Crystal Ball Required?

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.