Electronic Discovery & Information Governance – Tip of the Month: Bankruptcy Boom Will Create E-Discovery Challenges

In Houston, oil is king. But this year, several energy titans are among a troubling and growing corporate list turning to bankruptcy protection. Even if the economy rebounds unexpectedly, experts expect the sharp increase in bankruptcy proceedings to continue, at least for the remainder of 2020.

Bankruptcy Boom Creates E-Discovery Issues

Bankruptcy operates at the pace of emergency medicine with patients often near death upon arrival. And because some of these companies will be clinging to life when "wheeled" into the bankruptcy court, there is little doubt that these cases are likely to be accelerated on court dockets, depending on just how dire the debtor-company's financial circumstances. Deadlines will be tight. Debtors seek quick resolution of their obligations, and creditors seek quick repayment. Observers note that this will create a demand on expeditiously collecting and reviewing electronic data in these cases. Legal practitioners should beware, however, that this accelerated pace could create pitfalls and a heightened possibility for missteps in the e-discovery phase of these bankruptcies, particularly considering the unique data collection realities and privacy considerations specific to bankruptcy litigants.

E-Discovery Issues Specific to Bankruptcy

To begin with, a bankruptcy estate has limited assets and may be liquidated or reorganized by a trustee with little long-term knowledge of the business or its documents. This combination could result in a lack of understanding about the location of important electronically stored information or ESI and a lack of personnel to help locate the company's data map. In bankruptcies, employees with institutional knowledge face discharge as a cost-savings measure. As with any litigation, failure to provide relevant and correct documentation could result in the risk of spoliation.

Second, it is likely in bankruptcy that document collection will involve collecting computers, telephones and PDAs from departing employees, which should be done correctly and completely (e.g., obtaining passwords, passcodes and encryption keys). Important documentation may be difficult to access once people leave the bankrupt company. Remembering to be thorough about this process requires the benefit of forethought and time, both of which are rare commodities in a bankruptcy.

Third, an interested party's ESI obligations in bankruptcy may be informed by a host of factors best considered with the benefit of time and reflection, such as (1) regulatory requirements in the industry; (2) statutes or other laws that may apply to it; or (3) any other privacy agreements it has with third parties and/or affiliates. Failure to be thoughtful about this process could place the debtor crosswise with legal authorities, regulating bodies and third parties, and could result in other liabilities.

Best Practices

In light of these issues, there are some best practices worth considering for bankruptcy counsel and their clients (either debtor or non-debtor) contemplating conducting discovery. For example:

• Reflection. Because bankruptcy cases naturally proceed in an expedited manner to preserve cash and resources for the estate, careful planning at the beginning of (or before) the initiation of the bankruptcy proceedings can lessen the issues discussed above. For example, prior to filing for reorganization, a company should familiarize itself with its data map and the location of its documentation to avoid having this task fall on someone trying to find data during the harried pace of the bankruptcy.
• Preservation. An entity preparing to file for bankruptcy should take appropriate steps to preserve ESI. This applies to interested parties, too. Indeed, potential debtors and non-debtors have an obligation to preserve ESI and other evidence related to a contested matter or adversary proceeding; which duty to preserve arises when the potential litigation is filed or becomes reasonably anticipated. Document privacy obligations, including by statute, agreement, regulation or otherwise, should also be reviewed.
• Communication. Interested parties in bankruptcy litigation are encouraged to confer with one another regarding issues related to preservation and production of ESI. Clear communication with adverse parties (or other parties) can be especially helpful in winnowing discovery expectations and obligations among the parties before and during the litigation, and in minimizing disputes.
• Selection. Be attentive to the document preservation and production vendor (or internal group) chosen as adviser on these matters, if such an engagement or arrangement is necessary. This is an important decision that should be made with the input of both the client and counsel. These discussions should include how this vendor or group expects to handle the fast pace of discovery, client and vendor expectations in the event of any errors, and any protections the vendor or group may provide should the client and counsel have to go to court regarding a discovery issue.

Although the expectation is that bankruptcies will continue to rise through the end of 2021, which will put a strain and stress on e-discovery counsel in those cases, these best practices should help counsel and clients alike navigate this process.