Future Avoidance Litigation: A Debtor's Obligation to Preserve Electronic Data

As experienced leasing and finance professionals 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 overwritten, 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.