Social Media Update: Facebook and Twitter Accounts Are Property of the Estate

On April 3, 2015, U.S. Bankruptcy Court for the Southern District of Texas ruled that business social media accounts are property of the estate.  Accordingly, the court ordered the former owner to relinquish control of the accounts, which the former owner claimed were personal and not business related.[1]

Case Background

CTLI LLC (the “Debtor”) is a gun store and shooting range in Katy, Texas originally owned by Jeremy Alcede and his then-wife Sarah Alcede.[2] Sometime in late 2011, Steven Coe Wilson invested $2.2 million to expand the establishment in exchange for 30% ownership of the business.[3] Disputes arose between the parties and Mr. Wilson sought appointment of a receiver. On June 27, 2014, the day after the request for appointment of a receiver was approved, the Debtor filed a petition under Chapter 11 of the Bankruptcy Code. [4]

Mr. Wilson sought the appointment of a trustee.  Although the Court denied the request for appointment of a trustee, the Court terminated exclusivity so that Mr. Wilson could propose a chapter 11 plan (the “Plan”).[5]  Mr. Wilson’s Plan was confirmed on December 8, 2014. The Plan required Mr. Alcede to “deliver possession and control” of “passwords for the Debtor’s social media accounts, including but not limited to Facebook and Twitter” to Mr. Wilson, who became the sole owner of the Debtor under the confirmed Plan.[6] On December 11, 2014, the Court learned that Mr. Alcede had not complied with the Court’s order.[7]

The Court held a hearing on December 16, 2014, in connection with Mr. Alcede’s failure to turnover the passwords.  At the hearing, Mr. Alcede claimed that all of the social media accounts belonged to him personally and that they were not owned by the Debtor, and that it would be impossible to share control of the accounts without violating his privacy.[8] The Court issued an initial ruling that the personal and business content of the social media accounts would be sorted by a third party.[9] Ultimately, the Court found that the reorganized Debtor was entitled to direct control of 100% of one Facebook page and one Twitter account, and that the assistance of a third party was not necessary.[10]

Bankruptcy Court’s Ruling

Mr. Alcede argued, among other things, that the social media accounts in question should not be included in the Chapter 11 estate because he started them for personal reasons.[11] His primary argument in support of this proposition is that he only started the “Tactical Firearms” Facebook page because he reached Facebook’s 5,000 Friend limit.[12] As a result, he created the former Tactical Firearms page to serve as the “likes pages” and his personal profile as his “friends page.”[13] Furthermore, Mr. Alcede argued posting of personal political messages, personal status updates, and accessing the Tactical Firearm page through his personal profile was evidence that the social media accounts were personal in nature. [14]

The Court was not persuaded by the Mr. Alcede’s arguments.  Often skeptical of the Mr. Alcede’s rationale, the Court reasoned that because the social media accounts were used as a method of advertisement and a public relations tool for the gun store, the social media account was a business page.[15] The Court likened social media accounts to subscriber or customer lists that have material value to businesses generally.[16] The Court noted that at the cash collateral hearing, the debtor admitted that the social media accounts were an intricate part of the business: “It’s just very important that I stay in tune with social media because that’s how people follow us and that’s how they support us and that’s how they hear about what we’re doing.”[17] This statement, along with the facts that Mr. Alcede used Facebook Messages to communicate with customers and that the posts were business-related, led the Court to conclude that the Facebook page was a business page.[18]  Similarly, Mr. Alcede’s tweets were forms of business marketing.[19]

This case raised a concern about differentiating professional goodwill from business goodwill where the business is closely associated with an individual.[20]  The goodwill generated by an individual employee’s contributions to social media posts on a business social media account is either business goodwill that remains in the account, or professional goodwill that follows the individual.[21]  Estate property includes only the value of the social media reflected by the business goodwill.[22]  Any professional goodwill belongs solely to the individual and departs with such professional.[23]  The Court in this case found that Mr. Alcede’s interests in the Debtor’s social media accounts are interests in professional goodwill, and, therefore, while Mr. Alcede may have contributed and developed the goodwill manifested in the Debtor’s Facebook and Twitter followers, such personal goodwill was separate from the business goodwill. [24] “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.”[25]

In addition to distinguishing social media between personal and professional goodwill, this decision cements the concept that “property of the estate” is defined broadly to include social media.