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.