Thursday, May 31, 2012

Can You Recover Costs for E-Discovery Services as an Expense of Litigation

By Michael Palumbo

Much has been written about the exploding costs of commercial litigation as a result of discovery of electronically store information ("ESI"), in legal opinions, in law reviews, blogs and in the growing number of publications produced by service providers in this cottage industry. For example, for the year 2009, electronic discovery vendors had revenues equaling approximately $2.8 billion. See Erin Greenwood, Law Practice: A New View, Part 2: E-Discovery Changes Have Some Seeing a Career in Document Review, 97 ABA J. 27 (2011).

To date, a great deal of the discussion has related to duties and obligations of the litigants to preserve and produce ESI and the various techniques and methods available to accomplish those duties and obligations in the most cost-effective manner.[1] Now that a few years have gone by and cases where e-discovery has played a significant role in the litigation have wound their way through the court system to a conclusion, a new issue that is of significant interest to litigants in these cases is coming to the fore: that issue is can a successful litigant recover the tens of thousands (maybe even hundreds of thousands) of dollars spent on e-discovery from the other side as taxable costs. A relatively few appellate courts have addressed this issue, and, as might be expected, there is no uniformity of opinion.

Every jurisdiction has a cost recovery statute (or rule of court). These statutes define what litigation expenses can be "taxed" to the losing party (meaning recovered from).[2] In Arizona, the cost recovery statute is A.R.S. § 12-331, et seq.[3] A.R.S. § 12-332 provides that the following categories of litigation costs can be taxed to the other party: fees of officers and witnesses, costs of taking depositions, compensation of referees, costs of certified copies of papers or records, sums paid to a surety company for any bond or other obligation, and other disbursements incurred pursuant to a court order or agreement of the parties. Of course, this statute, and the opinions interpreting it, arose in the pre-ESI era. In fact, A.R.S. § 12-332 was last amended in 2001.

The pertinent question is how is the taxable cost statute and similar statutes to be applied to ESI-era cases. An opinion from the United States Third Circuit Court of Appeals, Race Tires of America, Inc. v. Hoosier Racing Tire Corp, et al., 674 F.3d 158 (3rd Cir. 2012), provides some insight.

Hoosier Racing involved antitrust claims in federal court, so the federal cost recovery statute, 28 USC § 1920, was the focal point of the analysis. Expenses that can be recovered per the federal statute are similar to those approved in the Arizona statute. They are (1) fees of the clerk [of the court] and [federal] marshal; (2) fees for printed or electronically recorded transcripts necessarily obtained for the use in the case, (3) fees and disbursements for printing and witnesses, (4) fees for exemplification and the costs of making of any materials where the copies are necessarily obtained for use in the case, (5) docket fees, and (6) compensation of court appointed experts, compensation of interpreters, and salaries, fees, expenses, and costs of [other] special interpretation services.

Hoosier Racing was the successful party, and it applied to the District (trial) Court for the recovery of more than $365,000 in charges imposed by its electronic discovery vendors for such services as hard drive imaging, data processing, keyword searching and format conversion. The District Court, concluding that the E-discovery services fell within sub-section (4) of the statute-fees for exemplification and making copies, awarded Hoosier the amount that it sought, and RTA appealed.

Wednesday, May 9, 2012

Eight Things a Debtor Should Never (or Almost Never) Do

By Brian Spector

The Great Recession and its aftermath have been a difficult time for investors and business owners who borrowed or guaranteed debt to finance their businesses and investments. After years of helping such borrowers (debtors) with their debt restructuring options, I have compiled a list of eight things they should never (or, except in certain cases, almost never) do:

8. Don't just proceed with "business as usual." Some debtors expect to continue operating the same business that has been losing money. Before doing so, they need to determine whether adjustments (e.g., reducing overhead or other costs) can be made so that the business can operate profitably on a go-forward basis. If it cannot, then the business likely is not worth saving. Remember - when you find yourself in a hole, the first thing to do is to stop digging.

7. Don't try to improve your company's cash flow by nonpayment of payroll taxes. Directors and officers of corporations, members or managers of limited liability companies, and certain financial employees of both may be personally liable as "responsible persons" (persons with a duty to collect and pay over withholding taxes) for failing to collect and pay over "trust fund" taxes - the portion of income, social security, and Medicare taxes required to be withheld from employees' paychecks. Tax authorities regard these monies as theirs and can be very aggressive in trying to collect them from those who directed or released their payment for other purposes. Responsible persons thus may incur personal liability where none previously existed if such taxes are not paid.

6. Don't withdraw money from your retirement plan. Funds in ERISA-qualified retirement plans typically are exempt from creditors' claims under Arizona law. There is no limit on the amount of the exemption, and it therefore is a valuable protection. Retirement funds are exempt for a reason - they are needed for your retirement. Early withdrawal also can result in stiff penalties. These funds should be considered "off limits" to any restructuring efforts and used only as a last resort.

5. Don't wait until you have exhausted your resources. It doesn't pay to use your last available funds to make one more installment payment if you still will have other unresolved debts and obligations. Instead, conserve your remaining resources and use them towards a comprehensive solution to resolve all of your debts.

4. Don't try to narrow down your debts to the largest one. While having one remaining creditor might sound simpler than having many, it actually can make debt restructuring more difficult. It is better to have multiple creditors, some of whom hopefully will support your restructuring proposal. That is particularly so if you decide to restructure in bankruptcy, where leaving one large creditor could give that creditor veto power over your restructuring plan.

3. Don't transfer valuable assets to Aunt Sally. You might think that if Aunt Sally has your valuable assets, your creditors can't get them. Wrong! Very broad laws apply to protect your creditors whenever you dispose of assets while insolvent without receiving "reasonably equivalent value" in return. Such transfers can subject you and Aunt Sally to liability and preclude you from protecting those assets (or their value) through better methods. And don't assume that no one will find out about such transfers. Your creditors might ask about them, and you likely will have to disclose them if you file for bankruptcy protection. Such transfers can taint you in the eyes of your creditors and the court, causing them to question otherwise legitimate conduct.

2. Don't lie about or fail to disclose assets or transfers. If you do so outside of bankruptcy, you could be engaging in fraud. If you do so in connection with a bankruptcy case, you could be committing a bankruptcy crime or risking your right to a bankruptcy discharge of your debts. It simply isn't worth the risk. Remember, honesty is not only the best policy - it will help you avoid more serious trouble.

1. Don't wait until the last minute to get professional help. Just as a good coach prepares a game plan, good counsel can help you evaluate your situation, determine your objectives, and devise the best plan to achieve them. And the more time you and your counsel have to do so, the better are your chances of a successful outcome.