Friday, April 17, 2015

Bankruptcy, Social Media and "Property of the Estate"

This post examines a recent opinion from the U.S. Bankruptcy Court in the Southern District of Texas in which the court analyzes a novel issue of law.  In re: CTLI, LLC, 2015 WL 1588085. The judge began his opinion by explaining that this case arose out of the
Chapter 11 reorganization of CTLI, LLC (the Debtor), which prior to bankruptcy was doing business as Tactical Firearms, a gun store and shooting range in Katy, Texas. The Debtor was formed in 2011 and was originally wholly owned by Jeremy Alcede and his then-wife Sarah Alcede. . . . Originally, the Debtor sold guns and ammunition but did not operate a firing range. . . . Later in 2011, Mr. Alcede recruited his wealthy friend, Steven Coe Wilson, to purchase a bigger building for the Debtor for $2.2 million in exchange for a 30% membership interest in the Debtor corporation. . . . . Wilson's entry enabled the Debtor to expand and open the `finest indoor firing range in the country.’ . . .
While the Debtor appeared to prosper, internal disputes between the owners began to fester. Mr. and Mrs. Alcede began divorce proceedings in November of 2012, . . . and relations between Mr. Alcede and Wilson deteriorated after Wilson began to suspect Mr. Alcede of diverting cash obtained through the sale of the used shells from the gun range. . . . Consequently, Wilson instituted a derivative action against Alcede in state court in November 2013, requesting that the Debtor be put in receivership. . . . The state court enjoined the Alcedes from diverting corporate assets or interfering with Mr. Wilson's management rights, but initially refused the request for receivership. . . .
The Debtor subsequently defaulted on several loans. . . . On June 10, 2014, Icon Bank of Texas, N.A., the major creditor of the Debtor, posted the Debtor's real property for foreclosure. . . . On June 26, 2014, the state court approved Mr. Wilson's request and ordered the appointment of a receiver for the Debtor. . . . The very next day, before a receiver could take control, Mr. Alcede caused the Debtor to file a Chapter 11 petition, . . . which in turn resulted in the automatic stay barring the receiver from taking control of the Debtor and allowed Mr. Alcede to remain in control.
In re: CTLI, LLC, supra.
The judge goes on to explain that in Bankruptcy Court,
Mr. Wilson quickly sought to have a trustee appointed to take control of the Debtor. . . . This Court did not appoint a trustee -- thereby allowing Mr. Alcede to remain in control of the Debtor -- but it did grant Mr. Wilson's request to terminate exclusivity so that he could propose a Chapter 11 plan of reorganization. . . . Mr. Wilson thereafter proposed a plan (the Plan), . . . which was confirmed on December 8, 2014. . . . Under the Plan, Wilson became the 100% owner of the reorganized Debtor. . . .

This Court's order confirming the Plan required Mr. Alcede to `deliver possession and control’ of `passwords for the Debtor's social media accounts, including but not limited to Facebook and Twitter’ to Mr. Wilson on behalf of the reorganized Debtor. . . . In a status conference held on December 11, 2014, this Court discovered that Mr. Alcede had failed to honor that instruction. Mr. Wilson's counsel filed a Certificate of Noncompliance on December 12, 2014. . . . In consequence, this Court found Mr. Alcede in contempt. . . .
In re: CTLI, LLC, supra.
The judge goes on to explain that, at a hearing he held on December 16, 2014, he heard
testimony and admitted evidence presented by Mr. Wilson and Mr. Alcede regarding the social media accounts. At this hearing, Mr. Alcede claimed that all social media accounts at issue belonged to him personally and not to the Debtor. . . . Further, Mr. Alcede argued that it would be impossible to share control of these accounts with the reorganized Debtor without violating his privacy. . . . This Court issued an initial ruling that a neutral third party court aide should be retained to sort the personal from the business content within the social media accounts. . . .Mr. Alcede stated on the record that he agreed with this approach. . . .
In re: CTLI, LLC, supra.
The judge, though, goes on to explain that when
Mr. Wilson's counsel filed a proposed order with this Court reflecting this initial ruling, Mr. Alcede objected to the proposed order. . . . On February 12, 2015, this Court held a hearing on Mr. Alcede's objection. After considering relevant legal authorities and the exhibits admitted and testimony adduced at the December 16, 2014 hearing and the February 12, 2015 hearing, against the background of all other testimony and filings in this Chapter 11 case, the Court now finds that the reorganized Debtor is entitled to direct control of 100% of one Facebook Page and one Twitter account, and that the assistance of an independent third party is not necessary.
In re: CTLI, LLC, supra.
Before the bankruptcy judge proceeded to “enter a final order adjudicating the dispute", he decided he had to determine if he had “the constitutional authority to enter a final order” resolving the dispute.  In re: CTLI, LLC, supra.  He began his analysis by explaining that, in Stern v. Marshall, 131 S.Ct. 2594 (2011), the U.S. Supreme Court held that
28 U.S. Code § 157(b)(2)(C) -- which authorizes bankruptcy judges to issue final judgments in counterclaims by a debtor's estate against entities filing claims against the estate -- is an unconstitutional delegation of Article III authority to bankruptcy judges, at least when the dispute being adjudicated is based solely on state common law and does not affect the claims adjudication process. 
Stern v. Marshall, supra.  In other words, when a bankruptcy court judge is adjudicating the issues in a bankruptcy, he or she cannot simply decide to resolve legal issues that arise under state law and that have nothing to do with the bankruptcy.
This judge went on to find that he did, indeed, have the Constitutional authority to decide the issue involving the social media accounts:
The dispute at bar is not a counterclaim of the Debtor, nor does it arise out of state law. Rather, the dispute at bar arises out of objections to the enforceability of the Confirmation Order, which requires Mr. Alcede to turn over estate property to the reorganized Debtor. The dispute thus arises from this Bankruptcy Court's authority under § 1142 to order third parties to cooperate in the consummation of a bankruptcy plan. State law has no equivalent to § 1142; it is purely a creature of the [Bankruptcy] Code.

Further, this dispute requires this Court to enforce its own Confirmation Order, which is governed by federal common law, not state law. See, e.g., Chambers v. NASCO, 501 U.S. 32 (1991) (holding that federal courts have the inherent power to require `submission to their lawful mandates’). Accordingly, because the resolution of this dispute is not based solely on state common law, but rather is based upon a provision of the Code and federal common law, this Court has the constitutional authority to enter a final order.
In re: CTLI, LLC, supra.
The judge then returned to the legal issue in dispute:  “what social media property belongs to the reorganized corporate Debtor as opposed to Mr. Alcede, personally?” In re: CTLI, LLC, supra. As a preface to his analysis, he explained that
Mr. Alcede refers to his personal Facebook Profile as his `friends page’ and to the former Tactical Firearms Facebook Page as his `likes page.’ The Court finds these terms unhelpful for an understanding of Facebook. Therefore, the Court will refer to Mr. Alcede's personal Facebook Profile as his `Facebook Profile’ and to the former Tactical Firearms Page as the `Tactical Firearms Facebook Page,’ the `former Tactical Firearms Facebook Page,’ or the `Jeremy Alcede Entrepreneur Facebook Page.’
In re: CTLI, LLC, supra.
He then took up the task of deciding whether the Facebook and Twitter accounts at issue “were property of the Debtor's estate and are now property of the reorganized Debtor.” In re: CTLI, LLC, supra. He began his analysis by noting that the Bankruptcy Code defines
`property of the estate,’ with enumerated exceptions, as `all legal or equitable interests of the debtor in property as of the commencement of the case.’ 11 U.S. Code §541. `Section 541 is read broadly and is interpreted to include all kinds of property, including tangible or intangible property [and] causes of action. . . .’ In re Equinox Oil Co., Inc., 300 F.3d 614 (U.S. Court of Appeals for the 5th Circuit 2002). . . . For specific determinations of what constitutes property, bankruptcy courts look to the underlying state law. Butner v. U.S., 440 U.S. 48 (1979).

Unfortunately, no Texas state courts have considered whether social media accounts are property interests. In one conversion case, a federal district court, applying Florida law, held that the plaintiff did not have a property interest in the `likes’ on a Facebook Page. Mattocks v. Black Entm't Television LLC, 43 F.Supp.3d 1311 (U.S. District Court for the Southern District of Florida 2014). That court reasoned that because individual Fans can `unlike the Page at any time, the Page creator has no ownership interest in the likes.  Mattocks v. Black Entm't Television, supra. However, a federal bankruptcy court, applying New York law, has treated social media accounts as property, grouping them with subscriber lists. In re Borders Grp., Inc., 2011 WL 5520261 (U.S. Bankruptcy Court for the Southern District of New York 2011). Many courts, applying the law of their respective states, have also held that subscriber or customer lists are property interests. See, e.g., In re Alert Holdings, Inc., 148 B.R. 194, 203 (U.S. Bankruptcy Court for the Southern District of New York 1992).]

Given the above-referenced holdings, and with one eye cocked on the broad scope of § 541, this Court finds that business social media accounts are property interests. Like subscriber lists, business social media accounts provide valuable access to customers and potential customers. The fact that those customers and potential customers can opt out from future contact does not deprive the present access of value. Just as Facebook Users can `unlike’ a Page at any time, subscribers to email lists can also, by federal law, opt out at any time. CAN–SPAM Act of 2003, Pub.L. 108–187, § 2, Dec. 16, 2003. . . .
In re: CTLI, LLC, supra.
The judge then took up another issue – the “characterization of individual —as opposed to business—social media accounts as property”, which he found “much more difficult” to resolve. In re: CTLI, LLC, supra (emphasis in the original). He went on to explain that the
Facebook Page or Profile of a celebrity or other public figure is a different type of property, related to the interest known as a persona. A persona is `the interest of the individual in the exclusive use of his own identity, in so far as it is represented by his name or likeness, and in so far as the use may be of benefit to him or to others.’ Brown v. Ames, 201 F.3d 654 (U.S. Court of Appeals for the 5th Circuit 2000) (quoting Restatement (Second)of Torts § 652C (1977)).

Although heretofore unrecognized by bankruptcy courts, in most states, including Texas, the persona is recognized as a property interest, and therefore that falls within the broad reach of `property of the estate.’ See Matthews v. Wozencraft, 15 F.3d 432 (U.S. Court of Appeals for the 5th Circuit 1994) (recognizing the persona as property under Texas law). The primary limitation on recognition of a persona as estate property is the 13th Amendment's prohibition on involuntary servitude. Just as a debtor may not assume contracts that would require any individual to perform personal services, 11 U.S. Code § 365(c); Matter of Tonry, 724 F.2d 467 (U.S. Court of Appeals for the 5th Circuit 1984) a debtor may not use estate property in a manner that would require any individual to perform personal services.
In re: CTLI, LLC, supra.
The judge then went on to explain that because the
value in a Facebook Page or Profile lies in the ability to reach Friends or Fans through future communications, the property interest in an individual Profile would likely not become property of the estate. See generally Smita Gautam, Reconsidering `Property’ to Determine the Role of Social Media in the Bankruptcy Estate, 31 Emory Bankr.Dev. J. 127, 127 (2014) (arguing that an individual debtor's interest in his social media accounts should be treated as a `liberty’ interest instead of a `property’ interest). However, the official Page of a celebrity or public figure that is managed by employees might be treated differently. See generally Melissa B. Jacoby & Diane Leenheer Zimmerman, Foreclosing on Fame: Exploring the Uncharted Boundaries of the Right of Publicity, 77 N.Y.U. L.Rev. 1322, 1347–57 (2002) (discussing how persona might be disentangled from personal services in general).
In re: CTLI, LLC, supra.
The judge then found that Mr. Alcede,
in his capacity as majority owner of the Debtor, created a Page for the Debtor and entitled it `Tactical Firearms.’ The fact that this was a Page (for `businesses, brands and organizations,’ not `individual people’) entitled `Tactical Firearms’ raises a presumption that it was the Debtor's Facebook Page, is now the reorganized Debtor's Facebook Page, and has never been Mr. Alcede's personal Facebook Page.
In re: CTLI, LLC, supra.  He explained that
[f]urther inquiry into the characteristics of the former Tactical Firearms Facebook Page cements this conclusion.

First, the former Tactical Firearms Facebook Page was directly linked to the Tactical Firearms web page. Second, Mr. Alcede used the former Tactical Firearms Facebook Page to post Status Updates on behalf of `Tactical Firearms’ relating to, among other subjects, guns. . . . Many of Mr. Alcede's posts were expressly business-related; for example, he advertised the store's Black Friday sale and new inventory, and he spoke for the store with phrases like, `on behalf of myself and the Tactical Firearms family.’ . . .

Mr. Alcede in fact admitted that he used the page for promoting Tactical Firearms business. . . .  He also granted access for a Tactical Firearms employee to post Status Updates to the Tactical Firearms Facebook Page directly through the business's Constant Contact account, an email marketing tool. . . . These Status Updates directly promoted Tactical Firearms's products and services. . . . Finally, Mr. Alcede shared his personal Facebook login information with a business associate so that this associate could post Status Updates to the Tactical Firearms Facebook Page promoting the company's products. . . . This particular use of the Tactical Firearms Facebook Page was clearly to generate revenues for the company, and confirms that this Page belongs to the reorganized Debtor.
In re: CTLI, LLC, supra. 
He also rejected Mr. Alcede’s argument that “he created the Tactical Firearms Facebook Page (which he has since re-named `Jeremy Alcede Entrepreneur’) because he reached Facebook's limit of 5,000 Friends on his personal Profile and thus his Friend requests were being automatically denied.”  In re: CTLI, LLC, supra.  The judge explained that even if Mr. Alcede
did indeed create the Tactical Firearms Facebook Page because he was approaching the Friend limit, it would not affect the character of the Tactical Firearms Facebook Page. It may be true that Mr. Alcede, like many small business owners, closely associated his own identity with that of his business, so closely that he entitled the Facebook Page `Tactical Firearms’ `for people to know it was me.’ . . .

Nonetheless, Mr. Alcede and the Debtor are -- and always have been -- two distinct legal entities, with separate and distinguishable property. The fact that the Tactical Firearms Facebook Page was created in the name of the business, was linked to the business's web page, and was used for business purposes places it squarely in the category of property of the Debtor's estate (and now property of the reorganized Debtor) and not personal property of Mr. Alcede.
In re: CTLI, LLC, supra (emphasis in the original).
The judge also found that the "sole Twitter account" discussed at the
hearings has clearly been a business account. As with the former Tactical Firearms Facebook Page, the name assigned to the Twitter account was originally `Tactical Firearms’ and the Twitter Handle was `@tacticalfirearm’ (missing the `s’ due to Twitter's character limit for Handles). . . . The summary provided for the Twitter account was `We are a local gun store with the best prices, knowledge, and customer service available. We are now home of the finest indoor shooting range in the country.’ . . .

As of the time of this Opinion, the link on the Tactical Firearms web page still directs to,the former URL of the Tactical Firearms Twitter account. Mr. Alcede testified that he does not recall whether he changed the name on the Twitter account from `Tactical Firearms’ to `Jeremy Alcede.’ However, the Court finds that he did make this change based on its close inspection of Plan Agent's Exhibit 3. Exhibit 3, a screenshot of the Twitter account entitled `Jeremy Alcede’, shows a Tweet under what appears to be the former name `Tactical Firearms.’ Therefore, the Court finds that the Twitter account entitled `Jeremy Alcede’ is the same as the account formerly entitled `Tactical Firearms.’

Further, the Court finds that the Twitter account admitted as Plan Agent's Exhibit 3, bearing the Twitter Handle `@tacticalfirearm’, is the same as the account that, as of the time of this Opinion, bears the Handle `@jeremyalcede.’ The Court so holds after comparing the accounts and observing that the five most recent photos, visible in Exhibit 3, perfectly match five chronological photos still visible at ; and also observing that the number of `followers’ and `following’ Twitter users is strikingly close (7,880 following and 7,352 followers shown in Exhibit 3 compared with 7,863 following and 7,205 followers shown at as of the date of this writing).
In re: CTLI, LLC, supra. 
And, finally, the judge held that the social media accounts of Tactical Firearms were,
pre-confirmation, property of the estate, and there is no reason not to treat them as the Court would treat any other assets belonging to the estate. Accordingly, because the social media accounts were property of the estate, and because the Plan vested all assets of the estate with the reorganized Debtor, this Court holds that the reorganized Debtor should have full control over these social media accounts.
In re: CTLI, LLC, supra. 

The news story you can find here explains that after the bankruptcy judge ordered Mr. Alcede to “turn over the passwords” for the social media accounts to “the new owner of Tactical Firearms” Mr. Alcede refused, so the judge held him in contempt until he complied with the judge’s order.  The stories you can find here and here provide more information about this case and the contempt order.  

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