A bankruptcy judge reprimanded Xclaim Inc., a trader in bankruptcy claims, for an unauthorized filing on PACER in a miscellaneous proceeding to decide whether the bankruptcy court in New York will impose sanctions on claims noticing agents for receiving unauthorized fees from Xclaim.
In his December 8 opinion, Chief Bankruptcy Judge Martin Glenn of New York struck Xclaim’s “procedurally defective filing made for an improper purpose by an entity that is not a ‘party in interest’ within the meaning of 11 U.S.C. § 1109(b).”
Judge Glenn also remonstrated Xclaim for including “the email addresses of [51] federal judges, senior Government officials, and court personnel” in the unauthorized court filing.
The Undisclosed Fee Agreements
In a retention application in a chapter 11 case in Manhattan, a claims and noticing agent disclosed that it had an agreement with Xclaim, a claims trader, under which the claims agent would upload the claims docket to Xclaim in a form compatible with Xclaim’s software. In return for the upload and updates, Xclaim would pay the claims agent 10% of the fees it received for effecting trades in claims against the debtor.
Previously unaware that the claims agent had agreements of the sort with Xclaim, Bankruptcy Judge Sean H. Lane of Manhattan approved the retention of the claims agent in his opinion on August 18, but ruled that the claims agent could not earn extra income by uploading the claims docket to Xclaim and receiving fees in return. Madison Square Boys & Girls Club Inc., 642 B.R. 487 (Bankr. S.D.N.Y. Aug. 18, 2022).
Judge Glenn described how Judge Lane held on August 18 that the fee agreement was not permissible under 28 U.S.C. § 156(c), in part because the court clerk could not be paid by the trader given the ethics rules for judicial employees. Judge Glenn said that Judge Lane “also rejected the claims agent’s representation . . . that it owned the creditor claim data.” To read ABI’s report on Madison Square, click here.
Judge Glenn’s Miscellaneous Proceeding
Interest piqued by the revelation in Madison Square, the bankruptcy judges in New York were keen to learn whether any of the 10 authorized claims agents in the district had similar fee arrangements with Xclaim.
As chief judge, Judge Glenn opened a miscellaneous proceeding on August 25 “to ascertain which other claims agents had, or still have, similar arrangements and to determine what sanctions, if any, should be levied on such claims agents.”
Judge Glenn directed the 10 claims agents to respond to his order to show cause by stating, among other things, whether they had fee-sharing agreements and how much they had earned. In responses by the claims agents in the district, Judge Glenn learned that five had similar fee arrangements with Xclaim. He said that all five had terminated their agreements with Xclaim.
Judge Glenn did not name Xclaim as a respondent in the miscellaneous proceeding, nor did he authorize or direct Xclaim to file a responsive pleading.
The Unauthorized Pleading
Although Xclaim was not a party, Judge Glenn said that Xclaim filed a pleading using its “limited [PACER] access credentials.” Since it was not an attorney, Xclaim had been authorized by the clerk to make PACER filings for the “limited purpose of filing notices of claim transfers on the docket.”
Without making a motion to intervene, Xclaim filed a 68-page submission in which it asked for no relief but instead sought to “correct and supplement the record.” Specifically, Xclaim disagreed with some of the statements and representations made by one of the claims agents that had not signed a fee-sharing agreement.
Beyond the fact that Xclaim was not a party in the miscellaneous proceeding, Judge Glenn took umbrage at Xclaim’s submission for including the “direct email addresses” of 51 federal judges and other high-level government employees.
Judge Glenn responded to the filing by entering an order for Xclaim to show cause why it “should not be sanctioned” for the unauthorized filing, for misuse of its PACER credentials and for including “personally identifiable information” about the 51 judges and federal employees.
The Court’s Power to Sanction
Xclaim faulted the order to show cause for failing to “cite authority under which the Court could issue sanctions.”
Judge Glenn responded by citing authority for the proposition that a court has inherent authority to sanction counsel for bad faith and to strike unauthorized pleadings by a nonparty. Likewise, he said that the court may “revoke the electronic filing privileges of a person who violates their efiling agreement with the court.”
Striking an ‘Improper’ Filing by a Nonparty
Judge Glenn said that Xclaim was not a party in interest within the meaning of Section 1109(b) because the miscellaneous proceeding was directed only against the claims agents. Furthermore, Xclaim had no “financial interest” in the outcome of the proceedings with the claims agents.
Xclaim defended its filing by alluding “to ‘reputational’ harm ‘as a result of these proceedings.’” Judge Glenn shot back by citing authority to say that “alleged harm to reputation is not sufficient to confer ‘party in interest’ status under 11 U.S.C. § 1109(b).”
Improper Purpose
While Xclaim’s submission said nothing about the merits of the proceeding with the claims agents, Judge Glenn said that Xclaim’s submission “is nothing more than a self-serving document designed to counter what [Xclaim] perceived as negative information that came to light in the [claims agent’s] submission.”
Judge Glenn said that a court docket “is not a forum for a nonparty corporation to file a letter designed to improve its public image while seeking no actual relief.”
Violation of Efiling Rights
Judge Glenn said that Xclaim was not authorized to file the submission because it violated the terms on which it had been given the right to make PACER filings.
In addition, Judge Glenn said that the submission initially was not signed by an attorney nor filed using an attorney’s PACER credentials.
The Email Addresses
Judge Glenn said that the email addresses for the 51 federal judges and government employees were protected by Section 107(c). He rejected the idea that the personal information was not protected because “most” could be found elsewhere on the internet.
Judge Glenn said Xclaim was being “disingenuous” in contending that it had no authority to redact the email addresses from its submission.
Judge Glenn struck the submission for being “procedurally defective” and “made for an improper purpose” by someone who was not a party in interest. He also ruled that the email addresses were entitled to protection, but he did not require Xclaim to make a redacted filing because he was striking the document.
[Note: On seeing the email addresses, the clerk had previously blocked public access to the Xclaim’s submission.]
The Proper Sanction
Because the submission was a “clear violation” of the Xclaim’s PACER-filing rights, Judge Glenn said he could terminate the trader’s electronic filing rights. Xclaim argued against a sanction, saying that the filing was made in good faith and on the advice of counsel.
Raising the advice-of-counsel defense waives the attorney/client privilege, Judge Glenn said. The advice came in the form of 11 emails over five days. [Note: The attorneys advising the trader before the filing were not the same attorneys who appeared in response to the order to show cause.]
“Much of the advice,” Judge Glenn said, “was not legal advice” but was “more geared toward effective messaging.” The comments by the lawyer on the filing were “largely stylistic in nature,” he said. However, the email did include one element of legal advice that the claims trader did not adopt.
As the advice-of-counsel defense was not available, Judge Glenn grappled with the proper sanction.
On the one hand, Judge Glenn said that Xclaim did “not take seriously its obligations under” its limited PACER-filing rights. He also said that publicly displaying the email addresses “shows a complete lack of discretion and disregard for the safety of judges.”
On the other hand, Judge Glenn said that claims traders “provide important sources of liquidity” for creditors to sell their claims. Taking away the trader’s PACER privilege, he said, would require the trader to trek to court to make every filing physically.
Short of revoking electronic filing privileges, Judge Glenn struck the submission “in its entirety.” Over the next year, he also required Xclaim to accompany every filing with a certification by an attorney admitted in the district who must say that the filing comports with the trader’s PACER-filing rights and that the filing complies with “any other applicable statutes, rules, and guidelines, and . . . does not republish the [personally identifying information] of any individual other than as required in connection with the filing of a claims-transfer notice under Federal Bankruptcy Rule 3001(e).”
Comments from Xclaim
Matthew D. Sedigh, the chief executive of Xclaim, provided the following comments to ABI:
After learning that the court had restricted access to our filing, I immediately recognized and conceded our error of docketing items that exceeded the limitations of our ECF privileges.
Although the case was squarely focused on Xclaim’s business arrangements, Judge Glenn actively prevented us from participating in the proceedings.
I was confounded by the court’s position that it would be a sanctionable violation if the official email address of a public servant, which the government had previously disclosed, were republished on a docket. I found it extraordinary that any court would take a position so contrary to the idea of open government.
As a marketplace that serves millions of creditors, Xclaim takes the responsibility of protecting PII very seriously, so I was deeply troubled that a court would consider the act of republishing official, governmental email addresses that had previously been disclosed by the government itself as tantamount to a security risk that could reasonably lead to the murder of federal judges.
Judge Glenn’s position, if adopted by other courts, will hinder the filing of papers that routinely disclose contact information without the prior consent of a party.
Judge Glenn’s expansive definition of PII would make it a sanctionable act for parties to speak his name in open court without his consent.
Despite the court acknowledging that our filing directly addressed the truthfulness of statements made under oath by a party in the case, the court refused to allow the public to inspect the refuting evidence we submitted. Unfortunately, all but the one-sided characterization of our filing in the opinion will remain hidden.
In the end, I am pleased that the judge appropriately issued no sanctions for republishing the official email addresses of public servants.
A bankruptcy judge reprimanded Xclaim Inc., a trader in bankruptcy claims, for an unauthorized filing on PACER in a miscellaneous proceeding to decide whether the bankruptcy court in New York will impose sanctions on claims noticing agents for receiving unauthorized fees from Xclaim.
In his December 8 opinion, Chief Bankruptcy Judge Martin Glenn of New York struck Xclaim’s “procedurally defective filing made for an improper purpose by an entity that is not a ‘party in interest’ within the meaning of 11 U.S.C. § 1109(b).”
Judge Glenn also remonstrated Xclaim for including “the email addresses of [51] federal judges, senior Government officials, and court personnel” in the unauthorized court filing.