Are Bankruptcy Practitioners Prepared for e-Discovery?

Last month, we stressed the dire economic and legal consequences of failing to properly identify, preserve, collect, review and produce relevant electronically stored information (ESI). We discussed several cases in point, including In Re Krause, Grochocinski v. Schlossberg, and In Re Quintus Corp. Part Two herein continues the discussion.

McCarty

McCarty v. Global Financial Solutions, LLC (In re Simonson), 2008 WL 4830807 (Bankr. W.D. Wa., Oct. 27, 2008), highlights the increasing frustration of bankruptcy courts with parties who take a laissez faire approach to their obligation to preserve and produce responsive and relevant ESI. In McCarty, the law firm for the defendants in a fraudulent transfer proceeding brought by the bankruptcy trustee failed to timely produce certain e-mails, and completely failed to produce other e-mails, all of which were relevant and responsive to the trustee's requests for production of documents and to a series of summary judgment motions filed by the law firm.

After the law firm withdrew as counsel, the trustee deposed the defendants about the e-mails and learned that they had been provided to the law firm, and had been obtained from the defendants' successor counsel, but only after having to spend substantial sums on discovering the same information from other sources and opposing at least one of the summary judgment motions. The attorneys at the prior law firm who worked on the case claimed to lack any specific recollection of the processing of the e-mails for production. The best they could do in response to the trustee's motion for monetary sanctions for the failures to produce was to submit testimony by their paralegal that she believed she had sent all responsive information to the trustee.

The bankruptcy court found this inexcusable, and that the prior law firm's actions constituted discovery abuse that “delayed the trial, complicated the case, and significantly increased the costs to the trustee,” and awarded substantial monetary sanctions against the firm. The court also made an observation about the costs of e-discovery that is unique to the bankruptcy context: “Because bankruptcy trustees must use funds of the estate to compensate their lawyers, every dollar spent on litigation costs is a dollar that does not reach the pockets of the debtor's creditors. Thus, increased costs in bankruptcy litigation force trustees to accept settlements a fully funded litigant might not otherwise accept or force trustees to limit litigation activities to their disadvantage.”

Conclusion

This case, and the ones discussed in Part One of this article, teaches us that e-discovery is in bankruptcy court to stay and can dramatically affect case outcomes. Participants in bankruptcy proceedings now need to be well-informed about both the technical process of e-discovery, i.e., the actual mechanics of identifying, preserving, collecting, reviewing and producing responsive and relevant ESI, and the legal framework governing e-discovery, i.e., the revised Federal Rules and the developing case law interpreting them. Having this knowledge base will help parties involved in bankruptcy court litigation and their counsel to ferret out and determine the scope of defects in electronic productions by adverse parties in contested matters, which could otherwise go undetected. Such knowledge will also help counsel for producing parties understand what ESI their clients have and where it is located, so that they are better equipped to comply with their e-discovery obligations and to avoid the imposition of case-threatening sanctions.

Dan P. Sedor and David M. Poitras are partners in the Los Angeles office of Jeffer Mangels Butler & Marmaro LLP. Sedor practices in the firm's litigation group and co-chairs the Discovery Technology Group. Poitras practices in the firm's bankruptcy group with a focus on complex Chapter 11 cases and out-of-court restructurings.

Last month, we stressed the dire economic and legal consequences of failing to properly identify, preserve, collect, review and produce relevant electronically stored information (ESI). We discussed several cases in point, including In Re Krause, Grochocinski v. Schlossberg, and In Re Quintus Corp. Part Two herein continues the discussion.

McCarty

McCarty v. Global Financial Solutions, LLC (In re Simonson), 2008 WL 4830807 (Bankr. W.D. Wa., Oct. 27, 2008), highlights the increasing frustration of bankruptcy courts with parties who take a laissez faire approach to their obligation to preserve and produce responsive and relevant ESI. In McCarty, the law firm for the defendants in a fraudulent transfer proceeding brought by the bankruptcy trustee failed to timely produce certain e-mails, and completely failed to produce other e-mails, all of which were relevant and responsive to the trustee's requests for production of documents and to a series of summary judgment motions filed by the law firm.

After the law firm withdrew as counsel, the trustee deposed the defendants about the e-mails and learned that they had been provided to the law firm, and had been obtained from the defendants' successor counsel, but only after having to spend substantial sums on discovering the same information from other sources and opposing at least one of the summary judgment motions. The attorneys at the prior law firm who worked on the case claimed to lack any specific recollection of the processing of the e-mails for production. The best they could do in response to the trustee's motion for monetary sanctions for the failures to produce was to submit testimony by their paralegal that she believed she had sent all responsive information to the trustee.

The bankruptcy court found this inexcusable, and that the prior law firm's actions constituted discovery abuse that “delayed the trial, complicated the case, and significantly increased the costs to the trustee,” and awarded substantial monetary sanctions against the firm. The court also made an observation about the costs of e-discovery that is unique to the bankruptcy context: “Because bankruptcy trustees must use funds of the estate to compensate their lawyers, every dollar spent on litigation costs is a dollar that does not reach the pockets of the debtor's creditors. Thus, increased costs in bankruptcy litigation force trustees to accept settlements a fully funded litigant might not otherwise accept or force trustees to limit litigation activities to their disadvantage.”

Conclusion

This case, and the ones discussed in Part One of this article, teaches us that e-discovery is in bankruptcy court to stay and can dramatically affect case outcomes. Participants in bankruptcy proceedings now need to be well-informed about both the technical process of e-discovery, i.e., the actual mechanics of identifying, preserving, collecting, reviewing and producing responsive and relevant ESI, and the legal framework governing e-discovery, i.e., the revised Federal Rules and the developing case law interpreting them. Having this knowledge base will help parties involved in bankruptcy court litigation and their counsel to ferret out and determine the scope of defects in electronic productions by adverse parties in contested matters, which could otherwise go undetected. Such knowledge will also help counsel for producing parties understand what ESI their clients have and where it is located, so that they are better equipped to comply with their e-discovery obligations and to avoid the imposition of case-threatening sanctions.

Dan P. Sedor and David M. Poitras are partners in the Los Angeles office of Jeffer Mangels Butler & Marmaro LLP. Sedor practices in the firm's litigation group and co-chairs the Discovery Technology Group. Poitras practices in the firm's bankruptcy group with a focus on complex Chapter 11 cases and out-of-court restructurings.