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Business Owner Disputes Whether Social Media Accounts Are Property Belonging to the Bankruptcy Estate

kropekk_pl [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayA Texas bankruptcy case, in which the former owner of a debtor business spent about seven weeks in jail for refusing to turn over passwords to several social media accounts, may have a substantial impact on the legal status of social media accounts as assets of a bankruptcy estate. The court ruled that several social media accounts belonged to the business, not the individual, and were therefore the property of the bankruptcy estate. In re CTLI, LLC, No. 14-33564, mem. opinion (Bankr. S.D. Tex., Apr. 3, 2015). The ruling could affect individual and family bankruptcies around the country, including in California, in which individuals use social media for any sort of business purpose. This seems especially true when one considers that social media is a very new phenomenon, and the law is always slow to catch up to new technologies.

The business owner (the “Owner”) operated a gun store and shooting range in the Houston, Texas area. He and his wife initially owned the entire business. He recruited an investor (the “Investor”) in 2011 to help purchase a larger facility in exchange for a 30 percent ownership stake. Problems developed among the three owners, according to the bankruptcy court. The Owner and his wife began proceedings for divorce in late 2012, and the Investor filed a state court action in November 2013 requesting a receivership.

The Owner filed a Chapter 11 bankruptcy petition for the business in June 2014, one day after a state judge ordered a receivership. The bankruptcy court allowed the Investor to propose a plan, and it approved his proposed plan in December 2014. The plan made the Investor the sole owner of the reorganized business and required the Owner to turn over passwords to accounts used for the business on Facebook, Twitter, and other social media platforms.

The Owner objected to turning over the passwords, but on April 3, 2015 the court ruled that the social media accounts fell within the Bankruptcy Code’s definition of “property of the estate.” 11 U.S.C. § 541. It rejected the Owner’s claim that the social media accounts were his personal property. The social media accounts in question, it held, primarily served to market the business, and all posts and updates were made under the name of the business, not the Owner.

The court held that the situation would be different if the accounts “related to the interest known as a persona.” CTLI, mem. op. at 10. A persona could be treated as property in many situations, but it might not be considered bankruptcy estate property because of “the 13th Amendment’s prohibition on involuntary servitude.” Id. at 10-11. California law might view personal social media accounts similarly, based on laws like the “password protection law,” Cal. Lab. Code § 980.

The Owner continued to refuse to turn over the social media passwords to the Investor, and on April 9 the court ordered him taken into custody by the U.S. Marshals Service. It denied his motion to reconsider and his request to stay the contempt order on April 21. It ordered him released from custody on May 27 after finding that he had complied with its order. The Owner had also filed an appeal in U.S. District Court on April 24.

Since 1997, Los Angeles bankruptcy attorney Devin Sawdayi has helped individuals and families find their way out of financial distress through the Chapter 7 and Chapter 13 bankruptcy processes. To schedule a free and confidential consultation with a knowledgeable, experienced, and compassionate financial advocate, contact us today online or at (310) 475-939.

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Photo credit: kropekk_pl [Public domain, CC0 1.0], via Pixabay.