Montana Blogger Tagged for Big Defamation Damages in Suit by Trustee

Montana Blogger Tagged for Big Defamation Damages in Suit by Trustee

A Montana blogger has learned that First Amendment freedoms do not extend to saying that a bankruptcy trustee is "guilty of Fraud, Deceit on the Government, Illegal Activity, Money Laundering, Defamation, Harassment" among other things. In Obsidian Finance Group, LLC and Kevin D. Padrick v. Crystal Cox, 2011 U.S. Dist. LEXIS 137548 (D. Ore. 11/30/11), the Court ruled that the blogger was not entitled to protections accorded to traditional media and found that the trustee was not a public figure. You can read the opinion here. (PACER registration may be required). While the case is no doubt welcome news for trustees who can be exposed to some bizarre public criticism, it is troubling for its constricted definition of "media."

What Happened

Summit Accomodators dba Summit 1031 Exchange was a company that was supposed to facilitate tax free 1031 exchanges. The company filed for chapter 11 relief on December 24, 2008 amid allegations that it had used customer's money to fund insider ventures. At least four persons associated with the company have been indicted or convicted. The Debtor initially employed Terry Vance as Chief Restructuring Officer. It also employed Obsidian Finance Consultants, LLC as financial adviser and paid it a retainer of $100,000. Shortly after the case was filed, the Debtor sought to replace Mr. Vance as CRO with Obsidian Finance.

At the hearing to replace the CRO on February 11, 2009, the Court entertained an oral motion from the U.S. Trustee to appoint a Chapter 11 trustee. The Court granted the U.S. Trustee's motion and suggested that perhaps Obsidian Finance or Kevin Padrick, who was one of its principals, could be appointed as Chapter 11 trustee. The U.S. Trustee did appoint Kevin Padrick as Chapter 11 trustee.

On May 12, 2009, the Court confirmed the First Amended Joint Plan of Reorganization filed by the Official Committee of Unsecured Creditors and the Chapter 11 trustee. The Plan provided for establishment of a Liquidating Trust with Kevin Padrick as Liquidating Trustee.

Crystal Cox is the daughter of one of the creditors of Summit Accomodators. She was present at the hearing on February 11, 2009 and subsequently met with Padrick on February 12, 2009. She became convinced that Mr. Padrick had used his position as financial adviser to undermine the CRO and get the job as Chapter 11 Trustee. She also was convinced that Mr. Padrick should not have been appointed Chapter 11 Trustee because his status as a principal of the Debtor's financial adviser made him an insider and therefore ineligible for appointment.

On July 19, 2009, Crystal Cox started a blog with the URL The headline of the blog reads "Kevin Padrick, Obsidian Finance Group, I Demand Transparency in the US Bankruptcy Courts." In her blog, she described herself as follows:

I am the Self Appointed Real Estate Industry Whistleblower. I am a Self Appointed Real Estate Consumer Advocate. I want to be a voice for Real Estate Victims that are not being heard, that are Powerless, and that Have no voice.

My, Self appointed job or mission, have you is to get the TRUTH out so that real estate victims can get justice, get "made whole", get their MONEY and get on with their REAL LIFE...

Ms. Cox wrote hundreds of articles for her blog, many of which made accusations against Kevin Padrick and Obsidian Finance. In some cases, she would post ten or more articles in a day. She also wrote for:

On January 14, 2011, the Trustee's counsel filed a defamation action against Ms. Cox in the United States District Court of Oregon. The case went to trial on November 29, 2011. Ms. Cox represented herself. The jury found that Crystal Cox was liable for defamation to both Obsidian Finance Group, LLC and Kevin Padrick. It awarded damages of $1,000,000 to Obsidian and $1,500,000 to Mr. Padrick. The Court entered judgment against Ms. Cox on December 8, 2011.

Prior to trial, the Court made several rulings from the bench which were incorporated into a memorandum opinion on November 30, 2011.

The Trustee Was Not a Public Figure, Not Even a Limited One

The defendant argued that the trustee was a "public figure" so that proof of actual malice was required under New York Times Co. v. Sullivan, 376 U.S. 254 (1964). A person can be a public figure if they "occupy positions of such persuasive power and influence that they are deemed public figures for all purposes" or an individual may "voluntarily inject() himself or (be) drawn into a particular controversy and thereby become() a public figure for a limited range of issues." Gertz v. Robert Welch, Inc., 418 U.S. 323, 351 (1974).

The Court found that the Trustee and his corporation were not "all purpose" public figures and that that they had not thrust themselves into a particular controversy so as to be limited purpose public figures. While the bankruptcy of Summit Accomodators itself received attention for its failure, agreeing to serve as trustee did not constitute "thrusting" oneself into a controversy. Moreover, a person must be a limited purpose public figure prior to the alleged defamatory statements rather than because of them. In this case, Ms. Cox could not create controversy over Padrick's handling of the estate through her blog and then contend that this made him a public figure.

The case would have been a closer call if the Trustee had sought out publicity about the job he was doing. While many lawyers are publicity shy, some actively seek to keep their names in the news, issuing press releases and taking out ads trumpeting their successes. The lawyer who blows his own horn too much in a case of public interest may find himself to be a limited purpose public figure.

The Blogger Was Not Entitled to Protection As a Member of the "Media"

The Court noted that "plaintiffs cannot recover damages (against media defendants) without proof that (the) defendant was at least negligent and may not recover presumed damages absent proof of 'actual malice.'" Opinion, p. 9. This would have made it more difficult for the plaintiffs to recover. However, the Court rejected the contention that the "investigative blogger" in this case qualified as media.

First, the Court noted that Defendant had not cited any cases giving media status to bloggers. "Without any controlling or persuasive authority on the issue, I decline to conclude that defendant in this case is 'media,' triggering the negligence standard." Opinion, p. 9. This appears to be a bit of a cop out by the court, since blogging is a relatively new phenomenon. By holding that bloggers do not qualify as media because Courts have not previously granted them this status creates a self-fulfilling prophecy.

However, the Court did go one step further and lay out a test for what evidence would establish someone's standing as a journalist.

Defendant fails to bring forth any evidence suggestive of her status as a journalist. For example, there is no evidence of (1) any education in journalism; (2) any credentials or proof of any affiliation with any recognized news entity; (3) proof of adherence to journalistic standards such as editing, fact-checking, or disclosures of conflicts of interest; (4) keeping notes of conversations and interviews conducted; (5) mutual understanding or agreement of confidentiality between the defendant and his/her sources; (6) creation of an independent product rather than assembling writings and postings of others; or (7) contacting "the other side" to get both sides of a story. Without evidence of this nature, defendant is not "media."

Opinion, p. 9. Unfortunately, the Court did not cite any precedent for this test. However, there is a growing body of case law which rejects this narrow definition.

Other Views on Bloggers and Journalists

Moreover, changes in technology and society have made the lines between private citizen and journalist exceedingly difficult to draw. The proliferation of electronic devices with video-recording capability means that many of our images of current events come from bystanders with a ready cell phone or digital camera rather than a traditional film crew, and news stories are now just as likely to be broken by a blogger at her computer as a reporter at a major newspaper. Such developments make clear why the news-gathering protections of the First Amendment cannot turn on professional credentials or status.

Glik v. Cunniffe, 655 F.3d 78, 84 (1st Cir. 2011)(rejecting qualified immunity for police officers who arrested citizen for filming them with a cell phone camera).

In another case, the Court refused to recognize a claim to a "reporter's privilege" not to divulge sources on the grounds that it could lead to a slippery slope which would include bloggers.

The press in its historic connotation comprehends every sort of publication which affords a vehicle of information and opinion.'" (citation omitted). Are we then to create a privilege that protects only those reporters employed by Time Magazine, the New York Times, and other media giants, or do we extend that protection as well to the owner of a desktop printer producing a weekly newsletter to inform his neighbors, lodge brothers, co-religionists, or co-conspirators? Perhaps more to the point today, does the privilege also protect the proprietor of a web log: the stereotypical "blogger" sitting in his pajamas at his personal computer posting on the World Wide Web his best product to inform whoever happens to browse his way? If not, why not? How could one draw a distinction consistent with the court's vision of a broadly granted personal right? If so, then would it not be possible for a government official wishing to engage in the sort of unlawful leaking under investigation in the present controversy to call a trusted friend or a political ally, advise him to set up a web log (which I understand takes about three minutes) and then leak to him under a promise of confidentiality the information which the law forbids the official to disclose?

In re Grand Jury Subpoena (Miller), 397 F.3d 964, 979-80 (D.C. Cir. 2005)(Sentelle, Concurring).

Finally, one Court got it right when it held that "not all bloggers are journalists. However, some bloggers are without question journalists."

Further, there is no published case deciding whether a blogger is a journalist.

However, in determining whether Smith was engaged in news reporting or news commentating, the court has applied the functional analysis suggested by commentators and the Plaintiffs in their memorandum in support of a preliminary injunction, which examines the content of the material, not the format, to determine whether it is journalism. (citation omitted). In addition, the court has considered the intent of Smith in writing the article. The court agrees that not all bloggers are journalists. However, some bloggers are without question journalists. (citation omitted).

Bidzerk, LLC v. Smith, 2007 U.S. Dist. LEXIS 78481 at *16-17, 35 Media L. Rep. 2478 (D. S.C. 2007).

Applying the Obsidian Test to A Texas Bankruptcy Lawyers Blog

It is a shame that the Judge in Obsidian v. Cox used an intellectually lazy definition of journalist when it probably did not influence the outcome of the case. The statements made by Ms. Cox in her blog were so outrageous that they likely would have failed a negligence or actual malice standard. I take personal offense because I like to think that the work that I do on this blog bears a passing resemblance to journalism. However, I doubt that I would qualify under Judge Hernandez's test.

1. Any education in journalism. I took three years of journalism in high school and wrote for both my high school and college papers. Is that enough?

2. Any credentials or proof of any affiliation with any recognized news entity. My blog is distributed by the State Bar of Texas, the American Bankruptcy Institute and the LexisNexis Bankruptcy Community. However, these are all legal organizations rather than recognized news entities.

3. Proof of adherence to journalistic standards such as editing, fact-checking, or disclosures of conflicts of interest. I do edit my pieces, although my partner says that I should do more of it. I do fact check my posts, which are mostly based on court opinions and thus pretty easy to document. Finally, if I have involvement in a case I write about, I disclose that.

4. Keeping notes of conversations and interviews conducted. I rarely do interviews. However, when I do, I don't necessarily keep my notes after the post is published unless it is because I have a messy desk and they get buried under something else.

5. Mutual understanding or agreement of confidentiality between the defendant and his/her sources. Sort of. If someone asks me not to use their name, I respect that. However, it just doesn't come up that often.

6. Creation of an independent product rather than assembling writings and posts of others. Yes.

7. Contacting "the other side" to get both sides of a story. Generally, I write about judicial opinions. I do not contact the losing party to get their side of the story. If a party to a case contacts me and points out a factual error, I will correct it. Sometimes I will allow the other side to tell their side of the story in the comments. However, I did not contact Crystal Cox or Kevin Padrick about this post.

Out of seven criteria, I qualify completely under two, partially under four and not at all under one. However, if you compare my writing to that of Bill Rochelle, who writes for Bloomberg and is definitely a real journalist, you will see that we frequently write on the same topics and discuss the same issues. The difference is that he is better at it than I am and gets paid for it, while I still have my day job.

The Ironic Conclusion-It's All in How You Say It

In reading through Crystal Cox's rambling and often obsessive blog, there is occasionally some solid reporting and good questions raised. It certainly raised my eyebrows that the Court would appoint a trustee based on an oral motion without any prior notice to parties in interest. It also was unusual for the Court to suggest an individual to the United States Trustee. It was also a very close call as to whether the principal of the Debtor's financial adviser qualified as a disinterested person eligible to be appointed as trustee. These were all good questions. However, from my personal review of the lawsuit and the blog, it appears that Ms. Cox took a wrong turn when she took the unusual circumstances of Mr. Padrick's appointment and her personal dislike of him and constructed a narrative of wrongdoing and fraud. Blogs that traffic in rumor, innuendo and unsupported allegations make the rest of us look bad and bring disrepute to blogging in general. On top of that, rumor, innuendo and unsupported allegations belong on talk radio, where they can be advanced by serious journalists like Rush Limbaugh, Alex Jones and Glen Beck, not on blogs.

Read more at A Texas Bankruptcy Lawyer's Blog

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Steve Mann
  • 12-16-2011

so do you think that this one is going to get appealed? (and not as pro se?)