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Understanding
Bankruptcy Privacy Issues: Are We In Compliance?
By Kevin Anderson,
President NDC
The
National Data Center ("NDC") has now been open since
April 2002. There are currently four subscribers accessing the
site on a regular basis, and the NDC is generating sufficient
revenue to pay current operating expenses. Negotiations are ongoing
to add new subscribers and to obtain data from other Chapter 13
software vendors. In short, the NDC is beginning to fulfill its
objective articulated four years ago:
It
is the mission of the NDC to furnish national Chapter 13 case
information
to parties-in-interest via a single, secured internet site while
protecting the
legitimate privacy interest of debtors.
Now
that the NDC is a reality, many trustees have asked, What are
the legitimate privacy interests of debtors regarding Chapter
13 case information made available to parties-in-interest over
the Internet?
The purpose
of this article is to help trustees more fully understand bankruptcy
privacy issues so they can better fulfill their statutory duty
to provide parties-in-interest with Chapter 13 case information
and how the NDC can help trustees comply with appropriate privacy
standards in bankruptcy.
WHY THE CONCERN ABOUT A DEBTOR'S PRIVACY? I THOUGHT A DEBTOR'S
BANKRUPTCY FILE WAS A PUBLIC RECORD AVAILABLE FOR REVIEW BY ANY
ENTITY?
This perception is correct
so far as it is limited to papers filed with the bankruptcy court.
Court files constitute a “public record” that may
be reviewed by any entity at the bankruptcy court. See 11 U.S.C.
§ 107. See also Nixon v. Warner Communications, Inc., 435
U.S. 589 (1978) (the public has a common law right to review judicial
records).
However, the
public’s right to review bankruptcy court files cannot be
interpreted so broadly as to permit the unrestricted resale, reuse
or republishing of all bankruptcy information. The reuse of bankruptcy
information must be subject to reasonable and appropriate limitations
that properly balance the public’s right to information
against a debtor’s right to privacy.
Furthermore,
creditors are often most interested in Chapter 13 payment and
disbursement records, which is information that is created and
maintained exclusively by the Chapter 13 trustees and is technically
not public information under 11 U.S.C. § 107 because it is
not filed with the court.
WHAT ARE THE CONCERNS ABOUT A DEBTOR'S PRIVACY?
In exchange for the substantial benefits of a discharge, debtors
are required to make full, complete and accurate disclosures of
their assets, debts, income, expenses, and prior financial transactions.
While such wholesale disclosure is essential to the administration
of the case and to maintaining the integrity of the bankruptcy
system, it also has the potential to reveal highly sensitive personal
information about the debtor.
For example,
by carefully reviewing a debtor’s statements and schedules,
one could ascertain whether the debtor is divorced, has illegitimate
children, is seeking psychiatric help, is incarcerated, is an
illegal alien, is paying a criminal fine, has a drinking or gambling
problem, is co-habitating, smokes, watches X-rated movies, owns
a gun, has political and/or religious affiliations, and even where
they buy their underwear (Victoria’s Secret or K-Mart)!
Such personal disclosures have the potential for substantial abuse
by aggressive lenders, unscrupulous marketers, or vindictive ex-spouses.
As stated by one website that is selling bankruptcy information:
“Our database is an excellent source for marketing leads
and consists of businesses and individuals that are in desperate
need of specialized services.”
Therefore,
while debtors have reduced expectations of privacy, that does
not mean they have waived all privacy protections - especially
as to persons who are not parties-in-interest to their bankruptcy
case.
WHY THE RECENT FOCUS ON DEBTOR PRIVACY?
Since court records have historically been available without restriction,
many wonder why the recent concerns about a debtor’s privacy
interests. This shift in policy is the result of a number of factors.
-
Increased Bankruptcy Fillings:
Bankruptcy fillings are at record levels, and as more persons
are affected by bankruptcy, the issue of a creditor’s
rights to information versus a debtor’s right to privacy
has moved to the forefront of bankruptcy policy issues.
- Computerized
Databases: Trustees now maintain Chapter 13 information
on computerized databases. Ten years ago, electronic databases
were limited to large organizations. However, the availability
and affordability of powerful computers and software has made
it possible for every trustee to maintain a sophisticated and
comprehensive database of Chapter 13 Information.
- The
Internet: The World Wide Web (www) has created an unquenchable
demand for information. Creditors who were once content with
obtaining bankruptcy information one case at a time from a trustee’s
28kps dial-in system are now demanding immediate access to national
bankruptcy information over the interent on a real time basis.
Furthermore, now that there are more than 200 trustees across
the country, creditors will no longer tolerate the burden of
accessing 200 different information systems using 200 different
logins to review their thousands of claims one case at a time.
The combined
effect of these factors is two fold. First, creditors are demanding
more efficient access to national bankruptcy information. Second,
these revolutionary changes in information technology have altered
the nature of a debtor’s privacy interests in bankruptcy
information. See United States Department of Justice v. Reporters
Committee for Freedom of the Press, 489 U.S. 749 (1989) (“Plainly
there is a vast difference between the public records that might
be found after a diligent search of courthouse files … and
a computerized summary located in a single clearinghouse of information.”)
Previously,
if the public wanted to review bankruptcy information, they had
to travel to the courthouse, request the file, and peruse it contents.
Therefore, while court records were available to the public, the
difficulty of actually reviewing the court file limited its accessibility.
This is known as the concept of “Practical Obscurity.”
However, with
the advent of computerized databases, the Internet, and the federal
court’s PACER system, all of these hurdles have now vanished,
and a debtor’s bankruptcy information has became “Super
Public,” meaning that anyone, anytime, and anywhere in the
entire world can access such information. Couple this development
with the epidemic of identity theft and marketing abuses, and
you have an ever-increasing awareness about the privacy implications
arising from personal disclosures made in bankruptcy papers.
Based on such
awareness, President Clinton directed in April 2000 that the Department
of Justice, the Department of the Treasury, and the Office of
Management and Budget (hereinafter the “Study Agencies”)
determine how to best address issues arising from the posting
of bankruptcy case information on the Internet. The President’s
directive contained the following comment about bankruptcy privacy:
Bankruptcy
records contain detailed sensitive information about debtors (including
account numbers, social security numbers, account balances, income
sources, and payment histories). In addition, aggregation and
electronic distribution of this information could lower bankruptcy
costs, but it also could make information easily available to
neighbors, employers, marketers and predators looking for those
most likely to be lured by scams.
WHAT
WAS THE RESULT OF PRESIDENT CLINTON’S STUDY OF FINANCIAL
PRIVACY AND BANKRUPTCY?
In January 2001, the Study Agencies published the Study of Financial
Privacy and Bankruptcy (hereinafter the “Privacy Study”).
Representatives from the NACTT actively participated in the Privacy
Study. A summary of the findings made in the Privacy Study is
set forth below:
1.
Balance Interests in Efficiency, Government Accountability and
Privacy. As technology broadens public access to bankruptcy
case information, there is a need to rethink privacy issues
in bankruptcy. The protection of personal privacy in bankruptcy
should be given increased emphasis through the adoption of a
national bankruptcy information policy that will appropriately
balance society’s interests in fair and efficient case
administration, maintaining the integrity of the system, ensuring
government accountability, and protecting debtors’ privacy.
2.
The General Public Should Have Access to Core Information.
The public should have access to basic case information to ensure
accountability of the bankruptcy system. At the same time, the
public should not have access to other bankruptcy information
that raises substantial privacy risks. Such information includes
Social Security numbers, financial accounts, dates of birth,
employer information, etc. Similarly, the bankruptcy statements
and schedules, showing personal spending habits, medical information,
family status, etc., should be removed from the public record.
Finally, special attention should be given to protecting information
regarding non-debtors such as spouses, children, relatives,
or business partners.
3.
Parties-In-Interest Should Continue to Have Access to Non-Public,
Highly Sensitive Data, Subject to Reuse and Redisclosure Limitations.
Parties in interest and potential parties in interest should
have access to a broad range of bankruptcy information so they
can effectively participate in the bankruptcy case. However,
parties-in-interest should be prohibited from reusing or re-publishing
such information for purposes other than asserting or collecting
a claim in a bankruptcy case.
4.
Incorporate Fair Information Principles. The bankruptcy
system should incorporate the Fair Information Principles of
Notice, Consent, Access, Security, Use Limitations And Accountability
(see below).
WHAT ARE THE FAIR INFORMATION PRINCIPLES?
The privacy study recommends that the Fair Information Principles
be applied to the disclosure of bankruptcy information. These
principles are intended to ensure that a debtor’s case information
is only used for legitimate purposes reasonably related to the
administration of the bankruptcy case. The Fair Information Principles,
in regards to Chapter 13 case information, can be summarized as
follows:
1.
Notice to Debtors: Debtors should be informed in writing
that trustees will make Chapter 13 case information available
to parties-in-interest through various means, including the
Internet, and how debtors can access and review their Chapter
13 case information.
2. Debtor Access: For purposes of verifying
its accuracy, debtors are entitled to review their Chapter 13
information that is made available to creditors. Debtors are
also entitled to have erroneous information expeditiously corrected
or removed by the trustee.
3. Security: Trustees should employ adequate
security standards to ensure that creditors only have access
to bankruptcy cases in which they are a party-in-interest.
4. Access and Use Limitations: A trustee’s
Chapter 13 case information can only be accessed and used by
a party-in-interest to legally assert or collect a claim against
a bankruptcy estate.
5. Accountability: Any access or use of bankruptcy
information that is inconsistent with these principles is improper
and should subject the violator to civil and/or criminal prosecution
by the debtor, state or federal agencies, or other appropriate
entities.
DO THE FAIR INFORMATION PRINCIPLES
APPLY TO CHAPTER 13 TRUSTEES?
In a word, yes. In connection with their administrative responsibilities,
trustees collect and store, on computerized databases, Chapter
13 case information that is significantly more extensive than
that found in the bankruptcy court file. As fiduciaries, trustees
hold such data as custodians for the benefit of all parties to
the bankruptcy system including the court, creditors, debtors,
and the U.S. Trustee.
While the
Chapter 13 trustee has a statutory duty to make information regarding
the estate and the estate’s administration available to
parties-in-interest who request such information, the trustee
also has a fiduciary responsibility to take reasonable steps to
ensure that a debtor’s bankruptcy information is not misused.
How then can a trustee strike an appropriate balance between making
bankruptcy information available to creditors while at the same
time protecting a debtor’s privacy? The answer is by complying
with the Fair Information Principles set forth above.
IS THERE A PROBLEM IF THE CHAPTER 13 SOFTWARE VENDORS SELL CHAPTER
13 CASE INFORMATION TO CREDITORS?
For the same reasons that it is ethically and legally wrong for
a trustee to profit from Chapter 13 data, so is it ethically and
legally problematic for Chapter 13 software vendors (the “Vendors”)
to sell such data.
Based on the
unique nature of their business relationship, Vendors hold Chapter
13 data in a derivative-fiduciary relationship with the Chapter
13 trustees. It is undeniably improper for trustees to use their
position or property of the estate, which includes Chapter 13
data, to realize income in excess of their allowed statutory compensation.
The legal and ethical issues that arise if a trustee sold Chapter
13 information were summarized in the Privacy Study:
The FTC suggested
that the commercial use of highly personal and sensitive [bankruptcy]
data should be prohibited for several reasons. First, such disclosure
may facilitate identity theft or other illegal conduct. Second,
trustees receive sensitive private information as a result of
governmental action, and the use of non-public information for
commercial purposes appears to be outside the scope of their responsibilities.
Third, the commercial use of debtor information conflicts with
the trustees’ fiduciary duties and responsibilities, and
the Department of Justice’s policy prohibiting trustees
from using estate funds for their personal benefit. Finally, the
commercial sale of debtor information may implicate concerns under
the Fair Credit Reporting Act (FCRA).
Consequently,
Vendors should be subject to the same limitations as trustees
regarding the use and selling of Chapter 13 data. Vendors only
have access to Chapter 13 data by virtue of their unique business
relationship with the trustees. Vendors are not “parties-in-interest”
in that they do not have a claim against the estate. Indeed, absent
their role as a software provider to the trustees, Vendors would
have no right to access, review or store the Chapter 13 data collected
by trustees. Consequently, Vendors should be subject to the same
use-limitations regarding bankruptcy data as trustees, and just
as trustees are not be allowed to “profit” from the
bankruptcy data acquired in connection with their fiduciary responsibilities,
Vendors should not be allowed to derive additional profit by virtue
of their unique association with the Chapter 13 trustees.
WHAT ABOUT OTHER ENTITIES SELLING
CHAPTER 13 CASE INFORMATION TO CREDITORS?
The operation of a regional or national Chapter 13 database by
any “for-profit” entity would create similar problems.
An entity with a profit motive does not have the same incentive
to limit a subscriber’s access or use of Chapter 13 data
or to enforce such limitations because they inherently reduce
the value of the data, which reduces the price that a vendor can
charge. As noted by the REPORT ON PRIVACY AND PUBLIC ACCESS
TO ELECTRONIC CASE FILES, prepared by the Judicial Conference
Committee on Court Administration, it would be undesirable to
encourage a “cottage industry” of data re-sellers
who would create their own web site “thus profiting from
the sale of public information and undermining restrictions intended
to protect privacy.” (Report at Page 7, emphasis added).
DOES THE NDC COMPLY WITH THE FAIR INFORMATION PRINCIPLES?
The NDC was designed from the ground up to comply with the Fair
Information Principles. The NDC spent significant time and expense
to ensure that subscribers can only view cases in which they are
a party-in-interest. The NDC also limits subscribers to basic
case information such as case status, debtor receipts, and creditor
disbursements. The NDC has strict contractual controls that limit
a subscriber from using Chapter 13 data for any purpose other
than asserting or collecting a claim in a bankruptcy case. Finally,
the NDC contracts contain substantial penalties for a violation
of the reuse restrictions including monetary damages and the reporting
of such violations to an appropriate governmental agency such
as the U.S. Trustee and/or the Federal Trade Commission. Trustees
who provide their data to the NDC can do so with confidence that
it is being handled in a manner consistent with the Fair Information
Principles.
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