Bankruptcy's Unique Characteristics Prompt Special Guidance From ABA Working Group
Earlier this year the ABA ESI in Bankruptcy Working Group issued interim guidelines on the "scope and timing" of a party's obligation to preserve ESI in bankruptcy cases. The group comprises both sitting and former judges, bankruptcy and litigation attorneys, law professors and a representative of the Executive Office of the U.S. Trustee.
The report covers three categories of bankruptcy: 1) large Chapter 11 cases; 2) middle market and smaller Chapter 11 cases; and 3) Chapter 7 and Chapter 13 liquidation cases. The group offers considerations and guidance in timeline categories, such as during the pre-filing period at the time of filing, and while a case is pending.
For large Chapter 11, middle market and smaller Chapter 11 cases, the working group offers these four principles:
- 1) The duty to preserve ESI and other evidence applies in the bankruptcy context
- 2) The actual or anticipated filing of a bankruptcy petition does not require a debtor to preserve every piece of information in its possession
- 3) Proportionality considerations regarding the preservation and production of ESI are particularly important in the bankruptcy context
- 4) Interested parties in a bankruptcy case are encouraged to confer regarding issues related to the preservation and production of ESI.
For Chapter 7 and Chapter 13 cases, the recommendations are a bit different. In addition to the core direction not to destroy information "unless otherwise justified under the circumstances of the case," the Working Group also applies the "proportionality principle," which takes into account "the resources and sophistication" of the debtor, the "significance of the matter" to which the ESI relates, and "the amount or value of the property" at issue in the case.
Brendan Schulman, E-Discovery Counsel and Special Counsel at Kramer Levin Naftalis & Frankel LLP, told the LexisNexis® E-Discovery Brief why the ABA feels bankruptcy-specific guidelines are required.
"The duty of preservation derives from common-law principles, but there has been little guidance on its application in bankruptcy cases," Schulman said. "I think the ABA recognized that there is a need for comprehensive and consistent guidance on preservation standards, because bankruptcy matters often lead to a wide variety of litigation that can be anticipated at a fairly early stage. That suggests a broad approach to preservation may often be appropriate, especially when numerous creditor claims are reasonably anticipated. However," Schulman added, "the debtor is always in financial distress, so comprehensive preservation can often be very burdensome."
"The ABA interim report recognizes the need for debtors to take reasonable steps to preserve certain types of documents and electronically stored information, while applying concepts of proportionality to the preservation exercise. The concept of proportionality is found in the Federal Rules of Civil Procedure (FRCP) with respect to discovery obligations," Schulman explained, "but there are no parallel rules on preservation."
Schulman, member of The Sedona Conference Working Group 1 on Electronic Document Retention and Production, said some courts and commentators (including The Sedona Conference) whose work was cited by the ABA group, have supported the application of proportionality to various stages of the e-discovery process, including litigation holds. He added that The Federal Rules Advisory Committee is considering similar amendments.
This concept is implemented in a unique way in this interim ABA draft-the trifurcation of bankruptcy cases into three categories (large cases, "middle market" or "smaller" cases, and liquidation cases). "We have seen in recent months e-discovery guidelines from the U.S. District Courts, such as the Southern District of New York's pilot program for complex cases," Schulman said. "I think the ABA recognizes that bankruptcy cases are typically complex and involve multiple constituencies that can be expected to demand a large volume of ESI in discovery."
"In terms of practical guidance," Schulman said, "one of the 'best practices' identified by the ABA is that preservation efforts should begin before first-day filings. Practically, this means that litigation hold is best discussed at the outset, once counsel is retained to prepare first-day motions."
The interim report also suggests that an order should be sought from the court pursuant to Federal Rule of Evidence 502(d) addressing the non-waiver of privilege when discovery is provided in the course of the proceeding.
"That's an excellent idea for any federal case," Schulman said. "FRE 502(d) is a recently created but underutilized rule that can often lower both the cost and risk of the discovery process."
In addition to being a member of The Sedona Conference Working Group 1 on Electronic Document Retention and Production, Schulman is also on the ABA's E-Discovery and Digital Evidence Committee.
- ESI preservation applies in bankruptcy.
- A debtor is not required to preserve absolutely everything.
- Proportionality considerations are particularly important in bankruptcy.
- Parties should confer on ESI preservation and production.
- Preservation efforts, e.g., litigation holds, should be discussed before first-day filings.
- 502(d) orders on non-waiver privilege should be sought when discovery is provided in the course of the proceeding.
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