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Crystal Ball Required?
As experienced Chapter 11 bankruptcy practitioners know, when a company suffers severe financial distress and faces the prospect of imminent bankruptcy, its record-keeping procedures can break down, even if they were previously adequate. Indeed, a company faced with abrupt layoffs or departures may find that employees have misplaced, removed, or even intentionally destroyed important documents. This problem can be particularly acute with respect to corporate information maintained exclusively in an electronic format, such as e-mail communications. Notwithstanding the efforts and directives of a company's executives and counsel, such data may be lost as e-mail folders are purged, master tapes are over-written, computers are sold or discarded, network servers are shut down, information technology personnel are given their walking papers and offices are shuttered. Any destruction or loss of important documents not only complicates the general administration of a bankruptcy estate, but also can potentially lead to significant adverse consequences in future litigation, including actions to recover avoidable transfers.
Despite these risks, collection and preservation of large amounts of electronic data in anticipation of hypothetical avoidance litigation that will most likely take place years in the future ' if ever ' is hardly a company's, or counsel's, top priority at the time of a bankruptcy filing, particularly because such activities can require the expenditure of significant resources. Nevertheless, to prevent future litigation difficulties from arising in connection with the prosecution of avoidance actions,
it is important for a practitioner advising a company heading into or newly in bankruptcy to begin to preserve all electronic data immediately.
The question of the timing and scope of a debtor's obligation to preserve and produce documents maintained in an electronic format recently arose in an avoidance action commenced by the Official Committee of Unsecured Creditors (the 'Committee') against Nortel Networks Inc. ('Nortel') in connection with the Chapter 11 cases of 360networks (USA) inc. and related entities ('360'). Nortel challenged 360's insolvency at the time of the relevant transfers and then sought an adverse inference on that issue, arguing that 360 had failed to take timely and adequate steps to preserve all electronic information responsive to Nortel's discovery demands related to solvency. Given the size of the case ' the Committee sought to avoid and recover transfers in the aggregate amount of over $101 million, making the preference action one of the largest ever commenced against a single defendant ' and the potentially all-or-nothing nature of a solvency defense, the timing and scope of 360's duty to preserve the electronic data became an issue of critical importance.
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