The Importance of Applying Section 521(4) in obtaining the Debtor's electronic data.

Jack Seward
Rosenfarb Winters, LLC
New York, NY 10016
JSeward@RWCPAs.com or
JackSeward@msn.com

Introduction

A trustee has the duty to investigate the financial affairs of the Debtor and ensure that books and records are properly turned over to the trustee in accordance with Section 704. Furthermore, under Section 521(4) it is the duty of the Debtor to "surrender to the trustee all property of the estate and any recorded information, including books, documents, records, and papers relating to property of the estate, whether or not immunity is granted under Section 344 of this title". The Handbook for Ch 7 Trustees indicates that "Attorneys and accountants may not be compensated for performing the statutory duties of the trustee" and investigating the financial affairs of the debtor falls within the duties of a trustee "unless sufficiently documented to show that special circumstances exist". This article will demonstrate the need for qualified forensic accountants with specific computer forensic skills as it relates to the bankruptcy process.

How many millions of businesses and individuals have e-mail, Word Perfect, Word, Excel, QuickBooks, Quicken, Money, and accounting software applications used to record and report on business and personal financial activities? (So did anyone mention keeping a second set of books or off the books accounting?) It is almost impossible for unscrupulous Debtors or their officers to escape from the trail of electronic/digital/optical information left behind in today's digitized business environment.

Indeed this is the digital age, and in the Bankruptcy arena that means the Trustee has powerful resources available to sift through the sand pit of the unscrupulous Debtor. To accomplish this, the Trustee will need the skills of the "eSleuthHound" , the forensic accountant for the 21st Century. The eSleuthHound is cognizant that business operates, and ultimately survives or fails, using digital information. After a failure, the eSleuthHound must be prepared to uncover and recover the Debtor's e-data from any available data-storage source.

The size of the eSleuthHound should not be important to the Trustee, because in the struggle to decipher the trail of the Pixie Dust the only thing that matters is the size of the fight in the eSleuthHound.

Computer Reality Check

Questions:

1. Let's assume that when you asked the Debtor at the Section 341 examination if the books and records were kept on computer, the Debtor answered "No". Did you then ask, "Ok, so how many computers were used in the business during the last six years and where are they now?"

2. Do you have the e-mail and www addresses from all your Debtor cases, including those of the insiders'?

3. In the larger cases, the Debtor often fails to immediately file the Schedules and Statement of Financial Affairs with the Petition, but all on the Creditors' team can be assured that those Debtors will have used more than one computer in the business.

4. Did the Debtor document for the Trustee exactly how many laptops were used and where they are now?

5. Does the Trustee have a plan to examine the laptop hard disk drive ("HDD")?

6. Did the Debtor sell or dispose of any desktop systems, laptop computers, PDAs or other digital devices during the two years prior to the filing?

7. Does the Debtor have leased computer equipment containing the business and financial records, including e-mail and word processing files on the hard disk drive ("HDD")?

8. Inasmuch as the computers are property of the Estate, when the time comes do you as the Trustee plan to sell the computers for fair value before the eSleuthHound makes an examination of the computer hard disk drive ("HDD"), PDAs and other digital devices?

9. Prior to any sale of computers belonging to the Estate, does the Trustee plan to take adequate measures to insure that no confidential personal and/or financial information resides in the Pixie Dust on the hard disk drive ("HDD") prior to any sale of computers or other digital devices that is property of the Estate (information such as credit card, personal identity, employee HR, customer history, financial, banking, and medical info. etc.)? Does the Trustee then plan to have the eSleuthHound first thoroughly examine and then sanitize those hard disk drives ("HDD") prior to their sale?

Obviously, in any bankruptcy case today, computers and digital devices contain the critical information necessary to obtain the money for the creditors and eliminate abuses of the Bankruptcy Code. Time is all-important and the Trustee should consider attaining access to the Debtor's Pixie Dust before the Section 341 examination.

Time is not on the Trustee's side

The Trustee would not want to learn after a case is closed that he/she did not find out that the insiders or employees of an unscrupulous Debtor slipped out the front door with the intellectual property of the Estate on a Microdrive, CompactFlash or HDD.

The ideal situation is for the Trustee to react with observation by the eSleuthHound of the computers and digital devices in place on site, and any hesitation on the part of the Debtor and/or insiders to allow that examination should be considered an indication that the evidence is in jeopardy so long as they controlled by the Debtor. Visiting the Debtor's facilities is key to be able to find things like passwords, the data backup schedules, private e-mail addresses, floppy disks, phone numbers and other information that might not be found in traditional techniques.

Exactly what are we talking about?

Promptly examining the Pixie Dust to find where the money went and who has the money now, before it is all gone, are obvious goals for both the eSleuthHound and Trustee.

What will the eSleuthHound do if the Pixie Dust does not contain the story about the Debtor's financial history and where the money went, and this information cannot be found in any of the electronic memos, documents, databases, spreadsheets, archives, presentations, graphics, accounting programs, or address books? What if this information was not recorded, revised, encrypted, deleted, backed up, copied, saved, pasted, printed and/or stored on the Debtor's computer HDD or the wide assortment of PDAs that include Palm, Handspring, iPaq, Jornada, Cassiopeia, Clie, Visor, or Windows CE and/or Pocket PC devices?

Suppose the eSleuthHound cannot find the story in the e-mail messages or any of the arrays of other digital storage sources not already mentioned? In that case the eSleuthHound may conclude by deductive reasoning that the insiders have the computers, PDAs or other digital devices with the Pixie Dust, and that the insiders would not then be able to put back the Pixie Dust when that is finally documented. Simply stated the eSleuthHound is relentless in the pursuit of finding the money for the Estate and will continue searching the Pixie Dust for electronic/digital/optical e-clues to the money trail for the Estate.

Information stored on a computer is often not capable of just being printed on paper so having the right skills to attain access to this data is key for any Trustee. Valuable information including names, addresses, passwords, bank accounts, taxpayer identification numbers or other information about the unscrupulous Debtors or their officers can be hiding behind legitimate files on the HDD as invisible attachments . This historical information was thus never visible, unless one knows how to find it. A wealth of information may be discovered in file slack space, and ram slack or drive slack space found on the HDD. In addition, most word-processing documents, spreadsheets, database files, presentation files and certain other files, contain valuable information, including embedded information about the author, title of the document, actual date and time created, edit or lapsed time, actual date and time modified, file last saved by whom, number of pages, and software program version used. Having this information provided by the eSleuthHound should be any Trustee's dream. During the examination of the Debtor's electronic/digital/optical e-data, the Trustee is furnished with detailed, summary and exception reports regarding the investigation of the Debtor's activities on a regular basis.