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Email, Disputed Accounts and the Courts

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Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

Email is revolutionizing how credit professionals do their work.

Whether using email to automatically invoice customers through their Web site, to automatically posting payments, to gathering credit information, including credit reports, credit professionals are now handling virtually all of their responsibilities electronically. Email is also being used to alert credit association members of problem accounts, communicate with credit peers, communicate with customers, including sending invoices and order acknowledgments across computer networks, and using email to collect delinquent accounts. Likewise, customers can provide credit professionals via email confidential financial information to assist with the credit analysis, as well as negotiating credit terms via email. Underscoring the exp losion of email use, businesses around the world are estimated to send over a trillion email this year.

Consider the following common situation when using email to communicate with a customer: you sell specially manufactured goods. The customer disputes the invoice complaining that the shipment contained defective product and refuses to pay. Your salesperson visits the customer and inspects the shipment. He emails you on his PDA that he believes that shipment was in fact defective. If you are forced to sue to collect on the delinquent account, may the customer obtain a court order directing you to turnover a copy of the salesperson’s email through electronic discovery? Must you turn over the email if the customer subpoena’s all email? Recent court developments highlight how the company must deal with this topic and the importance of that the credit department must put on managing emails and the responsibility to preserve email if litigation is commenced.

Email A Hot Topic With The Courts And Congress

While email is now the favored way for the credit professional to communicate with customers, credit colleagues and employees, email can also be a rich source of information for customers where litigation or arbitration is required to collect on a delinquent account. Not only has the credit professional’s use of email expanded in recent years, but retaining those emails has become complicated as the emails may be scattered over servers, laptops, PDA’s and home computers. Likewise, the emails containing discussions with the customer may be contained over a number of emails and from others in the credit department and sales force. And it is not just the use of email that has exploded, but the forms of einformation, from instant messaging, PDA’s, web-based emails and voice mails. This form of e-information may also be subpoenaed by a customer in the event of litigation in the form of e-discovery.

In this setting where a customers, including a bankruptcy trustee’s preference claims, are looking to your emails to build their cases, the credit professional needs to be mindful that a poorly written email’s meaning can be misconstrued. This requires that that the credit professional thoughtfully compose emails with an eye that they may ultimately end up in a court file, as email and e-information can be used to assist in testimony whereas a phone conversation is easily forgotten.

Thus, seemingly unimportant or poorly worded or thought out emails written by a credit professional or salesperson may be used to support a customer’s claims that a debt is rightfully disputed. Given this, at first blush, the credit professional may be inclined to delete or purge emails that a customer subpoenas that may appear damaging to the collection effort, or weaken a preference defense in a preference suit. However, as discussed below, a deleted email trail can both weaken a vendor’s defense and result in a court’s finding of a presumption of guilt.

Popular press has highlighted the hazards of email, both retaining them and not doing so. For example, with Enron a stored email from in-house counsel raising concerns about accounting improprieties served as a roadmap for federal prosecutors. In another example, several Wall Street investment banks are facing multimillion dollar fines for not keeping emails. These recent headlines highlight the significance of email and raise the question of the credit professional’s email retention program. Recent court decisions involving email sanctions include:

In Zumbulake vs. UBS Warburg, the court issued several opinions concerning ediscovery. One of the most significant decisions by the court underscored the need for a retention policy for e-information, as the court instructed the jury to assume that missing e-information was adverse to the defendant. The plaintiff obtained a $29 million verdict. The court set out that a party to litigation must observe the following with e-information:

--Place a litigation hold on potentially relevant e-information and notifying employees of that hold; oversee compliance with the litigation hold; and communicate with key employees how the e-information is stored and will be turned over.

The Zumbulake decision reinforces that emails should be thoughtfully written and that a document retention policy should be in place to deal with procedures when a delinquent account is being litigated or the vendor is defending a preference action.

In the case of Morgan Stanley, the investment bank and brokerage used 9/11 as the basis for failing to produce millions of emails in hundreds of arbitration claims. Morgan Stanley paid $15 million to settle a civil lawsuit with the Securities and Exchange Commission over failure to produce tens of thousands of emails. Bank of America was fined $10 million for failing to produce emails in a timely manner to the SEC.

These cases underscore the importance that emails have with litigation and disputes with customers, and that courts will impose sanctions, perhaps significant amounts, if companies fail to comply with managing and turning over emails.

E-Discovery Amendments

As a result of the court rulings and the explosion of email use, in December 2006, the Federal Rules of Civil Procedure were amended to take into account e-information. The key provisions that impact the credit department are:

-Definition of discoverable material includes all information that can be stored electronically, including Web–based email, instant messaging, voicemail, Blackberries and iPods;

-The parties must address early in the litigation the discovery of e-information and identify any disputes in providing the opposing party with the electronic information, including preserving the einformation;

-Provides that the requesting party to designate the form in which it wants estored information produced. The einformation that is difficult to access and produce is treated differently by the court;

-Safe Harbor provision allows that the court may not impose sanctions for failing to provide e-stored information lost as a result of routine document purging; and

-Failing to identify or preserve erecords may trigger sanctions, including fines and dismissal of the collection case.

When e-documents which have been requested have been destroyed, the court determines if the destroying party had an obligation to maintain the e-records. The court then determines whether the party acted with improper motives or intent in destroying the evidence. This is based on the spoliation of evidence doctrine that requires those who control important evidence keep it intact so that it can be reviewed by all. Courts take a case-by-case approach in dealing with e-information destruction. Given this, the credit department should consider an e-document retention policy that deals with retaining and destroying e-documents.

E-discovery imposes strict time limits on when e-information must be turned over. In litigation with a customer, the vendor would have approximately 30 days. In litigation with the government, such as the SEC, by contrast, the response may be as short as 48 hours.

These amendments addressing ediscovery mean that the credit department, with the assistance of the IT department or a third party, develop an effective management plan with the e-information in the credit department, from preservation of emails to production of emails to customers and bankruptcy trustees. The amendments underscore the importance that einformation is taking from the view of the court. The document retention policy needs to address the preservation of emails when a litigation hold is placed, as well as when einformation may be disposed without risk of destroying evidence and facing sanctions.

Email Policies and Procedures to Protect the Credit Department

Email has not only come to the forefront of the credit professional’s life, but has also come to the forefront of the courts and litigants. Given this heightened interest by the courts in how emails are managed and the right the customer or bankruptcy trustee generally has with regards to turnover of emails, the credit professional needs to consider a retention policy that deals with disputed accounts and retaining emails until the dispute is resolved. Consideration should also be given to records management, including setting up a procedure for storing and purging e-information, including a records retention and destruction policy. With an e-retention policy in place, the credit professional is prepared to handle the discovery demands that may come with the disputed account or the preference demand.

Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

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