Bankruptcy Court Resolves Social Media Showdown

By Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX

This is a story about guns and bankruptcy and social media in Texas.   When the dust had cleared, the gun shop’s social media accounts had been pried out of the former owner’s hands, having been found to be property of the estate.   In re CTLI, Inc., 528 B.R. 359 (Bankr. S.D. Tex. 2015). 
 
What Happened

The case begins with a man and his gun store.   Jeremy Alcede founded Tactical Firearms, a gun store and shooting range in Katy, Texas.   He recruited a wealthy friend, Steven Coe, to help him move into a bigger building and open “the finest indoor firing range in the United States.”    Things soured between Jeremy and his wife, who filed for divorce, and Jeremy and Steven, who accused him of diverting funds from the business.    After Steven filed a shareholders’ derivative suit and sought appointment of a receiver, Jeremy caused CTLI to file for chapter 11. 
Steven sought appointment of a chapter 11 trustee.    The Court denied this request but terminated exclusivity.   Steven filed and confirmed a plan.   The plan required Jeremy to “deliver possession and control” of the passwords for the company’s social media accounts.   Jeremy refused, contending that the accounts belonged to him personally.    Jeremy initially agreed to allow a neutral third party to sort through the accounts and separate the business from the personal.   However, he objected to a proposed order containing this provision.    The court then ruled that one Facebook account and one Twitter account belonged to the reorganized Debtor.    Jeremy filed an objection to the Court’s order, essentially moving for reconsideration.

 Social Media 101

The Court provided an introduction to how both Facebook and Twitter work.    While I am sure that there are other judicial explanations of these ubiquitous social networks, this is the first opinion I have seen which explains them.   I quote Judge Bohm’s descriptions in their entirety for the benefit of CLE panelists who need a source to describe social media as well as for anyone not already familiar with the sites.   (Plus, I just find this stuff interesting).  
Facebook is the preeminent social networking website of the current moment, and as of the time of this opinion, it boasts approximately 1.39 billion monthly active users. http://newsroom.fb.com/company-info/ (accessed April 1, 2015). While anyone can visit individual Facebook Pages and Profiles and view information that has been made public, to have access to the full range of Facebook features one must be a registered Facebook User. A Facebook User provides Facebook with his or her name, birthdate, sex, and an email address or phone number and is then granted a Facebook Profile, which the User can personalize with biographical information. The User is then prompted to “friend” other Users, beginning with the User’s personal contacts and branching out to Users with mutual Friends. Facebook Users can post Status Updates, photos and videos, and Life Events to Facebook. These posts appear on the User’s Timeline (the User’s personal page) and on the Newsfeeds (Facebook home pages) of the User’s Facebook Friends. The Facebook User can also access other features, such as sending individual or group Messages to Facebook Friends, and creating Facebook Events and Facebook Groups.

In addition to interacting with other individual Users, Facebook provides Pages for “businesses, brands and organizations.” A Facebook Page is created by an individual User to represent an organization or brand, and that User becomes the first Page Admin, which enables him or her to customize the Page, post Status Updates and photos, and access other features. Facebook Users can “like” the Page to become Fans who will then see the Page’s posts in their Newsfeeds. The first Page Admin can then grant other Facebook Friends various degrees of administrative access to the Page. Full access grants the new Admin equal powers to the original Admin, including the ability to remove the original Admin. 

In re CTLI, at  365.

Twitter is the next most popular social media platform after Facebook, with an estimated 288 million monthly active users, https://about.twitter.com/company (accessed April 1, 2015). Unlike Facebook, the default setting in Twitter is to allow Twitter Users to freely “follow” one another without the necessity of being approved by each other. When Users “follow” each other, they will see each other’s “Tweets” (like Facebook Status Updates) in their Twitter feeds. Tweets are limited to 140 characters, or less if the User includes a photo. Twitter Users often includes links to web sites in Tweets. Users can tag each other in Tweets using the “@” symbol followed by a user’s “Handle”—a unique identifier that can also be used to locate the User’s individual Twitter page (twitter.com/”Handle”). Users also “Retweet” each other’s Tweets. Additionally, Twitter users can tag topics with the “#” symbol, known as a hashtag. Other Users can filter their feeds to view all Tweets with any given hashtag. These features have made Twitter an important social media platform for tracking trends.

 Id, at 366.  

The Court’s Ruling

The Court found that business social media accounts were similar to subcriber or customer lists and therefore constituted property of the estate.     Because the Facebook page for Tactical Firearms was a page for “businesses, brands and organizations,” the Court found that it presumptively belonged to the Debtor.    The Court also found that the Tactical Firearms Facebook page linked to the company’s website and was used to promote the business.    The Court rejected Jeremy’s argument that he created the Tactical Firearms page because Facebook would not allow him to have more than 5,000 friends personally.
The Court is skeptical of Mr. Alcede’s purported rationale for creating the Tactical Firearms Facebook Page. Mr. Alcede contends that he had reached the limit of Facebook Friends and therefore Facebook was automatically denying his Friend Requests. [Hearing of February 12, 2015, at 1:08 p.m]. However, as of December 18, 2014, Mr. Alcede personally had only 4,423 Facebook Friends. [Alcede’s Ex. 9], While it is possible that Mr. Alcede had more Friends when he created the Tactical Firearms Facebook Page, such a precipitous decline in Mr. Alcede’s popularity is unlikely. Furthermore, if Mr. Alcede had really created the Page to promote himself personally, he would have originally entitled it “Jeremy Alcede.” Apparently, since the filing of the Plan, Mr. Alcede has created an individual Page specifically to promote his personal “brand,” and therefore two “Jeremy Alcede” Facebook Pages exist in addition to the personal “Jeremy Alcede” Facebook Profile: “Jeremy Alcede Entrepreneur” (the former Tactical Firearms Facebook Page) and “Jeremy Alcede Patriot.” Mr. Alcede, conveniently, has never mentioned this fact to the Court.

However, even if Mr. Alcede did indeed create the Tactical Firearms Facebook Page because he was approaching the Friend limit, it would not affect the character of the Tactical Firearms Facebook Page. It may be true that Mr. Alcede, like many small business owners, closely associated his own identity with that of his business, so closely that he entitled the Facebook Page “Tactical Firearms” “for people to know it was me.” [Dec. 16 H’rg Tr. 21:6-7]. Nonetheless, Mr. Alcede and the Debtor are—and always have been—two distinct legal entities, with separate and distinguishable property. The fact that the Tactical Firearms Facebook Page was created in the name of the business, was linked to the business’s web page, and was used for business purposes places it squarely in the category of property of the Debtor’s estate (and now property of the reorganized Debtor) and not personal property of Mr. Alcede.

Id. at 369.  

The Court rejected several other arguments.   One that I found interesting was that the page was personal because it contained his personal political opinions.  The Court found (correctly in my opinion) that the inflammatory political commentary was intended to drive up gun and ammo sales.
Finally, the history of Mr. Alcede’s activities promoting the Debtor specifically supports the characterization of political posts as business-related, as opposed to personal expression of political beliefs. While Mr. Alcede was in charge of the Debtor, the Debtor was known for its marquee displaying messages promoting gun rights and criticizing President Barack Obama—no doubt with the objective of increasing gun and ammunition sales. Such messages include: “I like my guns like Obama likes his voters / undocumented”, “Threatening to sue POS Obama and pro open carry is why I love Greg Abbott”, “Honk if you support open carry / Don’t tread on me”, “We have hit Barack bottom / go vote red”, “Does one of Obama’s family members have to be beheaded for “change” to happen?”, and “Will trade Obama to Mexico for Sgt Tahmooressi / God help us all.” [Plan Agent’s Exs. 2 & 3]. The store frequently received news coverage for its signs. [Plan Agent’s Ex. 2], At one point, the Debtor held a contest encouraging “ALL FRIENDS, FANS, AND MOST OF ALL LOYAL CUSTOMERS” to submit messages for the marquee, with the winner receiving a one year family gold range membership worth $560!” [Id.].

Mr. Alcede himself has stated to this Court: “I don’t mean to toot my own horn, but I’m a PR genius . . . .” [July 11 H’rg Tr. 125:16-17]. This Court finds that Mr. Alcede’s political messages on the store’s marquee and via social media were a manifestation of this genius. Given this context, regarding overtly political posts and tweets, the Court agrees with the Plan Agent’s counsel, who stated: “[I]t’s very hard for me to stipulate that anything on this page is not business related due to the nature of the business and the fact that this type of business is frequently affiliated with a particular political affiliation.” [Dec. 16 Hr’g Tr. 31:4-8], Indeed, this Court finds that all of these political posts and Tweets are related to the Debtor’s business and were issued with the purpose of generating publicity for the business in order to increase sales of guns and ammunition.
Id. at 371.   This points out that when you describe yourself as a public relations genius, there is a danger the court might believe you and find that you were promoting your business.   

The Court also found that the twitter account was business rather than personal.

The fact that the Twitter account was named after the business, included a description of the business, and was linked to the business’s web page raises a presumption that the Twitter account has always been a business account. Mr. Alcede’s dispute with this conclusion is premised solely on his contention that “95%” of the account’s Tweets were personal. [Dec. 16 Hr’g Tr. 35:14-20]. However, Mr. Alcede provided only one example of such a Tweet, and as addressed supra in Section III.H, this Court finds that it was not in fact a “personal” Tweet, but instead served to promote the Tactical Firearms brand. Therefore, this Court finds that the Twitter account formerly located at @tacticalfirearm and now located at @jeremyalcede is a business account of the reorganized Debtor. It is not a personal account of Jeremy Alcede.

  Id. at 372-73.

Finally, the Court had a fascinating discussion of the difference between business goodwill and professional goodwill.   While the Court found that Jeremy did have an interest in his professional goodwill, it found that Jeremy could protect this interest by inviting his followers to migrate to this personal Facebook and Twitter accounts.   

The liberty concerns inherent to individual social media accounts do not apply to business social media accounts, even if the business is closely associated with an individual. However, this Court must address another concern specific to an individual who is closely associated with a business’s social media account—the professional goodwill of the individual which may be reflected in that account. This Court finds that while an individual is using the business’s account, some of the individual’s professional goodwill may be reflected in the account’s followers along with the business goodwill. The bankruptcy estate includes only the value of the social media reflected by the business goodwill, and not the professional goodwill. Yet, the Court finds this reality is no limitation on the reorganized Debtor’s right to control its social media accounts, because any goodwill legitimately belonging solely to the individual will follow the individual.

A business social media account is in a sense a manifestation of the business’s accrued goodwill. See Smita Gautam, #bankruptcy: Reconsidering “Property” to Determine the Role of Social Media in the Bankruptcy Estate, 31 Emory Bankr. Dev. J. 127, 134 (2014) (including goodwill as an element of value in a social media account). The goodwill of a company is developed by its employees over the years. Nonetheless, whatever goodwill the individual caused to be associated with the [**34]  business remains property of the business. (citation omitted). If the individual leaves the business and some goodwill is thereby withdrawn, that goodwill is properly characterized as professional goodwill that is the sole property of the departed employee. (citation omitted).

This Court finds that the proper way to characterize Mr. Alcede’s interest in the reorganized Debtor’s social media accounts is as an interest in professional goodwill, and the Court allows that Mr. Alcede may have developed some such goodwill that is manifested by the Debtor’s Facebook Fans and Twitter followers. However, the Court finds that recognizing the business social media accounts as property of the reorganized Debtor does not deprive Mr. Alcede of any of this professional goodwill, if it indeed exists. The line of demarcation between professional and personal goodwill is precisely the line between goodwill that departs with the professional and goodwill that remains with the business. See id. Therefore, Mr. Alcede is unimpeded in his ability to control whatever property interest he legitimately holds in the reorganized Debtor’s social media accounts. Whichever followers embody the goodwill that legitimately inheres in Mr. Alcede, as opposed to the corporate reorganized Debtor, are free to follow him to his own personal Facebook Page, entitled “Jeremy Alcede Patriot,” and to a personal Twitter account which he is free to reestablish with the title “Jeremy Alcede” and Handle “@jeremyalcede.” The extent of the loss of followers to the business accounts and subsequent gain in followers by Mr. Alcede will reflect the true extent of his personal interest in the accounts.

 Id., at 473.

The Court ordered Jeremy to surrender control of the social media accounts to the reorganized Debtor and to cease any activity inconsistent with the order.   In order to implement the ruling, the Court ordered Jeremy to accept a friend request from the store’s general manager.   This is possibly the first time in judicial history that a court has ordered someone to accept a friend request on Facebook.  

The Story Continues

The Court set a status conference to determine whether Jeremy had complied.   Jeremy did not appear.   The store’s manager appeared and testified that Jeremy had not complied.  As a result, the Court entered an order holding Jeremy in contempt.   Case No. 14-33564, Dkt. #344.    The Court ordered the U.S. Marshall’s Service to “immediately take Jeremy Alcede into custody.”   Jeremy moved for reconsideration later that day on the basis that the Court should have required an adversary proceeding to determine ownership of the social media accounts and requested that he be released on his own recognizance.    He also filed a jury demand with regard to the contempt order as well as an application for writ of habeas corpus.  
After a hearing, the Court entered a 38-page findings of fact and conclusions of law.   One interesting finding was that Jeremy gave an interview to Law 360 in which he stated that he would refuse to comply with the order regarding social media accounts and would go to prison for contempt and go on a hunger strike to protest the order.    Case No. 14-33564, Dkt. # 372, para. 18.   The Court found that it had jurisdiction to enforce the plan under 11 U.S.C. Sec. 1142(b).    Judge Bohm concluded that Jeremy did not have a Seventh Amendment right to a jury trial on either ownership of the social media accounts or the contempt.   Neither one of these proceedings would have been tried in a Court of Law in England in 1791 for the reason that both issues were inherently equitable.  As a result, there was not a right to trial by jury.   
After nearly a month of confinement, Jeremy informed the U.S. Marshall that he would comply with the Court’s order.   However, when the Court set a hearing, he said that he would only comply with the Court’s order if he could delete his personal information from the accounts first.   The Court stated that it would not negotiate with him and entered an order for further confinement.   After a total of six weeks of confinement, the Court found that Jeremy had purged his contempt and ordered him released from custody.
Shortly after he was released, Jeremy filed a Motion to Revoke Confirmation of the Plan on the basis that confirmation had been procured by fraud.   Steven responded with a motion for sanctions.   Shortly thereafter, Jeremy’s attorney filed a motion to withdraw.   The Court denied the motion on the basis that it should have been filed as an adversary proceeding, that the issue had previously been litigated, that counsel failed to confer as required by the local rules and that the motion was equitably moot due to substantial consummation of the plan.  In re CTLI, Inc., 534 B.R. 895 (Bankr. S.D. Tex. 2015).    Steven agreed to settle the sanctions motion for payment of $3,500 by Jeremy’s former counsel provided that a final decree be entered.   This was approved and on September 15, 2015 a final decree was entered closing the case.
Final Thoughts
I was initially motivated to write about this case because of the social media issues involved.   This case certainly advances the law with regard to ownership of social media.   However, on a meta level, this case illustrates a number of important truths about the world of bankruptcy.
1.  Bankruptcy is not a get out of jail free card.    Instead, the person who initiated the case can find that far from gaining control over a difficult solution, they have lost it.   Jeremy apparently initiated this bankruptcy to prevent a state court receiver from being appointed.   While he escaped the state court’s jurisdiction and operated as a debtor in possession for a time, he eventually lost control of the business he founded and spent six weeks as a guest of the federal government.
2.  Bankruptcy can involve intense emotional battles.   Jeremy and Steven started as friends and business partners.   From the record, it appears that they ended as bitter enemies.   While bankruptcy is our court of financial last resort, it is frequently the final act in a cycle of destructive conflict. 
3.  Bankruptcy judges have to deal with a wide variety of difficult and unusual issues.   This case involved unique issues of ownership of social media, contempt and the Seventh Amendment.    The social media aspects of the case show how a bankruptcy system dating back to the 19th Century can deal with cutting edge 21st Century issues.   The contempt issues illustrate that the bankruptcy judge is not a mere administrator or referee but possesses the full power of the United States judiciary with full power to enforce its rulings.   Finally, the Seventh Amendment discussion (as well as the related discussion of the court’s authority to enter a final order) demonstrates that Bankruptcy Courts must be fully conversant with the United States Constitution as well as their own corner of the United States Code.    

 

     

Source: CLLA
Bankruptcy Court Resolves Social Media Showdown

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