Back to the Future FRCP and Electronic Discovery in Bankruptcy
Looking Forward to Electronic Discovery
The debate over the need to amend FRCP has been going on since before 1999, and the Committee on Rules of Practice and Procedure for the Judicial Conference approved for publication and comment the proposed amendments to the FRCP this past August. A material portion of the proposed changes directly relate or pertain to e-discovery of electronic, or digital, stored information.3 After public hearings and comments that will be accepted through Feb. 15, 2005, the earliest that these proposed amendments to the FRCP would take place is December 2006.
The Byte on Bankruptcy
In the modern world of information technology, 92 percent of new information is in digital form.4 Perhaps as much as 80 percent of crucial business information will never have been printed on paper. During the five years of discourse over the need to modernize the FRCP, the physical volume of electronic or digital information has more than doubled. It was reported by IDC in January 2003 that "more information has been generated and stored between 1999-2003 than all of the information created since the beginning of mankind."
Time has not stood still, and the very technologies that have advanced the practice of bankruptcy law and assisted in the creation of intellectual property should not be feared. Consider that present estimates suggest that 40-60 million people are using instant messaging (IM) in business and that 400 million people will be communicating using IM in just a few years.
Accepting that electronic evidence exists and it is generally stored on computers, networks, removable media and digital devices5 is perhaps the first step necessary to move into the 21st Century. The effect of not conducting e-discovery should be "self evident"; after all, how many businesses do not have computers, electronic books and records, e-mail, voice mail, electronic files and databases?
Putting Meat on the E-discovery Skeleton
In the rough-and-tumble world of bankruptcy litigation, that means obtaining (early in the case) the electronic evidence necessary to support the issues related to insolvency, valuation, accounting fraud, theft of intellectual property, bankruptcy fraud, equitable subordination, recharacterization of debt, breach of fiduciary duty, substantial consolidation, creditor rights, lender liability, preferences and fraudulent conveyances.
A comprehensive discussion of the discovery and recovery of electronic information, including electronic books and records and financial information using digital forensic accounting technology, is beyond the scope of this article.6
Back to the Future
Abe Lincoln said that if he had eight hours to fell a tree, he'd use six of them sharpening the axe. Consequently, promptly conducting adequate e-discovery will often determine if you win or lose.
As is frequently the case, electronic evidence is extremely commanding on its face, and when the opposing parties are confronted with the electronic evidence, many parties will want to settle the case before trial. When parties participate in ADR and mediation, it is hard to imagine the parties not settling after the electronic evidence is put on the table. Overall, conducting e-discovery in adversary proceedings will protect the rights of the parties, cases will settle promptly, and valuable court time will not be wasted. The purpose of this article is to advance the "best practices" for e-discovery under FRBP Rule 7026 and to explore specific provisions of the proposed changes to FRCP.
The Pragmatic Client
Conducting e-discovery requires adequate planning, understanding the bankruptcy landscape and the information technologies used by the parties. Bankruptcy attorneys and clients are pragmatic, and often it simply comes down to what it will cost. Defending claims in an adversary proceeding can become quite costly when the client chooses not to cooperate and comply with the e-discovery request. Remember, e-discovery in adversary proceedings is only done once and will generally require the assistance and skills of an experienced e-discovery and digital forensic professional.
Preparing for Electronic Discovery
The proposed changes to FRCP Rules 16(b) and 26(f) are founded on the early discussion pertaining to the e-discovery issues. In adversary proceedings, this allows the parties to adequately plan the e-discovery and consider the steps necessary to protect against waiving the attorney/client privilege.
Specifically, the proposed changes to FRCP include, but are not limited to, the following:
Proposed Rule 16(b) requires "(5) provision for disclosure or discovery of electronically stored information; (6) adoption of the parties' agreement for protection against waiving privilege."
Proposed Rule 26(f) provides "that the parties must confer to discuss any issues relating to preserving discoverable information and to develop a proposed discovery plan that indicates the parties' views and proposals concerning: (3) any issues relating to disclosure or discovery of electronically stored information, including the form in which it should be produced; (4) whether, on agreement of the parties, the court should enter an order protecting the right to assert privilege after production of privileged information."
Proposed Rule 33(d) provides for "including electronically stored information."
Proposed Rule 34 includes "electronically stored information" with 34(a)(1) containing the following specific language: "inspect, copy, test or sample...electronically stored information of any designated documents...sound recordings, images and other data or data compilations in any medium."
Proposed Rule 34(b) states: "The request may specify the form in which electronically stored information is to be produced...including an objection to the requested form for producing electronically stored information, stating.... Unless the parties otherwise agree, or the court otherwise orders...if a request for electronically stored information does not specify the form of production, a party must produce it in a form in which it is ordinarily maintained or in an electronically searchable form. The party need only produce such information in
Proposed Rule 37(f) may ultimately provide for a "Safe Harbor" from sanctions: "(f) Electronically stored information. Unless a party violated an order in the action requiring it to preserve electronically stored information, a court may not impose sanctions on the party for failing to provide such information if: (1) the party took reasonable steps to preserve the information after it knew or should have known the information to be discoverable in the action and (2) the failure resulted from loss of the information because of the routine operation of the party's electronic information system."
The Do-it-now E-discovery Action Plan
The preparation of the "e-discovery action plan" becomes the first order of business, including the transmittal of a preservation letter placing the opposing party on notice. The plan needs to be detailed, as it is unique to the facts and circumstances of the case based on the information technologies involved, including storage media and the use of accounting and financial software.
When requesting electronic information under FRCP Rule 34, always be specific in the e-discovery request. Using terms such as "each and every" for electronic information could become costly for the client should the opposing party seek allocation of costs because the request was overly broad, duplicative and unnecessary etc. Electronic or digital information is volatile; thus, time is of the essence, and failure to produce the requested e-discovery requires immediate attention.
Interrogatories and depositions are generally necessary to document the information technologies and identify those in control of the electronic information, including the electronic books and records and financial information. A request for admissions can be extremely beneficial in e-discovery, and when crafted with the focus on the electronic books and records and financial information, this can greatly assist in settlement discussion, ADR, mediation and court hearings.
Finally, be adequately prepared and ready to answer the e-discovery requests from the opposing party and have a designated person available if necessary to provide 30(b)(6) testimony regarding the preservation and gathering of electronic information.
Conclusion...To Be Continued
Adversary proceedings are being brought with more creativity, and conducting adequate e-discovery is practically mandatory. As information technologies change in the digital age (previously the electronic age) the digital forensic technologist experienced in bankruptcy matters and electronic data discovery is essential because without the proper skills on your side, you are at a disadvantage against those who will use the best of this technology.
1 Jack Seward is a consultant and digital forensic accounting technologist in New York City and veteran of many years of forensic accounting and electronic data sleuthing. He provides litigation support, including e-discovery for bankruptcy, insolvency, judgment enforcement and the discovery, recovery and analysis for digital forensic accounting technology for attorneys, corporations, creditors, trustees, stockholders and other interested parties. He may be contacted at [email protected] or (917) 450-9328, Fax (212) 656-1486. Return to article
4 According to a study, "How Much Information," at the University of California, 92 percent of all information created in 2001 was generated on computers, while only 8 percent was generated in other media, such as paper. Return to article
5 Removable media and digital devices include, but are not limited to, PDAs, hand-held devices, CDs, DVDs, Microdrives, CompactFlash, SmartMedia, SecureDigital, Memory Sticks and MultiMediaCards, optical devices, floppy disks, USB devices, FireWire devices, PCMCIA hard disk drives, Zip disks, Jazz Disks, internal and external hard disk drives, and tape back-up systems. Return to article
6 See the following articles for an analysis on the subject of electronic discovery and recovery of electronic information, including electronic books and records and financial information in bankruptcy: Seward, J., "The Debtor's Digital Reckonings." International Journal of Digital Evidence, Fall 2003 (http://www.ijde.org/docs/03_fall_seward.pdf); Seward, J., and Austin, D., "E-sleuthing and the Art of Electronic Data Retrieval: Uncovering Hidden Assets in the Digital Age," ABI Journal,Part I February 2004, Part II March 2004 and Part III April 2004; Seward, J., "The Debtor's Digital Autopsy, or Where's the Money!" NABTalk® Journal of the National Association of Bankruptcy Trustees, Summer 2003; "How Digital Forensics Can Give You An Edge." Bankruptcy Law & Litigation Report, National Litigation Bureau, April 2004; Seward, J., "The Debtor's Survival in the Digital Age," ABI Journal, June 2004; Seward, J., "Digital Stealth Secrets and the Act," LJN's The Corporate Compliance & Regulatory Newsletter, Law Journal Newsletters, March 2004 (http://www.ljnonline.com); Brighton, Jo Ann, and Seward, Jack, "Is it a Capital Contribution or a Loan, and How Can Electronic Data Assist in the Analysis or Defense of a Claim for Recharacterization?" Association of Insolvency and Restructuring Advisors (AIRA News), Part I June/July 2004, Part II August/ September 2004; Seward, J., "Protecting Yourself Against E-illiteracy: Avoid Being Duped," ABI Journal, September 2004; Seward, J., "Rejecting E-illiteracy and Adopting the Best Practices to Protect the Debtor's Confidential Information and Estate Asset," NABTalk® Journal of the National Association of Bankruptcy Trustees, Fall 2004. Return to article