COVID-19 Impact on the Practice of Law: Bankruptcy Edition

Back to Blog Posts

With the country entering the second month of near full shutdown as a result of COVID-19, the economy is showing signs of the beginnings of a protracted downturn. Industries including travel, oil & gas, entertainment, retail, and construction are facing a tsunami of bankruptcies, barring federal bailouts or some other drastic change. This poses unique challenges and opportunities for legal practitioners, especially as it pertains to ediscovery. From nearly unbounded scope to scrutiny by fiduciaries and follow on litigation, some of the most well-known ediscovery cases have come out of bankruptcy (looking at you Enron). Understanding these risks and preparing accordingly is a must. 

Just how big is this bankruptcy tsunami? 

Construction and manufacturing are at a standstill, air travel has plummeted so low that all carriers could be bankrupt by the end of the month (with some already filing for bankruptcy protection), and oil prices have dropped below zero. More than 190,000 retail stores have temporarily shuttered — at the time of writing Neiman Marcus and True Religion have filed for bankruptcy and JCPenney has missed a key loan payment. The scale of the economic impact is clear, and this is likely just the beginning

While many view bankruptcy as a process primarily composed of negotiation, litigation is often a necessary tool to bring parties to the negotiating table and establish the rights of the creditors between each other and with respect to the debtor company. 

What are the main drivers of this surge? 

While the impact was expected to industries like travel and hospitality that are affected by COVID-19, what is driving the wide-ranging impact across such a diverse spectrum of industries? Four main factors emerge.

One main driver is supply chain disruption, felt by as many as 75% of U.S. companies due to the dramatic reduction in Chinese production followed by “shelter in place” mandates halting domestic manufacturing. Then there are logistical challenges caused by COVID-19, like biotech labs unable to operate given social distancing restrictions. Spending at establishments that require in-person engagement like airlines, retailers, and salons has also dropped substantially. Finally, market volatility (as anyone brave enough to check their 401K lately can attest) is impacting liquidity with a chilling effect on IPOs, debt issuance, and M&A that will likely be felt into 2021. 

Unique challenges in bankruptcy ediscovery 

Ultimately, we could be looking at dozens of high-profile bankruptcies across a myriad of industries. What unique considerations should practitioners bear in mind in evaluating their ediscovery response for bankruptcy? 

Plays by a different set of rules

Bankruptcy litigation falls into two main flavors: adversary proceedings which entail a separate, complex litigation, and the more straightforward contested matters relating to conduct in the bankruptcy proceedings. Some contested matters can be elevated to adversary proceedings by a bankruptcy judge if conduct merits it. Unlike other types of litigation, bankruptcy is governed by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure in lieu of the Federal Rules of Civil Procedure (FRCP).

Bankruptcy Rule 2004 governs the execution of discovery generally, with Bankruptcy Rules 7026–7037 governing discovery in most adversary proceedings or contested matters commenced during a bankruptcy case. The latter incorporate many of the discovery rules that apply to other kinds of litigation in the federal district courts as outlined in the FRCP, however, the scope of discovery as outlined by Rule 2004 is substantially broader. Discovery may be sought from both the debtor and third parties under Rule 2004 if the party seeking the examination must demonstrate "good cause."

Deluge of data

Ediscovery in bankruptcy is often called a court-sanctioned fishing expedition. The range and scale of data that it is permissible to request and review in discovery relating to a bankruptcy is extremely broad, extending to “any party in interest” and extending to “the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate, or to the debtor's right to a discharge." 

For context, think of all the data in the trusty Enron database you see on every single ediscovery tool demo. That was from the Enron bankruptcy, not the shareholder disputes (which came later) — and bear in mind that was over a decade ago, before the digital proliferation we face today. The number of electronic data sources is rising exponentially in the digital age, and effectively being able to mine social, mobile, and other digital sources is pivotal.

Many parties with many differing objectives

In a Bankruptcy Rule 2004 examination, discovery may be sought from both the debtor and third parties which increases the number of potentially interested parties significantly. Complicating the process, debtors, secured creditors, unsecured creditors, and equity holders may each take a different litigation position on the same issue. Planning for efficient coordination and sharing of information is key and the right tools can facilitate that. 

While the broad nature of discovery for bankruptcy is essential for transparency, fairness, and maximization of the estate, the court is showing some inclination to limit the scope in certain circumstances. The recent ruling in In re Cambridge Analytica LLC, 600 B.R. 750 (Bankr. S.D.N.Y. 2019) highlights this willingness to limit scope of who can request this sort of discovery.

Show me the money

In a scenario where an organization is distressed and restructuring or completely dismantling, cost sensitivity is heightened. In cases where the ligation relates to a liquidated entity, litigation costs (including discovery-related ones) directly impact the remaining recoverable assets for creditors. 

Generally, the grounds for litigation in bankruptcy revolve around money and maximizing recovery in the proceedings. Because the involved parties are often trustees, this cost-sensitivity manifests itself in dollar-driven decisions about how to proceed with litigation, scope of discovery, and even who to engage as outside counsel. We can see this manifest by creditors committee objecting to an outside counsel discovery fee request because it would reduce unsecured recoveries.

Need for speed

The timeline for bankruptcy litigation is truncated, often fully litigated within months or even weeks, including ediscovery, depositions, and an evidentiary hearing. In contested matters specifically, hearings are often scheduled on a compressed timeline, as resolution is necessary to proceed with restructuring or reorganization. The dramatically reduced time schedules can result in increased discovery and review costs, often rivaling what is seen in more traditional complex commercial litigation. As a result, the use of AI to accelerate time to evidence is often employed to identify and prioritize key issues. 

Navigating bankruptcy with the right ediscovery partner

Bankruptcy is a unique beast when it comes to ediscovery. There are some resources practitioners can leverage and practices that can be adopted to maximize the likelihood of a favorable outcome for you and your client. 

Cost predictability and transparency

Given the heightened role that money plays in a bankruptcy and the pressure for justification of every penny spent, it is imperative to work with a provider that provides reliable cost estimates, transparent, and predictable pricing. 

No death by a thousand line items: In a bankruptcy litigation, clearly understanding and planning for spend relating to discovery is important. Rather than providing opaque and hard-to-estimate pricing structures rife with dozens of line items, DISCO provides a single predictable monthly per GB price that decreases based on duration or data volume. This simple structure is easy for the creditors committee to digest and approve. 

No per-user fees: By eliminating all user fees, DISCO enables you to scale up or down the number of reviewers necessary to meet the tight time crunches of a bankruptcy litigation without having to go back to the creditors committee and seek additional approval. Removing concerns about user fees is impactful when every penny must be accounted for. 

The right tools for the job

Heightened time and cost pressures combined with the bet the farm (literally) nature of many bankruptcy litigation amplifies the need to use the right processes and technology to accelerate the discovery process without breaking the bank. 

Excel as far as the eye can see: Money is the primary focus of most bankruptcy-related litigation, so the volume of Excel files relating to the financials of an organization is often substantial. Not all tools are equipped to effectively and quickly render Excel files, so it is important to work with a provider that is well-equipped to manage a large volume of Excel files quickly. 

Seamless collaboration: While debtors, secured creditors, unsecured creditors, and equity holders may not always be on the same page as far as litigation posture, it remains important that work product effectively be shared and collaboration facilitated when necessary. 

Reusable work product: In bankruptcy litigation, a simple contested matter is often converted into an adversary proceeding — and creditors or an unforeseen party can bring a follow on suit at any time. As a result, it is important not to cut corners to meet the time and cost constraints of bankruptcy litigation. But that doesn’t have to mean starting from scratch. DISCO enables practitioners to leverage AI model-sharing to accelerate the refinement of the data prioritization algorithm. 

Scalability and adaptability: Truncated timelines and stiff cost pressures often mean that discovery has rapid surges in demand to meet these needs. The right tool should seamlessly scale up to meet your needs without breaking the bank and should not penalize you with user fees and latency to do so. 

Just-in-time computing in the cloud: Cloud-based solutions offer your clients the perfect balance of heightened data security for these highly confidential data sets and ability to leverage just-in-time scalability to manage large data volumes in a fraction of the time. When time is money and money is everything, avoiding the spinning wheel of death and the dreaded wait time for a service provider to finally get all your data processed is a major game changer. 

Bankruptcy litigation, given the current perfect economic storm, is likely to rapidly surge in the coming weeks and months. It is important to collaborate with a partner equipped to meet the unique time and cost pressures of this sort of matter and with the experience necessary to support all aspects of the case. 

Also in this series:

COVID-19 Impact on Insurance

COVID-19 Impact on Class Action Lawsuits

COVID-19 Impact on Construction

Subscribe to the blog
Cat Casey
Quick Menu