Monthly Archives: February 2014

Is a Credit Cap Bid in Your Future?

In a much criticized decision, a bankruptcy court in Delaware recently held that cause existed to limit a secured creditor’s right to credit bid its claim at the amount it paid to purchase the claim.  In re Fisker Automotive, 2014 WL 210593 (Bankr. D. Del. 01/17/2014).

Fisker, involved in green energy, manufactured electric vehicles financed with assistance of the US Department of Energy.  It was the victim of safety recalls of battery packs, loss of inventory from Hurricane Sandy, and the loss of its credit facility from the DOE.  It filed chapter 11 to sell all of its assets to Hybrid Tech Holdings, LLC (Hybrid).  Hybrid purchased DOE’s loan facility and claim of $168.5 million for 15 cents on the dollar.  Fisker proposed a sale of its remaining assets to Hybrid Tech for a $75 million credit bid.  The Creditor’s Committee objected to the credit bid and requested an auction which would involve another proposed bidder.

The bankruptcy court addressed two questions: (1) whether Hybrid was entitled to credit bid its purchased claim and (2) if so, may the court limit or cap the amount that Hybrid may credit bid.  The bankruptcy court found that Hybrid could credit bid under 11 U.S.C. § 363(k) but the right could be limited based on cause.  The court firmly determined there was no absolute right to credit bid where the lender had engaged in inequitable conduct, where public policy required ensuring successful reorganization, or limiting the right to credit bid fostered an environment conducive to competitive bidding.

The evidence was clear.  If Hybrid was allowed to credit bid the full amount of its claim there would be no auction of the debtor’s assets. Other potential bidders testified they would not bid in the face of an unlimited credit bid by Hybrid.  Fisker also sought an expedited sale process during the holidays which was “troubling” to the court.  Finally, the Committee questioned the validity of Hybrid’s secured position.  Based on the unique facts presented, the court found cause to deny Hybrid’s request to credit bid the entire amount of its claim and limited its maximum allowable credit bid to $25 million.

Lesson learned: Fisker should not be taken to mean all credit bids will be limited to the amount paid for the claim, although it will likely be trotted out by competing interests as authority to limit aggressive attempts to sell assets.  The court’s decision was based, in part, by the uniqueness of the facts presented.  Ultimately, the facts of each case will be instructive and the methodology of the proposed bidding process and its impact on potential participants will be determinative.

Texas Expedited Trial Rules: Removal from the Expedited Actions Process

This is the fourth and final post in a series discussing the new rules for Expedited Actions in Texas mandated by the 2011 Amendments to Texas Government Code § 22.004(h) and implemented through the Texas Rules of Civil Procedure, including amendments to Rules 47 and 190, and the addition of new Rule 169.

In many cases, the amount of damages sought by a party may increase over time or with newly discovered evidence.  Moreover, often the complexity of a case has little to do with the ultimate amount in controversy, thus making a clear presentation at trial under the time constraints imposed by the new Expedited Action Rules nearly impossible.  Fortunately, the rules recognize these practicalities and provide some relief.

Rule 169(c) governs removal of a case from the expedited action process.  Under this rule, a court must remove a suit from the expedited action process when a party files a motion demonstrating good cause, or if any claimant, other than a counter-claimant, files a pleading or an amended or supplemental pleading that seeks any relief other than the monetary relief allowed under Rule 169(a)(1).  Accordingly, if a plaintiff files an amended pleading seeking damages which exceed $100,000, or other relief such as equitable or injunctive relief, Rule 169(c) mandates that the court remove the case from the expedited action process.  Likewise, on a motion and showing of good cause by any party, the same result must occur.  The removal of a case from the expedited action process requires the court to reopen discovery under Rule 190.2(c).  From there, the case will be governed by Level 2 or Level 3 discovery procedures under Rules 190.3 or 190.4, whichever is applicable.  In addition, depositions may be reconvened as provided under those rules, and the trial court should continue any expedited action trial setting to accommodate completion of discovery.

Removal of a case from the expedited action process is somewhat peculiar in its treatment of counterclaims.  As discussed previously, Rule 169(a)(1), defining the application of the Expedited Action Rules, on its face precludes consideration of the value of a counterclaim in the calculation of the amount in controversy.  Thus it appears that a counterclaimant seeking removal of a case from the expedited trial process cannot rely on the amount in controversy, but must bring a motion showing good cause under Rule 169(c).  However, Comment 3 to Rule 169 provides that “[i]n determining whether there is good cause to remove the case from the process or extend the time limit for trial, the court should consider factors such as whether the damages sought by multiple claimants against the same defendant exceed in the aggregate the relief allowed under Rule 169(a)(1), whether a defendant has field a compulsory counterclaim in good faith that seeks relief other than that allowed under Rule 169(a)(1), the number of parties and witnesses, the complexity of the legal and factual issues, and whether an interpreter is necessary.”

So, while the rule itself precludes consideration of the amount in controversy, the comment to the rule allows that to be taken into consideration in the determination of good cause.  What effect this invitation to consider a compulsory counterclaim in the context of good cause will have on courts facing the issue remains to be seen.  However, one thing is clear, the mere filing of a counterclaim which exceeds the $100,000 threshold is insufficient under Rule 169(a)(1) to trigger an automatic removal from the process.

In conclusion, the new Expedited Action Rules, with their time limitations for discovery and trial, appear readily able to facilitate the legislature’s stated intent to “promote prompt, efficient and cost-effective resolution of civil actions” for cases in which the amount in controversy does not exceed $100,000.  The question of whether the new Expedited Action Rules will promote the interests of justice in affording a fair adjudication of claims and counterclaims subject to them is an open question.  Although the new rules place significant limitations on the litigation process, the Texas Supreme Court’s promulgation of guidelines such as those set forth in Comment 3 to Rule 169 evidences its recognition that not all cases may fit the mold of an expedited action regardless of the amount in controversy.  It will be interesting to observe the results as cases begin to move through the court system under these new rules.

Blackmail Ransomware: Beware!

This week, the Federal Trade Commission and Federal Bureau of Investigations issued a warning about an aggressive blackmail ransomware referred to as Cryptolocker.  Cryptolocker first appeared last fall and again this winter in an updated, copy-cat version.

The ransomware uses strong cryptography to encrypt all files that an infected computer has access to and demands a ransom for the decryption key.  The ransom page even includes a countdown clock.  The scam starts with a phishing email purportedly from a known company like FedEx, UPS, or Xerox.  It tricks users into opening a zip attachment that contains executable files, often disguised as PDF files, and then demands hundreds of dollars to give the data back.  In some instances, particularly in the absence of offline backups, the ransomware may lock the contents of backup disks that were created for immediate access when the main disks fail or are inaccessible as in the ransomware situation.

Protecting personal information is often the focus of privacy blogs and articles. Yet with CryptoLocker, the focus is shifted to maintaining access to all files, including those that contain information necessary for business continuity, in addition to safeguarding personal information.

What steps can companies take to protect against hijacked business information by ransomware such as Cryptolocker?  One of the first steps is to detect suspicious activity by routine monitoring and vigilent alertness of employees.  Companies keep a variety of information in their files — names, EINs or Social Security numbers, and data related to accounts, products, production, inventory, and orders, etc. — information that is necessary to perform essential business functions.  When ransomware hijacks that information, it can lead to an interruption in business, loss of customer business, and possible fraud, identity theft, or other similar harms.

Best practices include regularly backing up files offline, minimizing business data interruption or loss.  For small businesses and home offices, an external hard drive may be an option, but disconnect it when you are not actively backing up files.  If the backup device is connected to your computer when Cryptolocker strikes, the program may lock those files, too.

Also consider using email filtering rules that strip out executable attachments, keeping your computer software up-to-date, and regularly running antiviral and antispyware products.  If you already have a “botnet”, the hacker can upload files through that without any email at all.  Keeping operating systems patched and anti-malware and anti-virus software up-to-date, you stand a better chance of avoiding ransomware.  Remind anyone with an office email account that instead of clicking a link in an unexpected message, it is safer to type into your browser the URL of the company the message claims to be from and then navigate to the information you need.  The FTC also recommends taking a closer look before downloading a file that ends with .exe.

Regardless of the size or nature of the business, sound information security practices will significantly help maintain the information necessary for business continuity.

Sound information security practices are best memorialized in a written policy and implemented by employee training and enforcement to help ensure compliance with the security practices.  Even more, sound information security practices may prevent business injury from ransomware.  Privacy lawyers can help businesses with the creation and implementation of security practices.  They provide legal counseling about sound information security practices tailored to specific businesses, draft written security policies, and help develop training policy and training certification forms and enforcement policies.

Deanya K. Cocanougher, CIPP/US 817-877-2809 direct



Texas Expedited Trial Rules: Trials Under the Expedited Action Rules

This is the third post in a series discussing the new rules for Expedited Actions in Texas mandated by the 2011 Amendments to Texas Government Code § 22.004(h) and implemented through the Texas Rules of Civil Procedure, including amendments to Rules 47 and 190, and the addition of new Rule 169.

As previously discussed, Rule 169(a)(1) provides that the expedited actions process will apply to a suit in which all claimants, other than counter-claimants, affirmatively plead that they seek only monetary relief aggregating $100,000 or less, including damages of any kind, penalties, costs, expenses, pre-judgment interest, and attorney’s fees.  The amount of monetary recovery available to a party who prosecutes an expedited action is capped at $100,000, excluding post-judgment interest, under Rule 169(b).  Initial trial settings in expedited actions are governed by Rule 169(d)(2), and requires a court to set the case for trial within 90 days after the discovery period ends on any party’s request.  Under this rule, the court may continue the case twice, but not exceeding a total of 60 days from the initial trial setting.

Rule 169 provides significant time limits in trial on expedited actions.  Under Rule 169(d)(3), each side is allowed no more than 8 hours to complete its entire trial presentation, including jury selection, opening statements, presentation of evidence, examination and cross-examination of witnesses, and closing arguments.  On a motion showing good cause, a court may extend each side’s presentation to a maximum of 12 hours.  The term “side” has the same definition as set forth in Rule 233, dealing with preemptory strikes, so that in a multi-defendant case, each party defendant, if interests are aligned with the other defendants, could be looking at putting on its entire case in something less than the full time allotted in the rule.

Alternative dispute resolution is governed by Rule 169(d)(4).  Except where the parties have agreed not to engage in ADR, this provision allows a court to refer the case to ADR once, not later than 60 days before the initial trial setting, and the procedure cannot exceed a half day in duration, or exceed a total cost of twice the amount of the applicable civil filing fee in the court.  However, the parties may also agree to engage in ADR outside of the rule.  This gives a lot of flexibility to the litigants to attempt to resolve their claims, or to recognize the futility of settlement discussions, allowing them to focus on preparing for a short trial on the merits in their expedited action.

Finally, the procedures for challenging the methodology and qualifications of expert witnesses have changed significantly for expedited actions. Under Rule 169(d)(5), such challenges are limited to objecting to an expert’s testimony or work product used in a summary judgment proceeding under Rule 166(a), or during a trial on the merits.  Traditional motion practice in this area is precluded in an expedited action.  A litigant who has a firm belief that the opposing party’s expert is not qualified, or has used methodology which is unsound, may be forced to use valuable cross-examination time taking the witness on voir dire on these issues.

Obviously, trial practice in an expedited action will be significantly differently from that in other cases.  As with discovery and depositions, a party must put a premium on focus and efficiency in the trial presentation.  Direct and cross-examination of witnesses which are traditionally more time consuming, such as the named parties and experts, will need to be paired down to the most important points in order to meet the time limitations under the new Expedited Action Rules.  However, the Texas Supreme Court did not craft these rules as completely inflexible in all cases.  The final post in this series will examine methods afforded for removing a case from the expedited actions process, as well as other practice considerations.

Texas Expedited Trial Rules: Discovery Under the Expedited Action Rules

This is the second post in a series discussing the new rules for Expedited Actions in Texas mandated by the 2011 Amendments to Texas Government Code § 22.004(h) and implemented through the Texas Rules of Civil Procedure, including amendments to Rules 47 and 190, and the addition of new Rule 169.

The new Expedited Action Rules adopted by the Texas Supreme Court have brought major revisions and limitations to discovery in cases which fall under them.  The changes have been incorporated into the Level 1 discovery control plan set forth in Rule 190.2 of the Texas Rules of Civil Procedure.  In an expedited action, now the discovery period is 180 days in length, and begins on the date the first request for discovery of any kind is served on a party under Rule 190.2(b)(1).  This can be contrasted with Level 2 discovery under Tex. R. Civ. 190.3(b)(1), because the time period is shorter than the 9 months allowed under Level 2, which begins on the earlier of the date of the first oral deposition or the due date of the first response to written discovery.  Discovery in expedited actions must progress quickly under Level 1, because Level 1 is specifically excluded from Rule 190.5 which allows litigants to modify the discovery control plan in cases outside of Level 1.

Although the forms of discovery have remained consistent for expedited actions (with the exception of an expansion of the request for disclosure practice, discussed below), significant limitations have been placed on the amount of discovery available in an expedited action.  The total time afforded a party to conduct oral depositions in an expedited action, including both direct and cross examination of witnesses, is six hours under Rule 190.2(b)(2).  The parties may agree to expand the limit up to 10 hours in total without court intervention, but not more than that except by court order.  The new rule does give a court power to modify the deposition hours so that no party is given an unfair advantage.  This provision suggests that a court may be allowed to “equalize” deposition hours in a multi-party expedited action, similar to the manner in which a court is allowed to equalize preemptory strikes in a jury trial.

Written discovery has been significantly limited for expedited actions as well.  Parties may only serve 15 interrogatories, excluding those asking a party to identify or authenticate specific documents, under Rule 190.2(b)(3).  Similarly, requests for production and requests for admissions are limited to 15 items each, under Rules 190.2(b)(4) and (5).  The one area in which expedited trial has expanded written discovery is with respect to requests for disclosure.  In addition to the content which is already subject to disclosure under Rule 194.2, a party to an expedited action, under Rule 190.2(b)(3), may request disclosure of all documents, electronic information, and tangible items that the disclosing party has in its possession, custody or control, which it may use in support of its claims or defenses.

All of these limitations mean that litigants in an expedited action must economize in their use of written discovery and depositions.  Written discovery must be narrowly tailored to the major issues in the case.  Depositions must get straight to the point.  Getting proper discovery responses will also be paramount in expedited actions, and it will be interesting to see whether an attendant increase in discovery motions will accompany practice under the new Expedited Action Rules.  The next post in this series will consider changes which will be seen at trials of expedited actions.

Getting “Hometowned”: U.S. Supreme Court Enforces Forum Selection Change

Forum selection clauses in contracts are important terms which govern where a certain dispute will be litigated.  For example, parties to a contract which provides for performance in one state may agree that all disputes will be litigated in another state.  Forum selection clauses are not to be confused with choice of law provisions in contracts, which dictate which state’s law will apply. State and federal courts, as well as state legislatures have provided a patchwork of decisions and rules which have affected the enforceability of these forum selection clauses, which can lead to uncertainty when negotiating contracts, as well as litigation costs regarding disputes over the locale where the lawsuit will be.

The United States Supreme Court clarified forum selection rules in a recent decision, the Atlantic Marine case. In that case, a general contractor based in Virginia was hired to build a child development center in Fort Hood, Texas. The general contractor contracted with a Texas subcontractor, and that contract provided that any dispute related to the subcontract must be brought in Virginia. The subcontractor subsequently brought a claim for payment in Texas Federal Court.  The subcontractor, who opposed the forum selection clause, successfully persuaded the trial judge that forcing its small company to litigate this dispute in Virginia, despite that the project was in Texas, would inhibit its ability to prosecute its case.  For example, the subcontractor was concerned about its inability to compel necessary witnesses as well as the expense of litigation in Virginia.  The Supreme Court’s reversed the trial court, holding that the increased expense and convenience of the parties was not sufficient excuse to disregard the forum selection clause that required the case to be brought in Virginia.

The Supreme Court also pre-emptively negated arguments about unfairness to companies with less bargaining power by noting that the negotiation of the forum selection cause “may have figured centrally in the parties’ negotiations and may have affected how they set monetary and other contractual terms; it may, in fact, have been a critical factor in their agreement to do business together in the first place.”  The Court concluded that the interest of justice is served by holding parties to their bargain. In fact, the only way to defeat a forum selection clause based on this recent ruling, is if the trial court finds that there are extraordinary circumstances unrelated to the convenience of the parties.  The Court does not give examples of what those circumstances may be.

When contracting, companies should be cognizant of the issues that may arise by agreeing to litigate outside of the company’s “home” state, including such considerations as increased expenses. Based on this recent ruling by the Supreme Court, it will be much more difficult to overcome a forum selection clause that is unfavorable if you end up litigating in Federal Court.

Texas Expedited Trial Rules: Background of Amendments

This is the first post in a series discussing the new rules for Expedited Actions in Texas mandated by the 2011 Amendments to Texas Government Code § 22.004(h) and implemented through the Texas Rules of Civil Procedure, including amendments to Rules 47 and 190, and the addition of new Rule 169.

In May of 2011, the 82nd Legislature amended Texas Government Code § 22.004(h), to require the Texas Supreme Court to adopt rules “to promote the prompt, efficient, and cost effective resolution of civil actions” in which the amount in controversy, inclusive of all claims for damages of any kind (including actual and exemplary damages, penalties, attorney’s fees, expenses, costs or any other type of damage of any kind), does not exceed $100,000.  Following this mandate, the Texas Supreme Court issued Miscellaneous Docket No. 12-9191 on November 13, 2012, amending Rules 47 and 190 of the Texas Rules of Civil Procedure, and adopting new Rule 169, in order to accommodate the legislature’s directive.  This order was to be effective on March 1, 2013, but allowed for additional amendments to be made in response to comments received on or before February 1, 2013, by any interested party.  Having received and considered comments, on February 12, 2013 the court issued Miscellaneous Docket No. 13-9022 entitled “Final Approval of Rules for Dismissals and Expedited Actions,” incorporating amendments based on those comments.

As would be expected, the new rules for expedited actions involving cases under $100,000 brought with them key changes in procedure.  However, not all of these changes were limited to cases involving amounts in controversy under $100,000.  Indeed the new rules have changed all civil litigation in Texas, in some significant respects.  For example, in order to properly define for courts those cases which would proceed under the Expedited Action Rules, the Supreme Court amended Rule 47(c) to provide that each pleading setting forth an affirmative claim for relief in any case must contain a statement that the pleading party seeks:

(1)       only monetary relief of $100,000 or less, including damages of any kind, penalties, costs, expenses, pre-judgment interest and attorney’s fees; or

(2)       monetary relief of $100,000 or less, and non-monetary relief; or

(3)       monetary relief over $100,000 but not more than $200,000; or

(4)       monetary relief of over $200,000 but not more than $1,000,000; or

(5)       monetary relief over $1,000,000….

This change to Rule 47(c) is significant, not only to define those cases which will proceed under the Expedited Action Rules, but to all litigants in Texas courts, because the amendments to Rule 47 also made compliance with subsection (c) a pre-condition to a litigant conducting any discovery in the suit.  As a practical matter, this means any Texas plaintiff (or counter-plaintiff or cross-plaintiff) who fails to comply with the requirements of Rule 47(c) in the petition can expect to be met with objections rather than responses from his opponents to any discovery which is due prior to the time that the plaintiff amends the petition to comply with the rule.

Although all cases will be affected by this change to Rule 47, the main features of the new Expedited Action Rules set forth in Rule 169 are directed at cases under the $100,000 threshold, with certain exceptions.  New Rule 169(a)(2) provides that medical liability cases are excluded, as are cases brought under the Family Code, Property Code and Tax Code.  One significant, and potentially problematic, aspect of Rule 169(a)(1) governing the application of the Expedited Action Rules is the fact that the value of a counterclaim is excluded from the calculation of the amount in controversy.  This means that in a two-way dispute where one party has a claim it values over $100,000 and the other has an opposing claim it values at under $100,000, a literal race to the courthouse may be the determining factor in whether the party with the larger claim will be forced to litigate it under the significant limitations presented by the Expedited Action Rules.  For cases proceeding under the new Expedited Action Rules, there are significant changes to discovery, deposition, trials and available recovery in these cases.  In the next installment in this series we will examine changes in discovery procedure in expedited actions.