Tech Bankruptcy

Yes Virginia, You Can Prove an Electronic Signature!

noreply@blogger.com (Warren Agin) — Fri, 28 Nov 2014 18:10:00 +0000

Surprisingly, the question of how to prove something was signed electronically arises relatively rarely. In Perry v. Ad Astra Recovery Services, Inc., the U.S. District Court for the Eastern District of Missouri tackled the issue, finding that the plaintiff signed a loan agreement based on the defendant's affidavit about the execution process.

Back in the late 1990's I had the privilege of hanging around in the ABA's Business Law Section when the Uniform Electronic Transactions Act (UETA) and the Federal variation, E-SIGN, were being developed. At the time, many of the key players in the emerging electronic and digital signatures movement were active in the Business Law Section and they often use the organization's meetings to explore and discuss ideas - away from the sometimes politically charged atmosphere of NCCUSL meetings. It was a great time to be a fly on the wall.

As a bankruptcy professional, the one thing that struck me about electronic signatures was the proof problem. In other words, it was all well and good to have someone "sign" something "electronically," but when court proceedings came into the picture proving that someone had signed something was clearly going to be be more complicated than just handing the judge a piece of paper and saying "see, the signature is right there." The issue was illustrated by a 2005 decision, In re Vinhee, which laid out in great detail the complex steps needed to prove an electronic business record. Way beyond just handing the Judge a piece of paper.

In Perry, the defendant sought to enforce arbitration provisions in a loan agreement that the plaintiff had signed online using a click-through mechanism. Although the plaintiff denied having signed the agreement, the defendant provided, through affidavits, evidence that to obtain a loan a customer had to go through a series of steps as part of the online application process, including checking boxes to indicate assent to the various contracts and policies involved. Citing to the UETA, the court held that these processes were sufficient to create an electronic signature and the evidence showing that the processes must have been followed in order for the plaintiff to obtain her loan, sufficient to prove her "signature."

Better Check the 'Net First

noreply@blogger.com (Warren Agin) — Wed, 19 Nov 2014 20:01:00 +0000

In a swan song before retiring from the bench, bankruptcy judge James Gregg penned an interesting decision in In re Hale, 2014 WL 2922347 (Bankr. W.D. Mich. 2014) touching on an attorney's obligation to do an on-line real estate search before filing a consumer bankruptcy case. After a chapter 7 trustee discovered, two years into the bankruptcy case, the debtors' ownership interest in previously undisclosed real estate, the debtors sought to convert their case to chapter 13. Judge Gregg held that the motion to convert was filed in bad faith and denied it. The court also denied an attempt by the debtors to exempt their interest in the previously undisclosed property.

None of this is particularly novel. So far. But, then, in a section of the opinion captioned "What Now? How These Circumstances Could Have Been Avoided and Possible Sanctions" Judge Gregg delved into the debtors' counsel's obligations under F.R.B.P. 9011(b):

"By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney... is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances [list of four different categories]." .... Dietrich submitted the Debtors' erroneous schedules to the court. He therefore faces "presenting" sanctions unless a reasonable inquiry was made."

Judge Gregg believed that debtors' counsel had not, in fact, made a reasonable inquiry. Why not? Because the Judge (or someone in his office - the opinion does not state) was able to go online and discover the debtors' concealed real estate interest in "less than five minutes." Certainly, debtors' counsel or a paralegal could have, and should have, made a similar investigation given the searches' ease. Fortunately for debtors counsel, Judge Gregg did not actually impose sanctions, citing both the benefit of hindsight and the desire, given his pending retirement, to not impose the sanctions process on another judge.

While Judge Gregg is certainly correct about the ease of performing such searches in many jurisdictions and most situations, it's a bit of a slippery slope to state that not doing a real estate search prior to filing a bankruptcy case constitutes a failure to make a reasonable inquiry. The search was an easy one in the Hale case, but how easy should the search be before the attorney MUST do it. Run a grantee search for John Silva in New Bedford, Massachusetts (a heavily Portuguese town in my region) and you get twenty pages of results. Some title checks can take hours to sort through. At some point an attorney should be able to trust his client. Judge Gregg also doesn't address the fact that it took the chapter 7 trustee two years to discover the concealed real estate. Guess she didn't run a routine title check either.

Still, the warning is worth noting.

Eight Circuit follows Third Circuit's Exide in En Banc Review of Interstate Bakeries

noreply@blogger.com (Warren Agin) — Sun, 22 Jun 2014 14:19:00 +0000

Complex corporate transactions often include ancillary intellectual property licenses. For various reasons, when one company sells off part of its business operations it may not be able to transfer intellectual property rights to the acquiring entity. Usually, this is because the selling entity still needs to retain the IP rights for the operations it doesn't sell. The parties resolve the problem by licensing the IP to the divested portion of the business - usually these IP licenses are perpetual and fully paid. In intent, the licensee receives the rights to the IP within a particular scope - possibly geographical or perhaps in connection with a specific brand or product.

When the seller files a bankruptcy can it reject these ancillary IP licenses? What if, by so doing, it effectively unwinds a fully completed business divestiture? The Court of Appeals for the Eighth Circuit had to address this issue recently in the Interstate Bakeries Corporation case. The debtor had previously sold off several food brands as part of a business divestiture, but licensed the trademarks instead of assigning them. Now, the debtor sought to reject the trademark license - effectively unwinding the prior business transaction.

In the Exide Technologies case, the Court of Appeals for the Third Circuit had faced a similar situation. It held that the trademark license was not executory because the parties had substantially performed the material provisions of the agreement when the prior business divestiture was completed. The remaining trademark license was thus substantially performed and non-executory. The debtor could not reject it.

The Court of Appeals for the Eight Circuit initially reached a different conclusion, even though on similar facts, holding that the remaining trademark license was executory. In distinguishing Exide, the Eight Circuit noted the existence of additional provisions requiring the licensor to continue to monitor the licensee's use of the marks. These provisions, the Court said, made the license executory.

On En Banc review, the full Court of Appeals reversed. Following Exide, it reviewed the license agreement as part of an integrated sale agreement, which it held had been substantially performed. Along the way, the court discussed the concept of considering the IP license in context. The Court felt that the central purpose of the agreement was the sale of certain brands and related operations to the buyer - not a trademark license. The trademark license itself was an ancillary part of the transaction and, thus, the remaining unperformed terms were not material.

FTC to the Bankruptcy Court: Do it Right or Appoint a CPO

noreply@blogger.com (Warren Agin) — Sat, 24 May 2014 10:25:00 +0000

In a May 22 letter from Jessica Rich, Director of the FTC's Bureau of Consumer Protection to the United States Bankruptcy Court for the Southern District of New York, the FTC drew a line in the sand in the ConnectEDU bankruptcy case. ConnectEDU was a venture funded tech start-up that provided data-driven services to help college students evaluate career options and paths.

The letter (the FTC also filed a formal objection with the Court) pointed out that ConnectEDU collected information from students under a privacy policy promising that “In the event of sale or intended sale of the Company, ConnectEDU will give users reasonable notice and an opportunity to remove personally identifiable data from the service.” The letter insisted that the Court either condition the sale on the company complying with that provision of the privacy policy or appoint a Consumer Privacy Ombudsman prior to the sale. Procedural oddities aside (the sale hearing itself was scheduled for May 23 on an emergency basis, leaving little time for appointment of a CPO), the letter is interesting because of the implications inherent in the FTC's dual request. Either the sale terms must change to make the sale itself consistent with the privacy policy OR the court should appoint a CPO. This implies an acceptance by the FTC that the court, with the CPO's guidance, might allow a sale that does not give users advance notice and an opportunity to remove personally identifiable information from the service prior to the transfer.

The hearing date was moved to May 27 prior to the hearing, so it remains to be seen what action will occur in the case, but given the FTC's objection, it seems likely the US Trustee's Office will appoint a CPO.

When is a Contract Not a Contract?

noreply@blogger.com (Warren Agin) — Sun, 11 May 2014 18:57:00 +0000

Simple answer - when it is really two contracts. In Physiotherapy Holdings, Inc., the United States Bankruptcy Court for the District of Delaware examined the issue of contract integration.

The debtor in this case faced an unusual dilemma. The court had affirmed its Chapter 11 plan, but it still needed to address an essential software license with Huron Consulting Services. The debtor absolutely needed the software to operate - at least for the six to nine months needed to switch to new systems. But, the software license was governed by a Master Agreement, which, among other terms, required the debtor to indemnify Huron against certain claims a litigation trust was planning to bring. If the debtor assumed the Master Agreement/Software License as an integrated contract, the reorganized debtor would have to insure Huron against the coming storm - a prohibitively expensive proposition. On the other hand, if the debtor rejected the contracts it would have to cease operations - since access to the software was essential. And, because the debtor's plan had been confirmed, no further delay was obtainable.

The debtor attempted the middle road. It asked for leave to assume the software license while rejecting the Master Agreement. Ordinarily, a debtor must assume or reject an executory contract in its entirety. The debtor may not assume the parts of a contract it wants, while rejecting the rest. The same rule applies when several agreements are designed to work together as an integrated contract. The debtor must reject or assume the integrated contract in its entirety.

The court closely examined the provisions of the Master Agreement and the license agreement. Executed as part of a single business arrangement, the Master Agreement terms governed, and were incorporated into, the license agreement. However, the court noted that at several places in the combined contracts provisions made clear that where the specific contract had provisions conflicting with the Master Agreement's terms, the specific agreement's terms would control. In particular, the Master Agreement contained broad indemnification provisions while the license agreement contained only a subset of the indemnifications' scope. By carefully reviewing the contracts' provisions, the Court was able to support a finding that the license agreement constituted a stand-alone agreement, even if some of its terms were derived from the Master Agreement. The debtor could assume the license agreement, while rejecting the Master Agreement.

Electronic Voting Comes to the Bankruptcy Court

noreply@blogger.com (Warren Agin) — Thu, 03 Apr 2014 12:00:00 +0000

Released on PRNewswire a few days ago was a press release about the first bankruptcy court order approving electronic balloting procedures in a Chapter 11 case. Using a system developed by claims agent Upshot Services LLC, the Chapter 11 trustee for Pitt Penn Holding Company, Inc. obtained a court order allowing creditors to complete and submit their ballots using a website interface. Creditors can also use a paper ballot. The voting website is accessible here: http://www.upshotservices.com/pittpennvoting. The order is available here: http://bit.ly/1sbWuAE.See paragraph 20 for the language allowing the claims agent to accept votes by electronic, online transmission.

The advantage of using a system like this are obvious, and given the fact that technologies for obtaining electronic signatures are well established, this is a welcome step in reducing the amount of paper chapter 11 cases can generate.

Badmouthing the Bankruptcy Trustee and the First Amendment

noreply@blogger.com (Warren Agin) — Wed, 19 Mar 2014 12:50:00 +0000

As a Chapter 7 panel trustee, I sometimes annoy (to use a mild term) the occasional party - either because they don't understand the bankruptcy process, have an inflated sense of self-entitlement, or merely because my actions are inimical to their sense of well being. A California trustee, in a similar situation, found himself in the cross-hairs of a somewhat critical blogger in a Ninth Circuit decision that defined the scope of a blogger's right under the First Amendment to publicly criticize a trustee's actions. Not just a bankruptcy case, the Obsidian Finance Group, LLC v. Cox decision provides a road map to applying First Amendment decisions to online commentary.

Kevin Padrick was appointed as the Chapter 11 trustee for Summit Accomodators, Inc. shortly after it filed its Chapter 11 bankruptcy petition. He soon found himself within the cross-hairs of a Crystal Cox, who commenced blogging about the bankruptcy in a manner critical of Mr. Patrick (some examples: "the facts of what Kevin Padrick of Obsidian Finance did that was probably illegal are washed under the carpet, never to be seen again" and "He is smart and good at his job, which is apparently screwing people out of their money"). She accused Padrick of fraud, corruption, money-laundering and other illegal activities in connection with the Summit bankruptcy. In response, Padrick and his company, Obsidian Finance Group, LLC, sued Cox for defamation.

The underlying framework derives from two Supreme Court cases - New York Times Co. v. Sullivan and Gertz v. Robert Welch, Inc. In Sullivan, the Supreme Court stated that defamation against a public official is only actionable if made with "actual malice." The plaintiff must show that the writer published the statement with actual knowledge that it was false or with reckless disregard to the truth. Under Gertz, in a private defamation action mere negligence in making a false statement is sufficient to create liability. Padrick was arguing for an even more lenient standard, arguing that the Gertz negligence standard applied only to protect journalists, or, alternatively, where a matter of public concern was involved.

The District Court held that most of Cox's posts were constitutionally protected opinion, with the exception of one allegation - that Padrick had failed to pay taxes due from the bankruptcy estate. That claim went to a jury, which found in favor of Padrick. After Cox's motion for a new trial was denied, she appealed the case to the Court of Appeals for the Ninth Circuit, which held (a) that First Amendment protections were available to a blogger, (b) that Padrick was not a "public officer" but that the bankruptcy case was a matter of public concern, thus requiring a higher standard before liability could attach, and (c) that liability could not be imposed without a showing of fault or actual damages.

The Circuit Court started with analyzing whether Cox could avail herself of First Amendment protections, or whether those protections were limited to journalists. Citing to the Supreme Court case, Citizens United, as well as decisions in the Second, Third, Fourth, Eighth, and DC Circuits, the court held that a First Amendment distinction between the institutional press and other speakers is unworkable. In defamation cases, the speaker's status as a professional journalist is not relevant - First Amendment protections derive from the defamed party's status and the public importance of the matter being discussed.

The Court then turned to the question of whether the matter was of public concern. It held that it was. Padrick was appointed as a bankruptcy trustee of a company that had been accused of diverting funds from investors. His actions, and particularly the allegations that he was acting improperly in his position, were a matter of public concern. Accordingly, Padrick needed to prove that Cox had acted negligently in making her statements to obtain a judgment for actual damages incurred. Also, the jury could not award presumed damages, under Gertz, unless it found that Cox acted with actual malice.

The Court also considered whether Padrick, as a bankruptcy trustee, was a public official. If he was, then the stricter New York Times standard would apply to the entire case. The Court noted that Padrick was neither elected nor appointed to a government position, and did not exercise control over governmental affairs. He merely was appointed as a stand-in for a debtor in possession. As such, Padrick was not a public official for purposes of defamation law.

The case was remanded back to the District Court for further proceedings. So, perhaps, the matter will have to be retried, with Padrick having to prove either that Cox acted with actual malice, in order to obtain an award of presumed damages, or having to prove both that she acted negligently and also that he suffered actual damage as a result of her posts. As for me, I was told when I got into this business that Chapter 7 trustees need to have a thick skin.

Mt Gox files for bankruptcy protection in Japan

noreply@blogger.com (Warren Agin) — Fri, 28 Feb 2014 15:37:00 +0000

Reuters reports that Bitcoin exchange Mt Gox has filed for bankruptcy protection in Japan, after disclosing that it lost about $480 million dollars in Bitcoin to hackers.

Back to the Mattress: Mt Gox and the Future of Bitcoin

noreply@blogger.com (Warren Agin) — Thu, 27 Feb 2014 02:17:00 +0000

A true digital currency is the holy grail of the on-line world. Since the start of the Internet, a long series of folks have been trying to find the on-line equivalent of cash - some kind of digital token that is secure, easy to transfer and, for most of the people who have joined the hunt, anonymous. Bitcoin provides the latest foray into this arena, and the Bitcoin story provides the latest example of the basic truth that payment systems are always dependent on the support of a strong, trustworthy third party.

This truth applied to traditional currencies, like this:

Or these:

Valued when their backing governments existed, when the government support failed so did the currency.

The digital world is no different. When "virtual" banks tried to build a business around Linden Dollars in Second Life, problems quickly developed. Customers of Ginko Financial, an unregulated Second Life investment bank, swarmed the "doors" at the first hint of trouble, causing a run on the bank and its collapse.

The rapid increase of Bitcoin popularity is creating a similar dynamic. At one point the largest trader of Bitcoin, Mt Gox started to encounter pronounced difficulties handling transactions as the result of regulatory issues. Customers started to move business to different exchanges, and on February 7 Mt Gox halted withdrawals. Four days later, another exchange, BitStamp, also suspended withdrawals, citing difficulties caused by denial of service attacks against its servers that could potentially affect the security of its transactions.

On February 24, Mt Gox shut down completely. Customers might have lost up to $480,000,000. Although, Bitcoin value has been plunging as a result of the shutdown and other disturbances in the Bitcoin infrastructure. So, the actual loss might be significantly less.

As of today (February 26) visitors to its website received this informative and reassuring message:

February 26^th 2014
Dear MtGox Customers,
As there is a lot of speculation regarding MtGox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues.
Furthermore I would like to kindly ask that people refrain from asking questions to our staff: they have been instructed not to give any response or information. Please visit this page for further announcements and updates.
Sincerely,
Mark Karpeles

And so it goes.

The lesson, as I pointed out before, is that any currency, even a virtual one, requires a reliable and trustworthy controlling authority. An imaginary person simply does not cut it.

Understanding Electronic Discovery: Its Not Just About Protecting Your Client

noreply@blogger.com (Warren Agin) — Mon, 17 Feb 2014 18:02:00 +0000

Reading a recent Massachusetts Lawyers Weekly, I spotted an item in the Bar Discipline column that highlighted the dangers of not staying up to date with technology. A litigation attorney, let's call him Paul, failed to understand the rules governing electronic discovery, resulting in his client deleting electronic data and the Massachusetts Board of Bar Overseers issuing a public reprimand.

Paul represented a client accused of taking confidential information with him when he left his employer to work for a competitor. Allegedly, the client had transferred the information from his old laptop to a new one, used a computer software program to delete the stolen information from the old laptop, and then returned the old laptop to his former employer. In late 2006, his former employer sued him, and obtained a TRO requiring the client to return to his former employee any information that he had taken. Instead of complying with the order, the client instead deleted the files from the new laptop. About five months later, plaintiffs' counsel advised Paul that they planned to file a motion to obtain turnover of the new laptop, and that documents on the new laptop had to be preserved. Paul did not advise his client not to delete relevant files from the new laptop, and his client subsequently deleted some additional files - although without Paul's knowledge.

Then, the court ordered the new laptop be surrendered to the plaintiff's IT expert. Notified of this event, the client told Paul that the new laptop contained confidential information belonging to his new employer and unrelated to the lawsuit. Paul advised his client that these documents could be removed from the laptop before turning it over. When the laptop was turned over, and the deletions discovered, the Court held that the client had engaged in spoliation of evidence.

Reading the reprimand didn't give me the impression that Paul was acting in bad faith - instead he had failed to comprehend the nature of the information on the computer and the need to keep all of the information preserved once the litigation commenced. Used to a paper world, he failed to anticipate and guard against a client who was tempted to delete information, and failed to understand that deleting information from a computer can leave a gap - showing that information was removed but leaving wide open the question of what the removed data contained. By issuing proper warnings to his client, being alert to the possibility of non-relevant trade secrets residing on the laptop, and following appropriate protocols to avoid the release of trade-secrets stored on the laptop, Paul could have avoided the damage to his client.

In its reprimand, the BBO indicated that Paul's failures violated his duty to provide competent representation. In 2012, the American Bar Association adopted revisions to the Model Rules of Professional Conduct, including this language added to the commentary for Rule 1.1:

To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology...

That's a simple change, but one attorneys should take to heart lest they, some day, end up like Paul. Massachusetts hasn't yet adopted the 2012 revision in its commentary to Rule 1.1, but the Massachusetts BBO clearly expects its attorneys to understand the new world of handling electronic evidence.

Backing Away From Those Messy Electronic Signatures

noreply@blogger.com (Warren Agin) — Tue, 14 Jan 2014 21:12:00 +0000

Back in August, the Judicial Conference for the United States Courts released for comments proposed amendments to the Federal Rules of Bankruptcy Procedure, including revisions to FRBP 5005 that will effectively limit the types of electronic signatures usable on court pleadings.

Currently, the relevant part of FRBP 5005 reads:

Filing by Electronic Means. A court may by local rule permit documents to be filed, signed, or verified by electronic means that are consistent with technical standards, if any, that the Judicial Conference of the U.S. establishes. A document filed by electronic means in compliance with a local rule constitutes a written paper for the purpose of applying these rules, the Federal Rules of Civil Procedure made applicable by these rules, and § 107 of the Code.

Added in 1996, this provision allowed parties to file documents with electronic signatures, so long as the signatures conformed with the particular court's local rules. Different courts employed different requirements, some requiring that an original signature be scanned, with the attorney retaining the original signature. Others, such as my home court in Massachusetts, allowed use of a printed name, preceded by a /s/, to serve as a party's "signature" so long as the filing attorney maintained an original copy of the document with an original wet signature. Model Rules for Electronic Case Filing, approved in 2001, allowed use of an electronic signature in the "s/Name Here" format, but also required the filing attorney to maintain the paper document with the original wet signature. Wet signatures were still required for evidentiary purposes (particularly in the rare case involving subsequent criminal prosecutions) and, as a practical matter, requiring a wet signature made sure that the third parties, usually the bankruptcy debtors, were actually reading and signing the documents before their attorney filed them with the "s/Name Here" electronic signature. (Some of you commercial bankruptcy law types might look aghast at the possibility, but take it from a Chapter 7 trustee - that kind of thing happens all the time.)

The proposed revision is more specific, although it provides three alternatives:

(3) Signatures on Documents Filed by Electronic Means.
....
(B) Signature of Other Individuals. When an individual other than a registered user of the court’s electronic filing system is required to sign a document that is filed electronically, the registered user shall include in a single filing with the document a scanned or otherwise electronically replicated copy of the document’s signature page bearing the individual’s original signature.
[Alt. 1: By filing the document and signature page, the registered user certifies that the scanned signature was part of the original document.]
[Alt. 2: The document and signature page shall be accompanied by the acknowledgment of a notary public that the scanned signature was part of the original document.]
Once a document has been properly filed under this rule, the original document bearing the individual’s original signature need not be retained. The electronic signature may then be used with the same force and effect as a written signature under these rules and for any other purpose for which a signature is required in proceedings before the court.

In short, no more electronic signatures. The wet signature is scanned, filed electronically with the court, and then thrown away. Warm up those scanners people and hire some support staff to attach those scanned signature pages to your single filings. It strikes me as a lot of extra work. Option two allows the filing attorney to certify that the electronic signature is really the debtor's, which strikes me as problematic for the filing attorney if the debtor disclaims his or her signature later on. Perhaps an attorney desiring to save scanning costs might like this option if he is willing to keep those original wet signatures anyway. The third option has the same issue - plus it leaves open the question of how you file the notarization. E-notarizations are not exactly commonplace. Perhaps the rule should give filing attorneys a choice - scan and toss, or use the /s/ and retain the original.

More amazing is the complete lack of an approach allowing the use of true electronic signatures - electronic documents signed using a click-through process or using a Signature Capture Pad. The technology is available to create and maintain truly enforceable electronic signatures. Perhaps bankruptcy attorneys still aren't using that technology, and perhaps the vendors that serve bankruptcy attorneys haven't yet incorporated the available technology into their products, but they will if the rules accommodate it. These rules won't.

Those are my comments.

What do you think? Written comments are due to the Judicial Conference by February 15, 2014.

When You Don't List Copyright Infringement Claims in Your Bankruptcy Schedules You Lose Standing

noreply@blogger.com (Warren Agin) — Thu, 19 Dec 2013 20:50:00 +0000

"High up in the pristine White Mountains of Northern Arizona, is a place where...truth and honesty are hard to find, if at all.." [Fair use] So starts Lynnell Levingston's 2008 memoir of politics in Springerville, Arizona. In 2009, Livingston sued a host of defendants asserting, among other things, that one of them violated her copyright in the book by plagiarizing an excerpt from the book in a police incident report. That initial case was dismissed in 2010, without prejudice. Levingston also maintained a blog called Three Men Make a Tiger. In August 2012, Levingston filed a second complaint for copyright infringement alleging the defendants made and distributed copies of the book and content from the blog without authority or license.

But, in 2009, after filing her first lawsuit, Levingston had filed a pro-se chapter 7 bankruptcy petition. She had listed the book as an asset, but had not scheduled the blog as an asset, nor had she listed as assets the claims for copyright infringement.

In a short decision issued in Levingston v. Earle, 2013 WL 6119036 (D. Ariz. 2013), District Court Judge Teilborg dismissed the copyright claims reasoning that because the copyright infringement claims had not been listed as assets in the bankruptcy case, they remained property of the Chapter 7 bankruptcy trustee. Thus, they were not Levingston's property and she lacked standing to bring the infringement actions.

The case seems to have some fascinating undertones and complications. I can't say I could follow them all, but the underlying legal proposition remains clear - if you think someone has infringed your copyrights, make sure you list them on your bankruptcy schedules.

Qimonda Decision Affirmed But Fourth Circuit Won't Say Whether Denying Section 365(n) Protections Manifestly Contrary to U.S. Public Policy

noreply@blogger.com (Warren Agin) — Tue, 10 Dec 2013 21:41:00 +0000

The Court of Appeals for the Fourth Circuit recently released its decision in the ongoing debate over whether the Qimonda AG bankruptcy estate gets to ruin the world's semiconductor industry. For those unfamiliar with the complex, but important, Qimonda decisions, I'll refer you to California bankruptcy attorney Robert L. Eisenbach's excellent and comprehensive explanation of the issues and history, as well as his earlier description of one of the lower court decisions.

For those who recollect the basic background, when last seen the United States Bankruptcy Court for the Eastern District of Virginia had decided that bankruptcy code section 1522(a) required it to balance debtor and creditor interests in determining whether to apply section 365(n)'s protections to those patent licenses Qimonda AG was terminating, thus allowing the licensees to continue to practice the licensed patents. The bankruptcy court held that denying section 365(n) protections would be unduly detrimental to the licensees, creating a "very real" "risk to the very substantial investment the [Licensees]...[had] collectively made in research and manufacturing facilities in the United States" in reliance on the licenses.

The Court also determined that 365(n) protected a fundamental U.S. public policy promoting technological innovation and, failing to provided the licensees with section 365(n)'s protections would undermine that fundamental public policy. Thus, the U.S. statute needed to be applied in lieu of the default rules under German insolvency law.

On direct appeal to the Fourth Circuit, the Circuit Court affirmed. It noted that 11 U.S.C. 1522(a) allows the court to grant discretionary relief to a foreign representative under section 1521 only if the court determines that "the interests of the creditors and other interested entities, including the debtor, are sufficiently protected." Such discretionary relief can be granted subject to appropriate conditions. It also noted that 11 U.S.C. 1506 prohibits granting relief that is "manifestly contrary to the public policy of the United States."

Addressing first the question of applying section 1522(a), the Court of Appeals agreed with the bankruptcy court that section 1522(a) requires a balancing analysis, and further held that the bankruptcy court had properly exercised its discretion in applying that test. This was sufficient to affirm the decision below.

Turning, in its final pages, to the public policy issue, the Circuit Court stated that "by affirming the bankruptcy court, even though on its section 1522(a) analysis, we too necessarily further the public policy inherent in and manifested by section 365(n)." So, section 365(n) is designed to protect licensee rights as an expression of public policy - but, that was obvious and well known. Restating the fact is meaningless. Is denying section 365(n) rights to a patent licensee "manifestly contrary" to that policy? The bankruptcy court thought so, but the Court of Appeals seems less sure - failing in the final portion of the decision to directly address the question or state an opinion. And, one judge clearly did not want to discuss the point, declining to join in the last few pages of the otherwise unanimous decision on the grounds that it was "unnecessary dictum."

He was right. Perhaps this decision marks the end of the long standing Qimonda patent license debate. Perhaps not. The decision does help define the structures for judicial decision making in Chapter 15 cases, but fails to provide a definitive answer to the question of whether and how IP licensees retain the protection of 11 U.S.C. 365(n) in international insolvency cases.

O'Say it's not So: Virginia Judge O'Grady Rules Domain Names are not Property Saleable By a Chapter 7 Trustee

noreply@blogger.com (Warren Agin) — Sun, 24 Nov 2013 16:16:00 +0000

Courts do not agree on the issue of domain names as property. Some courts treat domain names as a contract right between the domain name holder and the registrar. Other courts recognize domain names as a separate form of intangible property. But, until now, courts have all agreed that domain names are, in fact, property, and encompass a property right that can be transferred by a bankruptcy trustee.

In the Alexandra Surveys International, LLC case, Federal District Court Judge O'Grady held that a domain name was not a property right that could be sold by a chapter 7 trustee, particularly when the domain name registration agreement would have been automatically rejected under 11 USC 365(d)(1). The case had an unusual set of facts. The debtor filed a chapter 11 petition on March 3, 2010. At that time, it owned the domain name "ALEXANDRIASURVEY.COM" but did not disclose the domain name in its bankruptcy schedules. The case converted to chapter 7 on January 27, 2012, and eventually closed. After the bankruptcy case closed a new company started by the debtor's principals, Alexandria Surveys, LLC, acquired the domain name. The decision doesn't state whether the original domain name registration had lapsed, and the name re-registered, or whether the debtor had managed to assign the name to Alexandria Surveys, LLC in some manner. A month later, a third party filed a motion to reopen the case and offered to buy from the chapter 7 trustee the previously undisclosed domain name and other assets of the estate. The bankruptcy court allowed the motion to reopen, and, over Alexandria Surveys, LLC's objection, allowed the sale of the domain name and other assets. Because the domain name and other assets had not been disclosed by the debtor to the chapter 7 trustee, they remained property of the bankruptcy estate notwithstanding the case's closure.

On appeal, the District Court held that the domain name was not property of the bankruptcy estate saleable by the chapter 7 trustee. Bound to follow the Virginia Supreme Court's earlier decision in Network Solutions v. Umbro International, the court concluded that "because Virginia does not recognize an ownership interest in ... web addresses, neither were property of Alexandria International's estate and neither were subject to sale by the trustee." The court stated further that even if the estate had an interest in the domain name, that interest was limited to the rights under the domain name registration agreement. The debtor's schedule G had listed web hosting contracts with Cox Communications, and the chapter 7 trustee had not assumed those contracts within the 60 day period dictated by 11 USC 365(d)(1). Thus, the interest was automatically abandoned by the trustee and could not be sold.

The decision, unfortunately, is riddled with errors. First, it miss-characterizes the holding in Network Solutions v. Umbro International, which defines a domain name as a contractual property right. The decision cannot be properly read to hold that a domain name is not property at all. Second, it assumes that the domain name contract is executory in nature, which while possibly the case can't be determined without reviewing the actual contract. Third, a review of Verisign''s list of authorized domain name registrars indicates that Cox Communications is not a domain name registrar. So, even if the debtor had purchased website hosting services from Cox Communications, it's domain name registration agreement was not with that company. Its domain name registration agreement must have been with some other, unknown, company. Thus, the executory contract was not properly disclosed. Fourth, even though the undisclosed registration agreement might have been automatically rejected under section 365(d)(1), that does not necessarily act as a termination or abandonment of the agreement. Chapter 7 trustees can, with the cooperation of the non-debtor party, assume and assign previously rejected agreements. Finally, the decision completely ignores the possibility that the debtor's principals had, post-petition, transferred the contract rights to their new company instead of allowing the domain name registration to lapse and then re-registering it. In that case, the Trustee would have a right to recover the property interest both under sections 542 and 549.

The most troubling aspect of the decision is the language stating bluntly that a domain name registration is not estate property. Fortunately, the conclusion does not find support in other cases and also runs contrary to the proper interpretation of Network Solutions v Umbro International. Domain names are property, and can be administered in a bankruptcy case.

Good Stuff Cheap

noreply@blogger.com (Warren Agin) — Thu, 21 Nov 2013 13:44:00 +0000

In the bankruptcy world, matching sellers of distressed assets with potential buyers has always caused difficulties - usually resulting in reduced sale prices and relative bargains. For large capital assets - like the Polaroid patent portfolio, or Chrysler, investment bankers satisfy the market gap. Selling smaller assets, like automobiles, time shares or necklaces, presents a more recalcitrant problem. The sellers are fragmented, a broad spectrum of individual chapter 7 trustees, receivers, and other liquidating agents, each with only a small number of items to sell. Further, court rules and procedures governing insolvency processes limited sellers' ability to use many traditional sale mechanisms.

Years ago, the National Association of Bankruptcy Trustees developed the bankruptcysales.com website, as a service to chapter 7 bankruptcy trustees to help them locate buyers for various assets. The website contained listings for available assets providing information for buyers to locate items of interest. But, the website was poorly structured and provided limited benefits.

The NABT has now updated the website, renaming it MarketAssetsForSale.com, and expanding its scope, allowing receivers, assignees, banks and others who need to sell distressed assets to list their assets for sale. The website is not an auction mechanism or marketplace, like Bid4Assets, but a resource to help buyers locate assets for sale through insolvency processes. The assets themselves are sold through the traditional sale processes. Chapter 7 trustees and some others can post assets for free, others will have to pay a fee. Sellers and potential buyers do need to set up an account to access the website - buyers have to pay an annual fee of $120.00.

The new site has a much better interface than the old website, with nifty pictures of assets, a cleaner interface, and better tools for searching for assets. Hopefully, with the improved interface more bankruptcy trustees will post assets to the website, and with a broader scope of available assets more buyers will find the website a useful tool for locating the Good Stuff they want Cheap.

Is Air Free?

noreply@blogger.com (Warren Agin) — Thu, 14 Nov 2013 21:15:00 +0000

You would think that air should be free, but of course air, or at least the right to send signals through it, has not been free for some time. The FCC controls the right to use air to transmit information, divvying the air up into all sorts of frequencies and selling them off to the highest bidder. From a bankruptcy perspective, the right to use the air is well understood as an asset, and can be transferred or even sold under the right conditions. Now, Google has found a way to perhaps muddy the waters (or, perhaps I should way cloud the skies).

This morning, Google announced its new spectrum database to help companies to, well, use unused air. The basic concept is simple. Although the FCC has divided up the electromagnetic spectrum, large portions of the spectrum aren't actually being used. But, identifying what spectrum is available in a particular location presents a challenge - in some cases the spectrum has been allocated to someone so it is subject to use, and might actually be used from time to time and from place to place. Other spectrum exists in the gaps between already allocated spectrum. Google's new product is a database that tracks spectrum intended to carry television signals to identify exactly when and where the spectrum remains unused. This so-called "TV white space" can, once tracked, be re-purposed for other uses. Primarily, network providers can use it to create large public or private Wi-Fi networks. The database essentially provides a source of control over this TV white space to ensure that multiple systems or device networks don't try to operate using the same TV white space. Google provides an API that commercial entities can use to link their systems in with the database to maintain operations. What gives Google the authority to provide this service? Well, they built it and a few months ago the FCC certified them to manage the database - essentially controlling access to TV White Space in the United States.

In short, the FCC has given Google the right to control the little bits and pieces of unused spectrum. This is an interesting kind of asset - the right to control what economists refer to as a common good. Common goods are goods that can't be consumed by more than one person, but you also can't control who comes and consumes them. The classic example is wild fish - there are only so many fish in the sea but anyone can get in a boat and try to catch them. Absent some kind of legal or technical limitation on access, chaos ensues or the good is rapidly depleted. Usually, when controls are placed on common goods, we see the control function vested at the government level, as in the case of commercial fisheries or FCC spectrum licenses. But, with the TV white space, Google will control who has access. In the technology arena, we have already seen a similar structure applied to domain names and IP addresses, mostly controlled by NGOs. We've even seen a sale of a large block of IP addresses in the Nortel bankruptcy case. But, we haven't yet seen an attempt by the American Registry for Internet Numbers or a Regional Internet Registry to sell its rights to control large IP address blocks. I don't expect Google is likely to file a bankruptcy petition anytime soon, but I am curious about how the bankruptcy process might treat a privately held right to control a common good.

A Trade Secret is Not a Copyright

noreply@blogger.com (Warren Agin) — Thu, 07 Nov 2013 15:33:00 +0000

Bankruptcy courts (and lawyers) continue to mystify by their inability to tell the difference between types of intellectual property, confusing patents, copyrights and trademarks as if they are all just variations on the same theme. In the Virgin Offshore USA, Inc. case, the US District Court for the Eastern District of Louisiana had to deal with lawyers who had trouble telling the difference between copyrights and trade-secrets (or at least argued as if they did).

The case involved a debtor that had paid a one-time fee to access and use geological data resulting from seismic surveys for a limited time period. The licensor, TGS-NOPEC Geophysical Company, L.P., objected to the debtor's attempt to assume the license agreement under 11 U.S.C. sec 365. After the bankruptcy court overruled the objection, the licensor appealed the matter to the District Court. The idea that copyright licenses are personal to the licensor and can only be assigned in bankruptcy with the licensor's consent is well known as a result of decisions like Everex Systems, Inc. v. Cadtrak Corporation, so the licensor argued that the data was protected by copyright - notwithstanding the fact that the agreement was labeled a trade secret agreement, the licensor never attempted to copyright the information, and decisions from numerous courts existed holding that seismic data is not protected by copyright. It lost.

The District Court went on, in dicta, to talk about whether an inability to "assume" the license under 11 U.S.C. sec 365 would prevent "assumption" of the license by the reorganizing debtor. The Court recognized that the Fifth Circuit has not yet explicitly adopted the "actual test," which would allow assumption, over the "hypothetical test," which would not. Discussing the prior decisional history in the Fifth Circuit, the Court stated that the actual test is the correct test, based on the Court of Appeals' holdings in In re Mirant and In re O'Connor.

Turning a Paige on Domain Name Ownership

noreply@blogger.com (Warren Agin) — Wed, 14 Apr 2010 00:54:00 +0000

An unreported decision from the United States Bankruptcy Court for the District of Utah, Paige v. Search Market Direct, Inc., 2009 WL 2591335 (Bankr. D. Utah 2009), provides a fresh look at how to determine ownership of a domain name.

In a case with an unbelievably complex fact pattern (you read it - I just don't have that kind of time), the salient issue was whether the debtor, Mr. Paige, or a company he owned, was the true owner of the domain name "freecreditscore.com" when Mr. Paige filed his bankruptcy case in 2005. At the time of the filing, the name was registered to neither Mr. Paige nor his company - it was registered to a Mr. Conklin (Mr. Conklin did not claim ownership to the name).

Judge Thurman held that because Mr. Paige exercised dominion and/or control over the domain name both prior to and after the bankruptcy filing, that he was the correct owner of the domain name and, thus, the name was property of the bankruptcy estate.

Judge Thurman then addressed whether the domain name could be converted under Utah law. The bankruptcy trustee had argued that a domain name is a form of intangible personal property, subject to a claim for conversion under the 9th Circuit decision in Kremen v. Cohen (applying California law). The defendants argued that the domain name rights were limited to the contract with the registrar. Judge Thurman rejected both arguments. He noted that Utah courts had previously rejected the concept that intangible personal property could be converted. But, following a thread of reasoning so subtle that even I have difficulty understanding it, Judge Thurman held that a domain name is in fact a form of TANGIBLE personal property, and could, thus, be converted.

I will just repeat these two quotes: "...like web pages and software, domain names can be perceived by the senses..." and "unlike a mere idea that can only be stored in a person's mind, domain names can and do have a physical presence on a computer drive."

On the other hand, it is an unreported decision. And I do have to hand it to Judge Thurman for his understanding that general common law principles should be applied to the concept of domain name ownership, rather than a strict examination of domain name registry records.

sex.com bankruptcy

noreply@blogger.com (Warren Agin) — Fri, 19 Mar 2010 12:50:00 +0000

According to the Associated Press, the company that previously purchased the domain name "sex.com" for an estimated $14 million in 2006, has been placed into an involuntary bankruptcy on the eve of a scheduled foreclosure sale of the domain name. Domain name owner Escom, LLC financed the purchase through a secured loan from Domain Capital, LLC. When Escom failed to make its payments, Domain Capital, LLC called the loan and scheduled a foreclosure auction of the domain name. On March 17, three creditors filed a Chapter 11 involuntary in the Central District of California, case no. 10-13001, to stop the auction sale. Counsel for the petitioning creditors is listed as a Mark Chassman.

The first thing we do, let's hire all the lawyers

noreply@blogger.com (Warren Agin) — Tue, 09 Mar 2010 17:47:00 +0000

Anyone who has worked on patent prosecutions knows how the work generally gets done and billed. First, you hire a trusted U.S. firm to handle the overall prosecution effort. Then, that firm lines up the various other firms it works with to handle international work. The local firm coordinates and supervises the international work and also monitors the costs. Fees and costs incurred by the foreign firms are charged back to the primary prosecution firm, which passes the charges along to the client. Generally, these charges are fairly limited - perhaps a few hundred dollars or maybe just a couple of thousand dollars.

This structure serves a number of purposes. First, it makes sure the lead patent prosecution firm is comfortable with how the international work is being handled. Second, it eliminates the need for the client to deal with multiple firms - most of which are performing minor technical tasks that the client does not understand. Third, it allows the lead firm to work with the client to coordinate strategy and translate the foreign activity into terms the client can understand. Overall, the system works pretty well.

Not so fast, according to Judge Tchaikovsky of the U.S. Bankruptcy Court for the Northern District of California. In In re Lipid Sciences, Inc., 2010 WL 234840 (Bankr. N.D. Cal.), Judge Tchaikovsky denied a fee application filed by patent counsel to a Chapter 7 trustee. Pointing out that the fee application included as costs the fees of foreign patent counsel, the Judge stated "this portion of the costs is entirely inappropriate. Fees may be paid only to court appointed professionals." In her view, each of the foreign counsel would have to be separately retained by the Chapter 7 trustee and file their own fee applications.

This may be correct as a matter of law, but all I can say is good luck getting a firm in London or maybe China to jump through those hoops for what might only be a couple of hundred bucks.

Judge Bufford likes Websites

noreply@blogger.com (Warren Agin) — Tue, 09 Feb 2010 17:48:00 +0000

In In re S & B Surgery Center, Inc., 421 B.R. 546 (Bankr. C.D. Cal. 2009), Judge Samuel L. Bufford addressed the question of whether a creditors' committee MUST maintain an information website in order to comply with bankruptcy code section 1102(b)(3).

The BAPCPA added, at section 1102(b)(3), an affirmative obligation for creditors committees to provide access to case information to their constituencies. In the Refco decision the Bankruptcy Court for the Southern District of New York laid out how a creditor's committee should use a website to satisfy the section 1102(b)(3) requirement, and identified twelve features the website should contain.

In S & B Surgery Center, the creditors committee sought to provide a telephone number that creditors could call for information. They argued that maintaining a Refco compliant website would be too expensive and the number of creditors in the case did not warrant the expense. Judge Bufford disagreed, and held that the committee should maintain a website to provide information to the creditors.

Judge Bufford did not require that the website meet all twelve of the Refco factors, so long as the needs of the creditors were met. This leaves open the possibility that a creditors committee in a smaller case could use much cheaper options (read free), such as a Google Groups site (or maybe even a Facebook page) to communicate basic information about the case.

You've been served

noreply@blogger.com (Warren Agin) — Fri, 22 Jan 2010 21:10:00 +0000

BBC News reported a couple of months ago about a British court allowing service of a court order using Twitter. Twitter is, for those who do not yet know, an on-line network allowing users to post short messages that are then broadcast to a list of subscribers. In the particular case, a political blogger named Donal Blarney sought an order enjoining another user of the Twitter service. Because the target of the court injunction had not yet actually been identified, the court allowed the injunction to be served via a posting on Twitter. The posting gave notice of the court order and, because twitter postings are very limited in length, contained a link to the order itself.

Apparently, according to a story in The Register, the tactic succeeded. The malefactor did in fact receive the notice of the order and agreed to comply with the order.

Would similar tactics work in the U.S. Bankruptcy Court? Perhaps in limited circumstances. Fed. R. Civ. P. 5(b)(2)(D) and Fed. R. Bankr. P. 7005 allow service by "electronic means" when the recipient has previously consented in writing. Service is effective on transmission. This rule was designed to allow service by e-mail through the ECF system, but there really is no reason why other means could not be used as well. The catch is, of course, getting that advance written consent.

A little bit off-topic post about Kindles

noreply@blogger.com (Warren Agin) — Wed, 20 Jan 2010 13:30:00 +0000

I came across the following article yesterday: E-BOOK TRANSACTIONS:

AMAZON “KINDLES” THE COPY OWNERSHIP DEBATE, 12 YALE J.L. & TECH. 147 (2009). It struck a chord, mostly because it cites fairly extensively to an article I wrote back in 2005 on the law surrounding transactions in electronic information. (A Framework for Understanding Electronic Information Transactions, 15 Albany Law Journal of Science & Technology 277 (2005)) I had been under the distinct impression that no one had really read the article, so I was pleased to see that I was, once again, wrong.

This article, written by Yale law school student Michael Seringhaus, posits that Amazon's sale of e-books for use on the Kindle should be classified as a sale of a book rather than a license of information. It also suggests potential ways of applying technological solutions, rather than legal solutions, to enforce single-copy ownership of an e-book.

I, in the meanwhile, have e-mailed Mr. Seringhaus' article off to my Kindle, where I will be able to read it at my leisure along with other law review articles, Westlaw advance sheets, and other miscellaneous documents that I do not have time to read at my desk. As it turns out, the Kindle is well suited for this purpose because you can e-mail a pdf or Word document (as well as many other types of documents) to an e-mail address Amazon provides you, and the document is automatically transferred wirelessly to the Kindle device.

Chapter 11 Trustee appointed in SCO Bankruptcy

noreply@blogger.com (Warren Agin) — Tue, 25 Aug 2009 06:54:00 +0000

Every now and then I'm reminded that the SCO bankruptcy remains pending. You might recall SCO as the company that sued Novell and a number of other companies claiming that it owned copyrights to code found in the LINUX open source operating system. Almost two years ago, SCO filed a Chapter 11 petition in order to protect the company while the litigation continued. SCO is represented by Laura Davis Jones of Puchulski Stang Ziehl & Jones, LLP.

In May, the U.S. Trustee's Office in Delaware filed a motion to convert the long-standing Chapter 11 case to Chapter 7. Declining to institute such a drastic remedy, Judge Gross instead ordered a Chapter 11 bankruptcy trustee appointed. More detailed information about the decision can be found here on Groklaw. Although the order has not been appealled, a trustee has not yet been appointed.

Meanwhile, Steven Vaughan-Nichols' blog in Computerworld reports that SCO actually won a minor victory of sorts in its litigation with Novell, as the Court of Appeals reverses a prior summary judgment decision against SCO.

Supreme Court Denies Cert in NCP Marketing Case - Kennedy and Breyer Signal Preference for Actual Test

noreply@blogger.com (Warren Agin) — Sun, 19 Apr 2009 17:42:00 +0000

About a month ago the U.S. Supreme Court denied certiorari in the NCP Marketing Case. A link to the denial is here. Robert Eisenbach provides a detailed analysis of why this is significant in a March 26, 2009, post on his In the Red Blog.

In a nutshell, the NCP Marketing case dealt with the ability of a debtor to assume a trademark license. The bankruptcy court held that the license had been terminated pre-petition, and therefore could not be assumed. It also stated, in dicta, (and in my opinion incorrectly) that the trademark license was not assignable as a matter of common law and therefore, under applicable law in the 9th circuit, not assumable. Appeals ensued and the decision was affirmed at each step.

What makes the denial of certiorari in this case interesting is that two justices, Kennedy and Breyer, felt the need to issue a statement on the matter. While they agreed that denial of certiorari was appropriate in this particular case, they welcomed the opportunity to hear a case on the issue of whether the actual test or the hypothetical test is the correct test for analyzing section 365(c). And, from Judge Kennedy's comments, it seemed likely that they would support adoption of the actual test.

I would note that these are only two justices and they are among those more likely to support the policy driven reasons for adopting the actual test as opposed to the strict statutory construction theories behind the hypothetical test. On the other hand, only four Justices are needed to grant certiorary and it seems likely that Kennedy and Breyer would not have signaled their interest in taking a case on this issue if they expected the outcome to go against their viewpoints.