Better Check the 'Net First
In a swan song before retiring
from the bench, bankruptcy judge James Gregg penned an interesting decision in In re Hale
, 2014 WL 2922347 (Bankr. W.D. Mich. 2014) touching on an attorney's obligation to do an on-line real estate search before filing a consumer bankruptcy case. After a chapter 7 trustee discovered, two years into the bankruptcy case, the debtors' ownership interest in previously undisclosed real estate, the debtors sought to convert their case to chapter 13. Judge Gregg held that the motion to convert was filed in bad faith and denied it. The court also denied an attempt by the debtors to exempt their interest in the previously undisclosed property.
None of this is particularly novel. So far. But, then, in a section of the opinion captioned "What Now? How These Circumstances Could Have Been Avoided and Possible Sanctions" Judge Gregg delved into the debtors' counsel's obligations under F.R.B.P. 9011(b):
"By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney... is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances [list of four different categories]." .... Dietrich submitted the Debtors' erroneous schedules to the court. He therefore faces "presenting" sanctions unless a reasonable inquiry was made."
Judge Gregg believed that debtors' counsel had not, in fact, made a reasonable inquiry. Why not? Because the Judge (or someone in his office - the opinion does not state) was able to go online and discover the debtors' concealed real estate interest in "less than five minutes." Certainly, debtors' counsel or a paralegal could have, and should have, made a similar investigation given the searches' ease. Fortunately for debtors counsel, Judge Gregg did not actually impose sanctions, citing both the benefit of hindsight and the desire, given his pending retirement, to not impose the sanctions process on another judge.
While Judge Gregg is certainly correct about the ease of performing such searches in many jurisdictions and most situations, it's a bit of a slippery slope to state that not doing a real estate search prior to filing a bankruptcy case constitutes a failure to make a reasonable inquiry. The search was an easy one in the Hale case, but how easy should the search be before the attorney MUST do it. Run a grantee search for John Silva in New Bedford, Massachusetts (a heavily Portuguese town in my region) and you get twenty pages of results. Some title checks can take hours to sort through. At some point an attorney should be able to trust his client. Judge Gregg also doesn't address the fact that it took the chapter 7 trustee two years to discover the concealed real estate. Guess she didn't run a routine title check either.
Still, the warning is worth noting.
Eight Circuit follows Third Circuit's Exide in En Banc Review of Interstate Bakeries
Complex corporate transactions often include ancillary intellectual property licenses. For various reasons, when one company sells off part of its business operations it may not be able to transfer intellectual property rights to the acquiring entity. Usually, this is because the selling entity still needs to retain the IP rights for the operations it doesn't sell. The parties resolve the problem by licensing the IP to the divested portion of the business - usually these IP licenses are perpetual and fully paid. In intent, the licensee receives the rights to the IP within a particular scope - possibly geographical or perhaps in connection with a specific brand or product.
When the seller files a bankruptcy can it reject these ancillary IP licenses? What if, by so doing, it effectively unwinds a fully completed business divestiture? The Court of Appeals for the Eighth Circuit had to address this issue recently in the Interstate Bakeries Corporation case. The debtor had previously sold off several food brands as part of a business divestiture, but licensed the trademarks instead of assigning them. Now, the debtor sought to reject the trademark license - effectively unwinding the prior business transaction.
In the Exide Technologies case
, the Court of Appeals for the Third Circuit had faced a similar situation. It held that the trademark license was not executory because the parties had substantially performed the material provisions of the agreement when the prior business divestiture was completed. The remaining trademark license was thus substantially performed and non-executory. The debtor could not reject it.
The Court of Appeals for the Eight Circuit initially reached a different conclusion
, even though on similar facts, holding that the remaining trademark license was executory. In distinguishing Exide, the Eight Circuit noted the existence of additional provisions requiring the licensor to continue to monitor the licensee's use of the marks. These provisions, the Court said, made the license executory.
On En Banc review, the full Court of Appeals reversed
. Following Exide, it reviewed the license agreement as part of an integrated sale agreement, which it held had been substantially performed. Along the way, the court discussed the concept of considering the IP license in context. The Court felt that the central purpose of the agreement was the sale of certain brands and related operations to the buyer - not a trademark license. The trademark license itself was an ancillary part of the transaction and, thus, the remaining unperformed terms were not material.
Labels: executory contract, Exide, Interstate Bakeries, trademark, trademark license
FTC to the Bankruptcy Court: Do it Right or Appoint a CPO
In a May 22 letter
from Jessica Rich, Director of the FTC's Bureau of Consumer Protection to the United States Bankruptcy Court for the Southern District of New York, the FTC drew a line in the sand in the ConnectEDU
bankruptcy case. ConnectEDU was a venture funded tech start-up that provided data-driven services to help college students evaluate career options and paths.
The hearing date was moved to May 27 prior to the hearing, so it remains to be seen what action will occur in the case, but given the FTC's objection, it seems likely the US Trustee's Office will appoint a CPO.
Labels: consumer privacy, CPO
When is a Contract Not a Contract?
Simple answer - when it is really two contracts. In Physiotherapy Holdings, Inc.
, the United States Bankruptcy Court for the District of Delaware examined the issue of contract integration.
The debtor in this case faced an unusual dilemma. The court had affirmed its Chapter 11 plan, but it still needed to address an essential software license with Huron Consulting Services. The debtor absolutely needed the software to operate - at least for the six to nine months needed to switch to new systems. But, the software license was governed by a Master Agreement, which, among other terms, required the debtor to indemnify Huron against certain claims a litigation trust was planning to bring. If the debtor assumed the Master Agreement/Software License as an integrated contract, the reorganized debtor would have to insure Huron against the coming storm - a prohibitively expensive proposition. On the other hand, if the debtor rejected the contracts it would have to cease operations - since access to the software was essential. And, because the debtor's plan had been confirmed, no further delay was obtainable.
The debtor attempted the middle road. It asked for leave to assume the software license while rejecting the Master Agreement. Ordinarily, a debtor must assume or reject an executory contract in its entirety. The debtor may not assume the parts of a contract it wants, while rejecting the rest. The same rule applies when several agreements are designed to work together as an integrated contract. The debtor must reject or assume the integrated contract in its entirety.
The court closely examined the provisions of the Master Agreement and the license agreement. Executed as part of a single business arrangement, the Master Agreement terms governed, and were incorporated into, the license agreement. However, the court noted that at several places in the combined contracts provisions made clear that where the specific contract had provisions conflicting with the Master Agreement's terms, the specific agreement's terms would control. In particular, the Master Agreement contained broad indemnification provisions while the license agreement contained only a subset of the indemnifications' scope. By carefully reviewing the contracts' provisions, the Court was able to support a finding that the license agreement constituted a stand-alone agreement, even if some of its terms were derived from the Master Agreement. The debtor could assume the license agreement, while rejecting the Master Agreement.
Labels: assumption, executory contract
Electronic Voting Comes to the Bankruptcy Court
Released on PRNewswire a few days ago was a press release
about the first bankruptcy court order approving electronic balloting procedures in a Chapter 11 case. Using a system developed by claims agent Upshot Services LLC
, the Chapter 11 trustee for Pitt Penn Holding Company, Inc. obtained a court order allowing creditors to complete and submit their ballots using a website interface. Creditors can also use a paper ballot. The voting website is accessible here: http://www.upshotservices.com/pittpennvoting
. The order is available here: http://bit.ly/1sbWuAE
.See paragraph 20 for the language allowing the claims agent to accept votes by electronic, online transmission.
The advantage of using a system like this are obvious, and given the fact that technologies for obtaining electronic signatures are well established, this is a welcome step in reducing the amount of paper chapter 11 cases can generate.
Badmouthing the Bankruptcy Trustee and the First Amendment
As a Chapter 7 panel trustee, I sometimes annoy (to use a mild term) the occasional party - either because they don't understand the bankruptcy process, have an inflated sense of self-entitlement, or merely because my actions are inimical to their sense of well being. A California trustee, in a similar situation, found himself in the cross-hairs of a somewhat critical blogger
in a Ninth Circuit decision that defined the scope of a blogger's right under the First Amendment to publicly criticize a trustee's actions. Not just a bankruptcy case, the Obsidian Finance Group, LLC v. Cox
decision provides a road map to applying First Amendment decisions to online commentary.
Kevin Padrick was appointed as the Chapter 11 trustee for Summit Accomodators, Inc. shortly after it filed its Chapter 11 bankruptcy petition. He soon found himself within the cross-hairs of a Crystal Cox, who commenced blogging about the bankruptcy in a manner critical of Mr. Patrick (some examples: "the facts of what Kevin Padrick of Obsidian Finance did that was probably illegal are washed under the carpet, never to be seen again" and "He is smart and good at his job, which is apparently screwing people out of their money"). She accused Padrick of fraud, corruption, money-laundering and other illegal activities in connection with the Summit bankruptcy. In response, Padrick and his company, Obsidian Finance Group, LLC, sued Cox for defamation.
The underlying framework derives from two Supreme Court cases - New York Times Co. v. Sullivan and Gertz v. Robert Welch, Inc. In Sullivan, the Supreme Court stated that defamation against a public official is only actionable if made with "actual malice." The plaintiff must show that the writer published the statement with actual knowledge that it was false or with reckless disregard to the truth. Under Gertz, in a private defamation action mere negligence in making a false statement is sufficient to create liability. Padrick was arguing for an even more lenient standard, arguing that the Gertz negligence standard applied only to protect journalists, or, alternatively, where a matter of public concern was involved.
The District Court held that most of Cox's posts were constitutionally protected opinion, with the exception of one allegation - that Padrick had failed to pay taxes due from the bankruptcy estate. That claim went to a jury, which found in favor of Padrick. After Cox's motion for a new trial was denied, she appealed the case to the Court of Appeals for the Ninth Circuit, which held (a) that First Amendment protections were available to a blogger, (b) that Padrick was not a "public officer" but that the bankruptcy case was a matter of public concern, thus requiring a higher standard before liability could attach, and (c) that liability could not be imposed without a showing of fault or actual damages.
The Circuit Court started with analyzing whether Cox could avail herself of First Amendment protections, or whether those protections were limited to journalists. Citing to the Supreme Court case, Citizens United, as well as decisions in the Second, Third, Fourth, Eighth, and DC Circuits, the court held that a First Amendment distinction between the institutional press and other speakers is unworkable. In defamation cases, the speaker's status as a professional journalist is not relevant - First Amendment protections derive from the defamed party's status and the public importance of the matter being discussed.
The Court then turned to the question of whether the matter was of public concern. It held that it was. Padrick was appointed as a bankruptcy trustee of a company that had been accused of diverting funds from investors. His actions, and particularly the allegations that he was acting improperly in his position, were a matter of public concern. Accordingly, Padrick needed to prove that Cox had acted negligently in making her statements to obtain a judgment for actual damages incurred. Also, the jury could not award presumed damages, under Gertz, unless it found that Cox acted with actual malice.
The Court also considered whether Padrick, as a bankruptcy trustee, was a public official. If he was, then the stricter New York Times standard would apply to the entire case. The Court noted that Padrick was neither elected nor appointed to a government position, and did not exercise control over governmental affairs. He merely was appointed as a stand-in for a debtor in possession. As such, Padrick was not a public official for purposes of defamation law.
The case was remanded back to the District Court for further proceedings. So, perhaps, the matter will have to be retried, with Padrick having to prove either that Cox acted with actual malice, in order to obtain an award of presumed damages, or having to prove both that she acted negligently and also that he suffered actual damage as a result of her posts. As for me, I was told when I got into this business that Chapter 7 trustees need to have a thick skin.
Labels: Cox, defamation, Obsidian, Obsidian Finance, Obsidian Finance Group, Podrick
Mt Gox files for bankruptcy protection in Japan
that Bitcoin exchange Mt Gox has filed for bankruptcy protection in Japan, after disclosing that it lost about $480 million dollars in Bitcoin to hackers.
Labels: bank robbers, bitcoin, mt gox
Back to the Mattress: Mt Gox and the Future of Bitcoin
A true digital currency is the holy grail of the on-line world. Since the start of the Internet, a long series of folks have been trying to find the on-line equivalent of cash - some kind of digital token that is secure, easy to transfer and, for most of the people who have joined the hunt, anonymous. Bitcoin provides the latest foray into this arena, and the Bitcoin story provides the latest example of the basic truth that payment systems are always dependent on the support of a strong, trustworthy third party.
This truth applied to traditional currencies, like this:
Valued when their backing governments existed, when the government support failed so did the currency.
The digital world is no different. When "virtual" banks tried to build a business around Linden Dollars in Second Life, problems quickly developed. Customers of Ginko Financial
, an unregulated Second Life investment bank, swarmed the "doors" at the first hint of trouble, causing a run on the bank and its collapse.
The rapid increase of Bitcoin popularity is creating a similar dynamic. At one point the largest trader of Bitcoin, Mt Gox
started to encounter pronounced difficulties handling transactions as the result of regulatory issues. Customers started to move business to different exchanges, and on February 7 Mt Gox halted withdrawals
. Four days later, another exchange, BitStamp, also suspended withdrawals
, citing difficulties caused by denial of service attacks against its servers that could potentially affect the security of its transactions.
On February 24, Mt Gox shut down completely
. Customers might have lost up to $480,000,000. Although, Bitcoin value has been plunging as a result of the shutdown and other disturbances in the Bitcoin infrastructure. So, the actual loss might be significantly less.
As of today (February 26) visitors to its website received this informative and reassuring message:
February 26th 2014
Dear MtGox Customers,
As there is a lot of speculation regarding MtGox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues.
Furthermore I would like to kindly ask that people refrain from asking questions to our staff: they have been instructed not to give any response or information. Please visit this page for further announcements and updates.
And so it goes.
The lesson, as I pointed out before, is that any currency, even a virtual one, requires a reliable and trustworthy controlling authority. An imaginary person
simply does not cut it.
Understanding Electronic Discovery: Its Not Just About Protecting Your Client
Reading a recent Massachusetts Lawyers Weekly, I spotted an item in the Bar Discipline column that highlighted the dangers of not staying up to date with technology. A litigation attorney, let's call him Paul, failed to understand the rules governing electronic discovery, resulting in his client deleting electronic data and the Massachusetts Board of Bar Overseers issuing a public reprimand.
Paul represented a client accused of taking confidential information with him when he left his employer to work for a competitor. Allegedly, the client had transferred the information from his old laptop to a new one, used a computer software program to delete the stolen information from the old laptop, and then returned the old laptop to his former employer. In late 2006, his former employer sued him, and obtained a TRO requiring the client to return to his former employee any information that he had taken. Instead of complying with the order, the client instead deleted the files from the new laptop. About five months later, plaintiffs' counsel advised Paul that they planned to file a motion to obtain turnover of the new laptop, and that documents on the new laptop had to be preserved. Paul did not advise his client not to delete relevant files from the new laptop, and his client subsequently deleted some additional files - although without Paul's knowledge.
Then, the court ordered the new laptop be surrendered to the plaintiff's IT expert. Notified of this event, the client told Paul that the new laptop contained confidential information belonging to his new employer and unrelated to the lawsuit. Paul advised his client that these documents could be removed from the laptop before turning it over. When the laptop was turned over, and the deletions discovered, the Court held that the client had engaged in spoliation of evidence.
Reading the reprimand didn't give me the impression that Paul was acting in bad faith - instead he had failed to comprehend the nature of the information on the computer and the need to keep all of the information preserved once the litigation commenced. Used to a paper world, he failed to anticipate and guard against a client who was tempted to delete information, and failed to understand that deleting information from a computer can leave a gap - showing that information was removed but leaving wide open the question of what the removed data contained. By issuing proper warnings to his client, being alert to the possibility of non-relevant trade secrets residing on the laptop, and following appropriate protocols to avoid the release of trade-secrets stored on the laptop, Paul could have avoided the damage to his client.
In its reprimand, the BBO indicated that Paul's failures violated his duty to provide competent representation. In 2012, the American Bar Association adopted revisions to the Model Rules of Professional Conduct
, including this language added to the commentary for Rule 1.1:
To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology...
That's a simple change, but one attorneys should take to heart lest they, some day, end up like Paul. Massachusetts hasn't yet adopted the 2012 revision in its commentary to Rule 1.1, but the Massachusetts BBO clearly expects its attorneys to understand the new world of handling electronic evidence.
Backing Away From Those Messy Electronic Signatures
Back in August, the Judicial Conference for the United States Courts released for comments proposed amendments to the Federal Rules of Bankruptcy Procedure
, including revisions to FRBP 5005 that will effectively limit the types of electronic signatures usable on court pleadings.
Currently, the relevant part of FRBP 5005 reads:
Filing by Electronic Means.
A court may by local rule permit documents to be filed, signed, or verified by
electronic means that are consistent with technical standards, if any, that the
Judicial Conference of the U.S. establishes. A document filed by electronic
means in compliance with a local rule constitutes a written paper for the
purpose of applying these rules, the Federal Rules of Civil Procedure made
applicable by these rules, and § 107 of the Code.
Added in 1996, this provision allowed parties to file documents with electronic signatures, so long as the signatures conformed with the particular court's local rules. Different courts employed different requirements, some requiring that an original signature be scanned, with the attorney retaining the original signature. Others, such as my home court in Massachusetts, allowed use of a printed name, preceded by a /s/, to serve as a party's "signature" so long as the filing attorney maintained an original copy of the document with an original wet signature. Model Rules for Electronic Case Filing, approved in 2001, allowed use of an electronic signature in the "s/Name Here" format, but also required the filing attorney to maintain the paper document with the original wet signature. Wet signatures were still required for evidentiary purposes (particularly in the rare case involving subsequent criminal prosecutions) and, as a practical matter, requiring a wet signature made sure that the third parties, usually the bankruptcy debtors, were actually reading and signing the documents before their attorney filed them with the "s/Name Here" electronic signature. (Some of you commercial bankruptcy law types might look aghast at the possibility, but take it from a Chapter 7 trustee - that kind of thing happens all the time.)
The proposed revision is more specific, although it provides three alternatives:
(3) Signatures on Documents Filed by Electronic Means.
(B) Signature of Other Individuals. When an individual other than a registered user of the court’s electronic filing system is required to sign a document that is filed electronically, the registered user shall include in a single filing with the document a scanned or otherwise electronically replicated copy of the document’s signature page bearing the individual’s original signature.
[Alt. 1: By filing the document and signature page, the registered user certifies that the scanned signature was part of the original document.]
[Alt. 2: The document and signature page shall be accompanied by the acknowledgment of a notary public that the scanned signature was part of the original document.]
Once a document has been properly filed under this rule, the original document bearing the individual’s original signature need not be retained. The electronic signature may then be used with the same force and effect as a written signature under these rules and for any other purpose for which a signature is required in proceedings before the court.
In short, no more electronic signatures. The wet signature is scanned, filed electronically with the court, and then thrown away. Warm up those scanners people and hire some support staff to attach those scanned signature pages to your single filings. It strikes me as a lot of extra work. Option two allows the filing attorney to certify that the electronic signature is really the debtor's, which strikes me as problematic for the filing attorney if the debtor disclaims his or her signature later on. Perhaps an attorney desiring to save scanning costs might like this option if he is willing to keep those original wet signatures anyway. The third option has the same issue - plus it leaves open the question of how you file the notarization. E-notarizations are not exactly commonplace. Perhaps the rule should give filing attorneys a choice - scan and toss, or use the /s/ and retain the original.
More amazing is the complete lack of an approach allowing the use of true electronic signatures - electronic documents signed using a click-through process or using a Signature Capture Pad. The technology is available to create and maintain truly enforceable electronic signatures. Perhaps bankruptcy attorneys still aren't using that technology, and perhaps the vendors that serve bankruptcy attorneys haven't yet incorporated the available technology into their products, but they will if the rules accommodate it. These rules won't.
Those are my comments.
What do you think? Written comments are due to the Judicial Conference by February 15, 2014.