Discovery in the Digital Age
by Ira L. Herman
Thompson & Knight LLP; New York
The Farengi Fund aggressively participated in the run-up of oil and natural gas prices in 2005 and early 2006, making millions of dollars on numerous trades. Much like Amaranth, Farengi aggressively bet on a continued rise in fuel prices. Alas, in the third quarter of calendar year 2006, Farengi’s heretofore brilliant hedging strategy turned to ashes, resulting in losses exceeding $6 billion.
On Oct. 10, 2006, Farengi filed its voluntary chapter 11 petition in the U.S. Bankruptcy Court for Southern District of Never Neverland. Farengi immediately moved to retain Zimmer & Hodges, LLP, as counsel, and Chu, Chu & Coleman, LLP, as restructuring consultants. Shortly thereafter, a committee of unsecured creditors was appointed in the chapter 11 case, and the committee began investigating Farengi’s business affairs by, among other things, asking Farengi to voluntarily produce myriad documents. Farengi, by counsel, agreed to deliver many of the documents, all of which were reviewed by Chu, Chu & Coleman, LLP, before delivery to Committee counsel.
Two Recent Second Circuit Cases Involving “Fraudulent” Debtors
by: Bruce L. Weiner
Rosenberg Musso & Weiner, LLP; Brooklyn, N.Y.
In November 2006, the U.S. Court of Appeals for the Second Circuit decided two cases involving debtors that had been found to have engaged in fraudulent activity prior to the bankruptcy case. In Musso v. Ostashko, the debtor, Vladimir Ostashko, and his wife Tanya Ostashko, had been involved in a series of legal battles in state and federal courts since 1997. At the time of their separation, the debtor told Tanya that he would prevent her from ever getting any of his assets, the most valuable of which was a house worth more than $1 million. To further his plan, the debtor borrowed approximately $900,000 from a Russian bank of which he was a member of the board of directors. The debtor defaulted in payments to the bank, and after the bank sued him to collect, the debtor gave the bank a consent judgment for the amount owed. Tanya started a divorce proceeding and also brought an action to set aside the consent judgment as a fraudulent conveyance. Judge Allyne Ross of the U.S. District Court for the Eastern District of New York found that the debtor intended to defraud Tanya when he gave the default judgment and avoided the judgment as a fraudulent conveyance.
Minutes from 2006 Winter Leadership Conference
On Dec. 1, 2006, ABI’s Commercial Fraud Task Force and Ethics Committee met Jointly in conjunction with the 2006 Winter Leadership Conference in Scottsdale, Ariz. A well-qualified panel discussed protection of the attorney-client privilege and other “secrets” in the digital age. The topic was timely in that amendments to the Federal Rules of Civil Procedure related to discovery of electronically stored information and protection of the attorney-client privilege regarding such information went into effect on Dec. 1.
The panel was comprised of moderator Jayne South, general counsel for EPIQ Systems; U.S. Magistrate for the District of New Jersey Judge Ronald J. Hedges (Newark, N.J.); Ira L. Herman of Thompson & Knight LLP (New York); and Steve Katzman, U.S. Trustee for Region 15 (Los Angeles).
In the meeting, Judge Hedges took the lead in a presentation that outlined the key issues faced by attorneys in dealing with discovery of digital information, or “e-discovery,” and stated the following:
“Business bankruptcies will have to quickly adapt to the provisions for electronically stored information (ESI) found in the amended FRCP that became law on December 1, 2006…Like most judges, I expect litigants to understand their electronic discovery obligations.”
Hon. Ronald J. Hedges
In today’s highly technological world, valuable information is stored on computers, and issues of preserving, accessing and reviewing the information are difficult. Federal Rules of Civil Procedure 16, 26, 33, 34, 37 and 45 were amended and must be understood by practitioners involved in litigation. The panel explained that “document discovery” in Rule 34 includes “data or compilations.” Under Rules 16 and 26, the parties must meet and confer regarding issues relating to disclosure of electronically stored information (ESI) and how the attorney-client privilege can be preserved in the event of inadvertent disclosure. Form 35 of the FRCP requires that the parties describe how they propose to handle the disclosure of ESI. This can certainly be difficult due to the volume and dynamic nature of ESI. Nevertheless, Rule 26(a) does require that a copy of or description by category and location of all ESI and other discoverable information must be provided. In addition to discussion of the Rule changes and the practical issues involved, the panel discussed the Sedona Principles – 14 principles published by the Sedona Conference Working Group in 2003 and revised in 2006 – which offer practical guides for the bench and bar in the production of ESI and other documents.
Regarding privilege waiver, the inadvertent disclosure of privileged information presents tremendous problems. Even though parties can reach an agreement on how such unintentionally disclosed information will be handled, such as return of the information to the producing party, such an agreement may not protect the information from waiver as to other third parties. The panel discussed the practical problems in trying to “contract” around privilege waiver and the problems associated with a waiver.
Finally the panel addressed the issue of how ESI is produced – the form of production- and the issues related to spoliation and loss of ESI. Because companies and individuals may have a procedure for regular deletion of ESI, Rule 37 provides that a court may not impose sanctions for failure to provide ESI lost as a result of the good-faith operations of an electronic information system.
It is clear that the production of ESI will present many new and difficult challenges as litigation proceeds in the bankruptcy courts and other federal courts. Attendees of the panel presentation received a helpful primer on issues they need to become very familiar with.
Agenda for the 2007 Annual Spring Meeting
Understanding Debtor Responsibilities in Consumer and Business Cases: Providing Electronically Stored Information
The Panel:
Michael D. Fielding – Blackwell Sanders Peper Martin LLP; Kansas City, Mo.
Patricia B. Fugée – Roetzel & Andress; Toledo, Ohio
David P. Leibowitz – Chapter 7 Trustee, Leibowitz Law Center; Waukegan, Ill.
Jack Seward – Jack Seward & Assoc., LLC; New York
Bruce L. Weiner – Rosenberg Musso & Weiner, LLP; New York
Abstract:
The panel will discuss exactly how to find the assets in the 21st Century for the estate, but will also cover debtor counsel responsibilities under §§707, 542, 727, Rule 9011 and 18 U.S.C. Michael Fielding will take on the role of representing debtors, and as well as debtor and attorney responsibilities, and will explore the numerous issues facing any business case and perhaps most consumer cases. David Leibowith will discuss searching for undisclosed assets for the estate, but admits that times have changed and that the digital environment creates new opportunities and responsibilities in uncovering hidden assets. Patricia Fugée will talk about the need for discovering electronically stored information under the FRCP. Jack Seward will provide the "best practices" in forensics, fraud and electronic discovery issues, reminding attendees that the debtor's “digital autopsy” by definition needs to be performed in business cases and many consumer cases, but always with a tight grip on the practical aspects including timeliness, cost-effectiveness and being fair to all concerned. Free and fully functional bankruptcy triage software will be provided attendees and will be shown in real time. Bruce Weiner, who often represents the panel trustee, will keep the panel focused and provide hard-hitting and probative questions on what's important to understand in your practice, regardless of what side of the aisle you find yourself on.
New Contributing Editors Announced
We are pleased to announce and present the seven contributing editors to the editorial board for the Commercial Fraud Task Force eNewsletter. Please consider becoming one yourself. The only requirement is that you contribute your time and effort in writing for our quarterly eNewsletter. You will find this both a rewarding experience and an opportunity to enhance your professional status. Your contributions will help us expand both the content and number of issues during the next year.
Each of these contributing editors for the Commercial Fraud Task Force has published an article over the past year. Congratulations to each of them for a job well done and joining our committee’s editorial board.
Sometimes your submissions surpass expectations to such a degree that they are instead published in the ABI Journal. We congratulate two of our contributing editors, Ira Herman and Michael Fielding, for being published in the Journal this past year. And Bruce Weiner did exactly the same thing the year before as co-author of the Journal article “Zero Tolerance for Commercial Bankruptcy Fraud.”
Writing for the Commercial Fraud Task Force eNewsletter has its rewards. If you are interested, please contact Jack Seward, (jackseward@msn.com) co-chair and managing editor of the Commercial Fraud Task Force, indicating your willingness to participate and help others as you help yourself.
| Bruce L. Weiner Michael D. Fielding Wayne Greenwald Patricia B. Fugée |
Ira L. Herman Irving E. Walker Marcus Wide |