July/August 2015

Social Media Accounts — Bankruptcy Court Ruling Sets Precedent

Baker Donelson attorneys M. Ruthie Hagan and Zachary B. Busey dissect the tumultuous In re CTLI, LLC bankruptcy case involving and including a debtor, a derivative action, Chapter 11, an order to surrender social media account passwords, the U.S. Marshals Service and even jail time. The resulting ruling will be frequently cited in future social media cases.



Ruthie Hagan, Associate, Baker Donelson

M. Ruthie Hagan, Associate, Baker Donelson

Zachary Busey, Litigator/Labor Employment Associate, Baker Donelson

Zachary B. Busey, Litigator/Labor Employment Associate, Baker Donelson

In a recent case before the U.S. Bankruptcy Court for the Southern District of Texas, the court was faced with a dispute that centered on the application of the bankruptcy code, the implementation of a Chapter 11 plan and whether social media accounts were “property of the estate” under 11 U.S.C. §541. The relevant facts leading up to the bankruptcy petition involved CTLI, LLC, a company formed in 2011, which — prior to bankruptcy — was doing business as Tactical Firmarms, a gun store and shooting range in Katy, TX. The debtor was originally owned by Jeremy Alcede and his then-wife Sarah. The debtor sold guns and ammunition until late 2011 when Alcede expanded the business to include an indoor firing range. In order to expand, he recruited a friend, Steven Coe Wilson, to purchase a $2.2 million building for the debtor, in exchange for a 30% membership interest.

The business prospered until an internal dispute between owners erupted. Wilson suspected Alcede was diverting cash and instituted a derivative action against Alcede in state court in November 2013. Thereafter, the business defaulted on several loans, and its major creditor posted the business’s real property for foreclosure. The court, in the derivative action, ordered the appointment of a receiver to take control of the business. The next day, however, Alcede, as manager of CTLI, Inc., caused the debtor to file a Chapter 11 petition, resulting in In re CTLI, LLC.1

Social Media Comes Into Play

Upon the filing of the bankruptcy petition, Wilson sought the appointment of a trustee, which the court denied, but it did grant Wilson’s request to terminate the exclusivity period under 11 U.S.C. §1121. Wilson then submitted a proposed Chapter 11 plan, which was confirmed on December 8, 2014.2 Under the plan, Wilson became the 100% owner of the reorganized debtor, Alcede was removed as CEO and his stock ownership eliminated. The confirmation order also provided, among other things, that any person with actual or constructive notice [of the confirmation order], including but not limited to Jeremy Alcede, in possession or control of the following must immediately deliver possession and control to Wilson: passwords for the debtor’s social media accounts, including but not limited to Facebook and Twitter, and any other keys and passwords used to access any property or information of the debtor.

In a status conference held on December 11, the court concluded Alcede had failed to comply with the confirmation order and held Alcede in civil contempt. As for the social media accounts referenced in the confirmation order, the court ordered Alcede to turn over to Wilson all passwords and other login information by the following day, December 12.3 The court warned that if Alcede failed to timely comply, he would be taken into custody by the U.S. Marshals Service as a coercive sanction. This sanction would last until such time as Alcede purged himself of contempt by showing compliance with the court’s order. As of December 12, Alcede had not complied with the court’s order, and the U.S. Marshals Service took him into custody.

A Defense and a Ruling

On December 16, Alcede appeared before the court (with the U.S. Marshals Service) wherein the court heard testimony presented by Wilson and Alcede regarding the social media accounts. Alcede claimed that all social media accounts belonged to him personally, not to the debtor. Alcede also argued that it would be impossible to share control of these accounts without violating his privacy. The court issued an initial ruling, which Alcede (who was in custody for contempt at the time) agreed with on the record. The ruling called for a neutral third party to be retained and sort the personal content from the business content within the social media accounts. Based upon Alcede’s on-the-record agreement with the court’s ruling, Alcede was released from custody. However, just two days later, Alcede objected to the proposed order submitted by Wilson’s counsel.

After an additional hearing and further briefing (all of which took place while Alcede was not in jail), the court issued a memorandum opinion regarding the social media accounts on April 3, 2015. The court ruled that the reorganized debtor was entitled to direct control of the social media accounts — a Facebook page and a Twitter account — because the accounts were business accounts, not Alcede’s personal accounts. The court’s analysis was thorough and will be frequently cited in future social media cases.

Privacy Arguments

As with most social media cases, the court first addressed Alcede’s privacy arguments and other concerns about personal information. Alcede argued that the social media accounts were named after him and, therefore, were his personal and private accounts. The court rejected these arguments, explaining that Alcede had improperly changed the names of the accounts post-petition. The court even suggested that if the reorganized debtor was unable to restore the accounts to the proper names, the reorganized debtor may be entitled to damages from Alcede.

Alcede also argued that providing the passwords to the social media accounts would in essence provide the passwords “for everything,” claiming he used common passwords for unrelated personal accounts. The court rejected this argument as well, holding that Alcede is free to create generic passwords to the social media accounts before providing them to the reorganized debtor.

Across the country, courts dealing with social media issues typically reject boilerplate arguments about privacy and personal information, just as the court did with Alcede. However, courts struggle for consistency when resolving property and ownership arguments with respect to social media accounts. For example, in 2011, a California company sued a former employee for interference with business relationships. The company argued the former employee changed the name of a company-branded Twitter account and made it his personal account. The company alleged that it owned the Twitter account, and the employee’s actions interfered with the business relationships it had with the account’s followers. The case eventually settled, but only after a California federal court refused to dismiss it outright.4 A few years later, in 2014, a Florida federal court decided whether Facebook ‘likes’ were property that could be owned by a business. The court held that they could not. Facebook ‘likes,’ explained the court, “cannot be converted in the same manner as goodwill or other intangible business interests.”5

Business Versus Personal Account

Returning to the Alcede case, the court began its ownership/property analysis by reiterating the broad definition of “property of the estate” under 11 U.S.C. §541, as well as the fact that the confirmation order specifically called for the transfer of the social media accounts. The court then thoroughly analyzed each account to determine whether it was “business” or “personal” in nature. Personal accounts, explained the court, are a persona of a specific person. And while a persona can fall within the broad definition of property of the estate, a personal social media account cannot because doing so would violate the 13th Amendment’s prohibition on involuntary servitude. The court continued, forcing an individual to maintain his or her social media account for the benefit of a debtor, would violate the well-established prohibition against a debtor using property of the estate to require an individual’s performance of personal services.

To the contrary, business accounts, explained the court, are more akin to customer, subscriber or e-mail lists. Like these lists, business accounts provide valuable online access to customers and potential customers. Continuing with its analogy, the court noted that much like opting out of an e-mail list or solicitation, a user can ‘unlike’ a Facebook page or ‘unfollow’ a Twitter account. Based on this and the content of the accounts, the court found that the at-issue social media accounts were business accounts, and “with one eye cocked on the broad scope of Section 541,” the court ruled that the business accounts are property of the estate. Wilson’s plan vested ownership of all property of the estate in the reorganized debtor, under 11 U.S.C. §1141(b). Therefore, Wilson, as the reorganized debtor, was entitled to the social media accounts, and the court ordered Alcede to turn over control of the accounts by noon on April 8, 2015.

Failure to Comply

On April 9, the court convened a hearing in order to determine if Alcede had complied with its order and turned over control of the accounts. Alcede failed to appear for the hearing, and based on testimony by the general manager of the reorganized debtor, Alcede had also failed to turn over control of the accounts. Evidence was also submitted that prior to the hearing, Alcede provided Law360 with a telephone interview in which he informed the reporter that he refused to comply with the court’s order and planned to go to prison for contempt of court.

At the conclusion of the April 9 hearing, the court found that Alcede had deliberately refused to turn over control of the accounts and, therefore, found Alcede in civil contempt. The court ordered the U.S. Marshals Service to take Alcede into custody and hold him in custody until Alcede was ready, willing and able to comply with the court’s order. Alcede was then located, arrested and jailed. For more than 45 days, Alcede remained in jail, refusing to turn over control of the accounts. Then finally, on May 27, 2015, after providing login and password information first to the U.S. Marshals Service6 and then to the court, Alcede was released from jail. While Alcede appears to be the first person to be jailed over social media accounts, this will not be the last time social media accounts take center stage in bankruptcy. As we move closer and closer to the “Internet of things,” higher and higher values will be placed on the cyber-relationships companies and businesses enjoy with millions and millions of online users.

Footnotes

1. In re CTLI, LLC, S.D. Tex. Bankr. Case No. 14-33564.
2. Wilson’s plan proposed to infuse $1,500,000 in cash to the reorganized debtor on or before the effective date of the plan.
3. The court has the statutory authority under 11 U.S.C. §1142(b) to enter orders necessary for the consummation of the plan.
4. PhoneDog v. Kravitz, 2011 WL 5415612 at *4 (N.D. Cal. Nov. 8, 2011).
5. Mattocks v. Black Entm’t Television LLC, 43 F. Supp. 3d 1311, 1321 (S.D. Fla. 2014).
6. Prior to Alcede’s release, the court ordered that Alcede demonstrate to the U.S. Marshals Service his ability to access the “admin” pages of the accounts with appropriate passwords. Following a successful demonstration, the U.S. Marshals Service would report to the court whether Alcede purged himself of the civil contempt.