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Tech Bankruptcy
March 19, 2014
  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.

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A blog discussing the impact of technology on bankruptcy law and practice.

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Location: Boston, Massachusetts, United States

Warren E. Agin is a partner in Swiggart & Agin, LLC, a boutique law firm in Boston, Massachusetts focusing on the needs of technology companies. Mr. Agin heads its bankruptcy department. The author of the book Bankruptcy and Secured Lending in Cyberspace (3rd Ed. West 2005), Mr. Agin also chaired the ABA's E-commerce and Insolvency Subcommittee from 1999 to 2005, co-chaired the Boston Bar Association's Internet and Computer Law Committee (2003-2005), and served on the American Bar Association's Standing Committee on Technology and Information Services (2008-2011). Mr. Agin currently co-chairs the Editorial Board of Business Law Today. A contributing editor to Norton Bankruptcy Law and Practice, 3d, and co-author of its chapter on intellectual property for the past fifteen years, he is author of numerous legal articles and addresses on topics of technology, internet and bankruptcy law.

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