sheriff in Town – Ultimately, many commercial bankruptcies may be best served, at least for purposes of dealing with ESI issues, by the use of “ESI Referees”. No different from a traditional discovery referee, an ESI referee might be an informed but disinterested third party with the requisite knowledge to mediate, or if necessary arbitrate, ESI discovery disputes, assist with storage, forensics (through the use of reputable or approved third party vendors), and even facilitate “meet and confers”.


4) Piece-meal approaches are no substitute for an all-encompassing Plan - When dealing with ESI, it is not enough to troubleshoot problems as they become apparent. For instance, most lawyers are coming to the realization that private email is not so private, and that it tends to last, well, forever. To over come this problem , the ill-informed might recommend that emails be sent through web-based encryption, like services such as Hushmail.com. From a privacy standpoint, it is a great service, because neither the sender nor the recipient have to shell out the whopping $20 a year to get the digital id necessary to send encrypted mail. Even better, the email resides only on the Hushmail server, and is overwritten after a brief period of time. Woe be unto the practitioner that looses this technology on a client, only to discover that the client's employees start using the service to hide damaging transactions, or conceal something of great interest to a prospective creditor's committee.

The amended rules regarding ESI will have a huge impact on how bankruptcy practice is conducted in the future, while at the same time leaving the core structure of bankruptcy law untouched. By accepting the multiple roles and the changing shades of ESI, by viewing ESI as a complete body of knowledge rather than simply a group of piece-meal annoyances, we can all retain the joy we derive from the practice, while still meeting our numerous duties to those around us.

Windows Vista continued: Rage Against the Machine

"Ain't it funny how time slips away" - Western philosopher Willie Nelson





Sorry to have been away so long, wish that I could blame it all on the PS3 I claimed to have been purchasing when I first commented on Windows Vista. Turns out that one of you ratted me out to my wife, who threatened to use the prospective PS3 in an unsafe manner not in line with its original design and further threatened to use said device in a method not otherwise intended by the manufacturer. So I served my time in the doghouse, but put the time to good use by camping out in front of the local movie theater to be the first to get tickets to see "GHOSTRIDER". Oh Happy Day!



Back to work.


Keeping in mind that many of the Vista features are already available in various forms and from various sources, the reported ease of use of these features may be a boon for Microsoft shareholders but will cause many a litigant to develop a case of the "vapors" in due time.


Vista allows user level encryption for files and folders. For you and I, this means that two people might be share one computer, but those users can encrypt the data such that the other users are blocked from accessing it. From a discovery standpoint, if Party A has access and ownership of a computer running Vista, but cannot access responsive data that has been encrypted by Non-Party B, does Party A have "constructive" control or possession of the data?


The encryption also has some centralized features found at the administrative level. Administrators can set up keys to access encrypted files through the use of smart cards. (Taking this approach to the next logical step, can the day be very far off that I have to swipe my credit card through my computer at the office, and pay my own way while at work?).


More intriguing is the administrator's ability to block the use of removable storage, such that rogue information thieves cannot slip their sushi-shaped USB drives into the office and steal all the payroll files. Assuming, as I have, that document retention policies will become just as important to bankruptcy practitioners as will an accurate disclosure statement, this raises all description of potential traps. In the event a debtor or litigant has adopted a document retention policy forbidding the use of removable storage, has the administrator taken sufficient action to prevent such use? Are there exceptions to the rule, and if so, why? And how is the data being protected off site? This time next year, I expect that $69.99 at your neighborhood Best Buy will buy a Ginormous-o-byte removable hard drive powered by a flux capacitor and the radioactive goo scraped from a million old Timex watches. Whether that data constitutes "books and records" of the estate, or property of the estate, it might make sense to have someone commit to flipping the "no removable storage device, even for the CEO's idiot son who was recently names as Vice President for External Environmental Loss Control and Albanian Multi-National Development" switch.


Another "new" feature of Vista is its Shadow Copy. The Shadow Copy feature makes periodic point-in-time copies of a file as it is being used. In the event that the file is deleted by mistake, Shadow Copy makes it much easier to restore the file after the fact. Shadow Copy is the built in version of Delete Does Not Mean Deleted 2.0.


Anyone who has ever upgraded to a completely new computer knows the heartache of trying to transfer all those programs, addresses, favorite songs and personal avatars from the old machine to the next. Vista has an Easy Transfer system, which is a tempting equivalent to the do-it-yourselfer's version of the Easy Bake Oven. With just a USB cord, all those recipes and old girlfriend's phone numbers get passed from old computer to new. Even though I am a huge fan of the DIY crowd, a dangerous notion that Jack Seward is patiently trying to disabuse me of, Easy Transfer ought not be considered an appropriate substitute for cloning a drive.


My favorite new goodie is Windows Meeting Space. Meeting Space is a multi-user, peer to peer "collaboration" work horse. The real world equivalent is me and 9 of my closest friends squeezing around one table at Starbucks and working on an etch a sketch until we have completed a draft Disclosure Statement. Meeting Space allows users to work on a file/presentation at the same time, from different computers. When session changes are saved, each participant automatically has the saved changes on their document.


It is frighteningly easy to conduct a Meeting Space session, without the need for internal server infrastructure. Meeting Space works off of wireless local area networks, or even ad hoc PC to PC networks. The NEW real world equivalent means that me and 9 of my closest friends can lounge around Starbucks and replace the etch a sketch with laptops or other portable wireless devices with enough uuumph to support the program.


When I grow up, I wish to be a litigator, for I smile with glee at the endless universe of preservation, privilege, and disclosure issues this arrangement provides. Can changes and drafts be saved and tracked? If so, does the document retention policy address how and when? What is the practical effect of a "litigation hold" on Meeting Space users? Assuming some real time chat/IM option is available, can a chat log be kept by some users without the others knowing, and if so, who is tracking attorney-client exchanges? What if a participant drops out of the session early, and other users make subsequent changes to the file. Will the earlier version be drifting around in the ether, just waiting for a sanctions motion?


In case the point was missed in the earlier post, or even at the beginning of this post, many of these features, if not all, are available pre-Vista release. Tomorrow is Now!