Restructuring

Contributed by Doron P. Kenter.
Someone could be reading your emails right now, and you might not even know about it.  The good news is that if you use a U.S. internet service provider, they probably don’t have bankruptcy court approval to do so.  In a recent decision out of the United States Bankruptcy Court for the Southern District of New York, Judge Gropper refused to recognize orders of German and English courts that permitted an insolvency administrator to intercept postal and electronic mail sent to the debtor in a German insolvency proceeding, holding that such interception was “manifestly contrary” to public policy in the United States.  Notably, Judge Gropper further refused the administrator’s request to keep the chapter 15 proceeding secret from the foreign debtor.
In June 2010, an insolvency proceeding was initiated in the Munich District Insolvency Court against Dr. Jürgen Toft.  Toft was not particularly cooperative in that case, hid certain of his assets, and fled the country.  In accordance with what was alleged to be common practice, the German court entered a “Mail Interception Order,” which authorized the administrator, as estate representative, to intercept Toft’s postal and electronic mail.  Though Toft moved to set aside that order, the Mail Interception Order remained effective.  The insolvency administrator subsequently commenced a parallel insolvency proceeding in England, where the English High Court of Justice issued an ex parte order recognizing and enforcing the Mail Interception Order.
Seeking ex parte recognition of the Mail Interception Order in the United States, in In re Toft, the insolvency administrator also initiated a proceeding under chapter 15 of the Bankruptcy Code in New York.  The administrator’s chief aim behind the proceeding was to gain access to Toft’s email accounts stored on servers of two internet service providers (“ISPs”) located in the United States.  In effect, the administrator sought “the undisclosed production of past e-mails as well as what can only be described as a wiretap of Toft’s future e-mail correspondence.”  Though the ISPs did not appear in the proceeding, the United States Trustee opposed the administrator’s motion.
In denying the motion, Judge Gropper undertook an extensive explanation of chapter 15 and of the powers and the factors to be considered by courts deciding whether to grant relief to investigate and protect the debtors’ assets.  Specifically, a bankruptcy court may grant relief under section 1519 of the Bankruptcy Code to “protect the assets of the debtor or the interests of the creditors” pending an order recognizing a foreign main proceeding.  Section 1507 of the Bankruptcy Code further empowers bankruptcy courts to grant any “additional assistance” available under the Bankruptcy Code or under other laws of the United States, provided that such relief “is consistent with the principles of comity and satisfies the fairness principles set out in the [Bankruptcy Code].”
Judge Gropper then examined four considerations at issue regarding the administrator’s motion.  First, he analyzed whether the bankruptcy court had jurisdiction over the administrator’s application even though Toft had no contacts with the United States, concluding that the court had jurisdiction over the motion as a request for “discovery in aid of a foreign proceeding,” which is permitted by sections 1521(a)(4) and 1519(a)(3) of the Bankruptcy Code.
Judge Gropper then looked to whether an email “wiretap” would violate the public policy exception to chapter 15’s general principles of comity.  In general, bankruptcy courts give effect to orders of foreign courts in accordance with principles of comity.  An exception to comity exists where granting the relief sought would be “manifestly contrary” to the public policy of the United States.  Referring to a three-point test set forth in In re Qimonda AG Bankr. Litig. the court noted that the public policy exception is implicated where the foreign proceeding is procedurally unfair or, if there is a conflict between foreign law and U.S. law, where the requested action would “frustrate a U.S. court’s ability to administer the Chapter 15 proceeding and/or would impinge severely a U.S. constitutional or statutory right….”  Judge Gropper concluded that any ex parte recognition and enforcement of the Mail Interception Order would directly contravene U.S. laws and public policies against interception of incoming mail or accessing the contents of existing emails, acts that are prohibited under the Wiretap Act and the Stored Communications Act.  Judge Gropper noted that unauthorized access to email is a criminal act under United States law, and that the relief sought by the administrator “would directly compromise privacy rights subject to a comprehensive scheme of statutory protection, available to aliens, built on constitutional safeguards incorporated in the Fourth Amendment as well as the constitutions of many states.”
Third, Judge Gropper discussed the discovery and investigative powers of a foreign representative in a chapter 15 proceeding.  He rejected the administrator’s contention that interception of a debtor’s emails is within a trustee’s discovery powers.  He distinguished the an ex parte motion for a Rule 2004 examination from the Mail Interception Order, noting that (i) once a Rule 2004 examination is commenced, it does not remain secret, but proceeds through typical discovery devices, which require notice and (ii) civil discovery does not permit a court to compel an ISP to produce a subscriber’s emails.  Judge Gropper also noted that “unfettered access” to a debtor’s emails would raise a host of problems regarding privileged communications, which could not easily be separated or ignored by the administrator.
Lastly, Judge Gropper denied the administrator’s request to keep his investigation confidential and thereby preserve the possibility of collecting useful information from Toft’s ongoing use of his email accounts.  He held that Bankruptcy Rule 2002(q)(1), which directs the court to provide notice of a chapter 15 petition to the debtor, parties against whom relief is sought, and parties in interest, should only be disregarded in rare cases.  Judge Gropper wryly suggested, because Toft’s whereabouts were unknown, “a first step in providing notice would be to send an e-mail to the addresses that are to be investigated.”
Though Judge Gropper left the door open for the administrator to seek recognition of the German proceeding as a foreign main proceeding and to seek other appropriate relief after providing notice to Toft pursuant to Bankruptcy Rule 2002(q), he made it clear that foreign administrators, trustees, and other parties in interest will not be granted unfettered wiretapping privileges, regardless of the frequency of such orders in other countries.  It remains to be seen whether other online data will be afforded similar privileges, but for now, users of American email services can rest comfortably knowing that those daily jokes from their beloved Aunt Sadie will not be intercepted – at least not on the bankruptcy court’s watch.