Facebook Account Property of the Estate?

dislikeShould debtors be required to turn over control their social media accounts at the request of a trustee? Section 521 of the Bankruptcy Code states, “(a) [t]he debtor shall…(4) surrender to the trustee all property of the estate and any recorded information, including books, documents, records and papers, relating to property of the bankruptcy estate….” What if a trustee finds evidence of concealed property on a debtor’s public Facebook posts, or sees photos of a recent extravagant vacation? I have heard anecdotal stories of trustees requesting Facebook passwords at §341 meetings. Are social media accounts “property”, or “recorded information relating to property of the estate?” New technology raises new legal issues. Some of these issues are making their way into bankruptcy court and the trend will likely escalate.

In a case of first impression, a bankruptcy court in Texas addressed the issue of whether Facebook and Twitter accounts were property of a Chapter 11 debtor’s bankruptcy estate. See, In re CTLI, LLC, Case No. 14-33564, United States Bankruptcy Court for the Southern District of Texas, Houston Division, Dkt#334, April 3, 2015. The debtor, CTLI, LLC, operated a gun store and shooting range. A dispute arose between the majority and minority owners of the business and a bankruptcy was filed by the majority equity owner to thwart a state court receivership proceeding. A plan of reorganization was confirmed which resulted in the minority owner becoming the 100% owner of the reorganized debtor. The former majority owner refused to turn over the company’s Facebook and Twitter accounts. He asserted that the accounts were personal and were not property of the bankruptcy estate.

The bankruptcy court ruled that social media accounts for a business fall within the Bankruptcy Code’s broad definition of “property of the bankruptcy estate.” The court made a factual determination that the Facebook and Twitter accounts were “business accounts” and ordered administrative control be turned over to the new equity owner. The court found that the nature of the property right was similar to a business customer list which is generally recognized to be property under Texas law. The opinion distinguished between personal social media accounts and business accounts. Without ruling on the issue, the court suggested that personal social media accounts may involve personal liberty rights rather than property rights, but also acknowledged that in cases involving celebrities, or public figures, distinguishing between personal and business accounts may be difficult.

Whether a social media account is considered personal or business related, a trustee may be entitled to administrative access to social medial sites under Section 521. I am not aware of any reported opinions that address the issue. I have found Facebook to have limited value as an investigative tool. On a couple of instances I thought I had “busted” debtors with public posts about boats and vacations homes, only to find out later that they did not actually own the property they bragged about. Imagine that.

Attorneys Forging Debtors’ Signatures?

shamefulSometimes debtors seem puzzled when I ask them at the §341 meeting if they signed their bankruptcy petition and schedules.   They may look at their attorney for guidance in answering.   It could be poor memory or just nerves, but I have often wondered if some attorneys file petitions or schedules without first obtaining the debtors’ original signatures. Electronic filing has made this practice much harder to detect than the old fashion kind of forgery in which a signature had to be mimicked. But, forgery it is nonetheless.

Rule 1008 of the Federal Rules of Bankruptcy Procedure (“FRBP”) requires that all petitions, lists, schedules, statements and amendments be “verified” or contain an “unsworn declaration” as provided in 28 U.S.C. §1746. The official bankruptcy petition contains a declaration that meets the statutory requirement:

I declare under penalty of perjury that the information provided in this petition is true and correct.

I request relief in accordance with the chapter of title 11, United States Code, specified in this petition.

X Signature of Debtor        

The Declaration Concerning Debtor’s Schedules and the Statement of Financial Affairs contain similar language. The verification requirement of FRBP 1008 prohibits the attorney from signing the debtor’s name to the petition, schedules and SOFA. The adoption of Electronic Case Filing did not change the verification requirement. ECF merely shifted the responsibility to maintain the debtor’s original paperwork from the court to the debtor’s attorney. Pursuant to FRBP 5005, Local Rule 5005-1(a) and the Administrative Procedures for Electronic Case Filing, registered ECF users must maintain originally executed copies of signed documents for one year after the case is closed in the bankruptcy court. Placing a verified electronic signature on documents filed with the court without obtaining an original verified signature is forgery.

The electronic signature of an attorney on the bankruptcy petition is a representation by the attorney that the debtor signed the petition. FRBP 9011(b) and Miss Bankr. L. R. Rule 9011-1(a). Bankruptcy courts across the country have begun to recognize the problem of forged petitions and schedules and are imposing sanctions on attorneys who engage in the practice. See, e.g., In re: Whitehill, 514 B.R. 687 (M.D. Fla. 2014)(The debtor’s attorney filed schedules when the debtor had not reviewed or signed the documents. The court imposed sanctions, including monetary sanctions of $15,000.00.); In re: Bradley, 495 B.R. 747 (S.D. Tex. 2013) (The attorney’s actions which included forging by electronic signature defiled the “temple of justice” and were in bad faith.); In re: Stomberg, 487 B.R. 775 (S.D. Tex 2013)(The Court held that there are no circumstances that would ever justify an attorney filing the debtor’s petition or schedules without first obtaining his signature. Sanctions were imposed.); In re: Wenk, 296 B.R. 719 (E.D. Va. 2002)(A debtor’s attorney filed a “Skeletal petition” without any signature in order to get the benefit of the automatic stay. The Court found that the practice was no less egregious than filing an electronic petition without an original signature. The court imposed sanctions under a separate order.).

An attorney who files a bankruptcy petition, schedules and statements on behalf of a debtor is representing to the court that the debtor’s original signature appears on conforming copies maintained in the office. Including an electronic signature when an original was not obtained is no less forgery than attempting to mimic the debtor’s own signature. Such conduct is properly sanctionable under FRBP 9011.

Judicial Estoppel in the Fifth Circuit, Part 2 The Three-Prong Test

The Fifth Circuit has established a three-prong test for determining whether a debtor should be judicially estopped from pursuing a cause of action that he failed to disclose to the bankruptcy court.  See In re Flugence, 738 F.3d 126 (5th Cir. 2013); Love v. Tyson Foods, Inc., 677 F.3d 258, 261 (5th Cir. 2012); Reed v. City of Arlington, 650 F.3d 571(5th Cir. 2011)(en banc); Kane v. Nat’l Union Fire Ins. Co., 535 F.3d 380 (5th Cir. 2008); In re Superior Crewboats, Inc., 374 F.3d 330 (5th Cir. 2004); In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir. 1999).

Prong One.    The debtor asserted clearly inconsistent positions. If a debtor/plaintiff files bankruptcy and fails to schedule a civil lawsuit or cause of action as an asset, he has represented to the bankruptcy court that no such cause of action exists.  If he later asserts the claim by filing a lawsuit, the position asserted in the civil action is clearly inconsistent with the position taken in the bankruptcy proceeding. “[I]ntentional self-contradiction is being used as a means of obtaining unfair advantage in a forum provided for suitors seeking justice.” Superior Crewboats, 374 F.3d  at 334-35 (citations and quotations omitted).

Prong Two.   The bankruptcy court must have accepted the previous position.   The bankruptcy court must have accepted the debtor’s position that he had no pending lawsuits, claims or causes of action.  How does the bankruptcy court “accept” the debtor’s position?  No formal order or final judgment is required. In practice, almost ANY action the bankruptcy court takes could be “acceptance” of the debtor’s position.  If the cause of action had been scheduled, the case would necessarily have been administered differently in some respect.  The following actions taken by the bankruptcy court have been ruled to be “acceptance” of a debtor’s position:

A.     Granting the debtor a discharge in a Chapter 7 caseSee, e.g., Superior Crewboats, 374 F.3d at 335 (The bankruptcy court granted a “no asset” discharge thereby accepting the debtors’ position that they had no personal injury cause of action.); Kane, 535 F. 3d at 384 (The bankruptcy court accepted the debtor’s position by entering a “no asset” discharge and closing the case.); Reed, 650 F.3d at 575-76 (The bankruptcy court accepted the debtor’s position that he did own any judgments and issued a “no asset” discharge.); Kirk v. Pope, 973 So. 2d 981, 991 (Miss. 2007)(The bankruptcy court relied on the debtor’s schedules in granting a discharge.).

B.     Entering an order modifying a Chapter 13 PlanSee, e.g., Flugence, 738 F.3d at 130 (The bankruptcy court entered an order modifying a Chapter 13 plan accepting the debtor’s position that she had no personal injury causes of action.  If the cause of action had been disclosed, the bankruptcy court would likely have altered the plan to include a provision relating to the cause of action.).

C.     Entering an order confirming a Chapter 13 PlanSee, e.g., Tyson Foods, 677 F.3d at 261 (The bankruptcy court accepted the debtor’s position that he did not have an EEOC claim by confirming the debtor’s Chapter 13 plan that did not contain a provision related to the claim.).

D.    Entering an order terminating the automatic stay.  See, e.g., Coastal Plains, 179 F. 2d at 207 (The bankruptcy court entered an order terminating the automatic stay as to “intangibles” partially in reliance on the debtor’s omission of a cause of action.   If the debtor had included the cause of action in the schedules as an intangible asset, the valuation of the “intangibles” could have affected the court’s consideration of the motion to terminate the automatic stay.).

Prong Three.   The non-disclosure must not have been inadvertent.  A debtor is most likely to contest the  “not inadvertent” prong of the judicial estoppel test.   “[T]he debtor’s failure to satisfy its statutory disclosure duty is ‘inadvertent’ only when, in general, the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment.” Coastal Plains, 179 F.3d at 210. Love v. Tyson Foods well describes the “not inadvertent” prong and the shifting burdens of persuasion.    The party (defendant) urging judicial estoppel must demonstrate that the debtor (plaintiff) had a motive to conceal the cause of action from the bankruptcy court.  The defendant’s burden is not difficult because the motive to conceal is almost always present.  “Motivation in this context is self-evident because of the potential financial benefit resulting from the non-disclosure.” Tyson Foods, 677 F.3d at 262 (quoting Thompson v. Sanderson Farms, Inc., No: 3:04CV837-WHB-JCS, 2006 U.S. Dist. LEXIS 48409, at 12-13 (S.D. Miss. May 21, 2006)).   See also, Superior Crewboats, 374 F.3d at 336 (The Court found a motive to conceal where the debtors stood to “reap a windfall” from an undisclosed claim.).  After the defendant establishes motivation, the burden shifts to the plaintiff to demonstrate that he lacked knowledge of the undisclosed claims. Id.   The “lack of knowledge” of the duty to disclose or the reliance on an attorney is not enough.  In order to establish inadvertence, the plaintiff must demonstrate that he was “unaware of the facts” that gave rise to the cause of action. Flugence, 738 F.3d at 131; Coastal Plains, 179 F.3d at 212.

My two cents: If a debtor fails to disclose a cause of action that arose before a Chapter 7 or Chapter 13 bankruptcy case was filed, judicial estoppel should be fairly easy to obtain by summary judgment by relying on the bankruptcy schedules and other matters of record.  The three-prong test is almost self-effectuating. The harder cases involve causes of action that arise post-petition in Chapter 13 cases. There is a continuing duty to disclose causes of action that arise during the three to five years that the debtor is making plan payments. However, factual issues are more likely to preclude summary judgment on the issue of judicial estoppel in the post-petition failure to amend cases.  Complicating issues may include (1) the length of time that passed before the cause of action was disclosed, (2) whether the disclosure was made by the debtor or the defendant asserting judicial estoppel, and (3) the actions taken in the Chapter 13 case prior to the disclosure.   For example, if the debtor voluntarily amends the schedules to include the cause of action within a reasonable time after the cause of action arises, then the debtor has likely met his disclosure duty.    On the other hand, if the cause of action is brought to the attention of the bankruptcy court by the defendant a “long time” after the cause of action accrued, then the court, applying the three-prong test, will probably find that the debtor should be estopped.  See Anderson v. Entergy Operations, Inc., 2012 WL 5400059 (U.S.D.C. S.D. Miss. 2012)(The Chapter 13 debtor failed to amend his schedules to add a wage and hour claim against Entergy.  The defendant brought the claim to the attention of the court eleven months after the debtor’s Chapter 13 plan was confirmed.  The Court applied the three-prong test and judicially estopped the debtor from pursuing the claim.). In between those extreme scenarios, there are inumerable factual variations that could preclude summary judgment.

Just another reminder that estoppel only affects the debtor and does not apply to the trustee. See Judicial Estoppel Part 1.

Plaintiff as Debtor – Bankruptcy Basics for Trial Lawyers

21970042_s If your practice centers on non-bankruptcy civil litigation, you may be uncertain how to proceed when the plaintiff files bankruptcy.  You know about the “automatic stay,” but does it apply when the plaintiff files bankruptcy? How does the trustee fit into the picture?  The plaintiff’s bankruptcy could change the entire dynamic of the pending litigation.   If the stakes are high, consider consulting a bankruptcy lawyer.  If you decide to handle the bankruptcy related matters yourself, you should become familiar with “judicial estoppel,” “standing” and “real party in interest.” You should also be prepared for the involvement of the bankruptcy trustee and the Bankruptcy Court. A good starting place would be the cases cited in my previous post and the Mississippi Supreme Court case, Kirk v. Pope, 973 So.2d 981 (Miss. 2007).  Kirk v. Pope confirms that federal common law applies in Mississippi state courts when considering judicial estoppel due to bankruptcy omissions. The case also addresses “standing” and “real party in interest” related issues.  Whether you represent the defendant or the plaintiff in pending litigation, it is important to consider the following when the plaintiff files bankruptcy (hereafter, the plaintiff may be referred to as the Debtor):

1.  Did the Debtor have a duty to include the cause of action or pending lawsuit in his bankruptcy schedules?

The answer depends on whether the Debtor filed a Chapter 7 or a Chapter 13 bankruptcy.  [The analysis below is very abbreviated and sometimes issues arise.  However, as a general rule, if there is any doubt about whether a cause of action should be disclosed, the Debtor should choose disclosure.  If he asks the question “should I disclose?,” the default answer should be “yes.”]

In cases originally filed under Chapter 7 – If the cause of action arose before the bankruptcy petition was filed, then it is should be disclosed and included as an asset in the bankruptcy schedules.  11 U.S.C. §521; In re Coastal Plains, Inc., 179 F.3d 197, 207-08 (5th Cir. 1999).

In Chapter 13 cases – If the cause of action arose before the bankruptcy petition was filed, or while the Chapter 13 case was pending, the cause of action is property of the bankruptcy estate and should be included as an asset in the bankruptcy schedules. 11 U.S.C. §1306, §521. The law on post-confirmation duty to disclose has recently been settled by In re Flugence, 738 F.3d 126 (5th Cir. 2013). There are opinions issued as recently as 2012 that would likely be decided differently today. See, e.g. Byrd v. Wyeth, Inc., 907 F. Supp. 2d 803 (S.D. Miss. 2012).  Section 1327 of the Bankruptcy Code provides, “[e]xcept as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.” (emphasis added). The uniform order confirming Chapter 13 plans provides that property does not vest in the debtor until discharge, dismissal, or conversion.  Therefore, property of the estate includes property that the debtor acquires post confirmation, including causes of action that arise post-confirmation.  The Chapter 13 debtor has a duty to amend the schedules and disclose causes of action that arise before the case is dismissed, converted or until the debtor receives his discharge.

In Chapter 7 cases converted from Chapter 13 – It depends.  Generally, if the cause of action arose after the Chapter 13 case was filed, but before it was converted to Chapter 7, it would NOT be property of the Chapter 7 bankruptcy estate. 11 U.S.C. §348(f)(1). There is an exception that could apply that involves the debtor’s bad faith. 11 U.S.C. §348(f)(2).

The date that a cause of action arises is determined under applicable state or federal law and depends on the nature of the claim.  The date a lawsuit is filed is not the applicable date for purposes of determining whether a cause of action is property of the bankruptcy estate.

2.  Did the Debtor disclose the cause of action to the Bankruptcy Court?

If the cause of action became property of the bankruptcy estate, it should be included as an asset in the bankruptcy schedules. If you have access to PACER, you can search the bankruptcy court records by federal court judicial district using the Debtor’s name.   You can simultaneously search every district in the United States with the Debtor’s Social Security number.  The schedules are usually one of the first docket entries. It is possible that the Debtor told the trustee about the pending lawsuit at the 341 Meeting of Creditors.  I specifically ask debtors if they are “suing anyone” and whether they believe they are “entitled to sue someone for any reason.”   Sometimes debtors disclose the existence of causes of action at the 341 Meeting of Creditors even though they did not include a claim on their written schedules.  You may obtain an official copy of the recorded meeting of creditors from the U.S. Trustee.  I maintain unofficial recordings of my 341 Meetings and will provide a copy to attorneys upon request.

If the Debtor had a duty to disclose a cause of action or pending lawsuit and failed to schedule the claim or to inform the trustee, your next actions will depend on whether you represent the Debtor (plaintiff) or the defendant.

If You Represent the Defendant

If you represent the defendant, you will want to assert “judicial estoppel” and you will have to decide how to raise the issue procedurally. I have seen Motions to Dismiss and Motions for Summary Judgment filed with the trial court.  I have also seen a Complaint for Declaratory Judgment in bankruptcy court seeking a determination that the Debtor is judicially estopped.  I do not know if there is a right or wrong way to raise the issue – it likely depends on the circumstances and the court in which the case is pending.   Remember that judicial estoppel does not apply to the bankruptcy trustee.  Reed v. City of Arlington, 650 F.3d 571(5th Cir. 2011)(en banc); Kirk v. Pope, 973 So.2d 981 (Miss. 2007).   Therefore, if the trustee decides to proceed, it is unlikely that the trial court will dismiss the case.  However, it is very possible that the court will judicially estop the plaintiff, which will prohibit him from receiving any benefit from the claim or suit. In re Flugence, 738 F.3d 126 (5th Cir. 2013).  Thereafter, with the bankruptcy trustee involved, settlement opportunities may arise.  At a very minimum, the Debtor, as a witness, has lost credibility.

In addition to raising judicial estoppel, defendants usually include a request for dismissal based upon lack of plaintiff “standing” or based upon the “real party in interest” requirement of F.R.C.P. or M.R.C.P 17(a).  Unless the case trustee decides not to pursue the case as plaintiff, these assertions should not result in a dismissal of the lawsuit.  However, it should prompt a response by the plaintiff to cause the trustee to be substituted as plaintiff in the case.

If You Represent the Plaintiff/Debtor

It is not uncommon for a plaintiff to file bankruptcy without the knowledge of the attorney pursing a civil case on his behalf.  If you discover that your client has filed bankruptcy, you should immediately contact the case trustee.  If the cause of action is property of the Debtor’s bankruptcy estate, the bankruptcy trustee is the sole representative of the estate and the only party with authority to continue with the action or consider a settlement.  11 U.S.C. §323.   The case trustee will decide whether to continue as plaintiff in the civil action.  The trustee’s inquiry is whether the potential recovery would make a “meaningful distribution” to the Debtor’s creditors.

If the trustee agrees to pursue the case, you must be hired as “Special Counsel” and the Bankruptcy Court must approve your fee arrangement.  Special Counsel may be hired “on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis.” 11 U.S.C. §§ 328, 330.  If multiple firms are involved, or there is a fee sharing arrangement among two or more firms, the arrangement must be disclosed and the Court may require each firm to be separately employed.  Disclosure and transparency are paramount in Bankruptcy Court.   There are no secret deals or under the table transactions. The Bankruptcy Court must approve any settlement and award of attorney’s fees. As a general rule, the Mississippi Bankruptcy Courts and the Office of the U.S. Trustee limit the total compensation (combined fees and expenses) awarded to Special Counsel to 50% of the gross judgment or settlement amount. However, in a case in which Special Counsel has actually incurred extraordinary expenses, an exception may be made. The trustee will file the requisite Applications with the Bankruptcy Court.

When you represent the trustee, you must provide quarterly updates about the status of the case.  A one-paragraph e-mail message should be sufficient in most cases.   Failure to keep the trustee advised of the case status may result in a conference with the bankruptcy judge.  Repeated failures could jeopardize your fees.

Finally, please remember that when you agree to represent the trustee as Special Counsel, you have a new client with the attendant duty of loyalty.  Although you may feel sympathy for the Debtor, it is inappropriate to advocate that the Debtor be included in a settlement or to otherwise receive a benefit from a settlement.

3.  Does the automatic stay apply?

The automatic stay does not apply to civil actions in which the Debtor is the plaintiff. The stay only applies to proceedings against the Debtor. 11 U.S.C. §362(a).  Unless there was a counterclaim filed against the Debtor, the automatic stay should not affect the pending case.

*****After I was almost finished with this post, I realized that it was based on the premise that civil attorneys were “surprised” by a plaintiff’s bankruptcy filing.   It certainly happens that a plaintiff will file bankruptcy while a civil case is pending. However, for those attorneys who regularly represent plaintiffs in civil litigation, I cannot stress enough the importance of checking PACER for bankruptcies before you file a civil lawsuit.  You cannot simply rely on the potential client’s representations regarding past bankruptcies.   Some examples of what they may say if a bankruptcy is discovered include…

  • Oh! That was only related to my divorce.
  • That was about my failed business, not me personally.
  • That case was discharged a long time ago.
  • I didn’t file bankruptcy on the car that was involved in the accident.
  • That was just to stop a foreclosure; it didn’t have anything to do with the accident.
  • I forgot.
  • My attorney got that bankruptcy dismissed.
  • That was under my maiden name.

With so much information available online, there is simply no excuse for failing to discover a prior bankruptcy.  Your client may not have standing as plaintiff and your fee may be in jeopardy. *****