by Hillary Brouillette, Senior Associate

Introduction

“If you tell the truth you won’t have to remember anything”[1]—except the Sarbanes-Oxley and Dodd-Frank Acts, that is. For people who work in the financial industry, telling the truth about securities law violations within their workplace is not as clear-cut as Mr. Twain suggested. Specifically, to whom one should and must report violations of federal or state law in order to avoid resulting unemployment is much more complicated and less intuitive than remembering the truth.

I. Confusion for Whistleblowers under Sarbanes Oxley and Dodd-Frank

The Sarbanes-Oxley Act (“SOX”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) provide incentives and protections for whistleblowers who report violations of federal securities laws.[2] But until the United States Supreme Court weighed in just last month, federal courts of appeals were split on the issue of to whom a worker had to blow his whistle—his boss, the Securities Exchange Commission (“SEC”), or both.[3] In Digital Realty Trust, Inc. v. Somers, the Supreme Court unanimously agreed that Dodd-Frank only protects employees who externally report information relating to securities law, including SOX, violations to the SEC.[4] Meanwhile, internal reports of the same violations may be protected by SOX, which is referenced as protected whistleblower conduct under Dodd-Frank.[5]

II. Background of Whistleblower Provisions under SOX and Dodd-Frank

Congress enacted SOX in 2002, largely in response to the collapse of Enron, with the goal of restoring public trust in financial markets.[6] Six years later, the financial crisis of 2008 invited Congress to impose more regulations that would increase accountability and transparency to ensure financial stability.[7] The Security Exchange Act of 1934 was amended by Dodd-Frank in 2010.[8] Recognizing that “whistleblowers often face the difficult choice between telling the truth and . . . committing ‘career suicide,’”[9] Congress included in Dodd-Frank “a new, robust whistleblower program designed to motivate people who know of securities law violations to tell the SEC.”[10] Congress also added an award program for whistleblowers who voluntarily give information to the SEC that leads to monetary sanctions against violators of securities law.[11]

The anti-retaliation protections for whistleblowers in each act are vital to the larger regulatory goals of detection and punishment of corporate misconduct and increased consumer protection. SOX protects corporate employees who provide information or assistance either to a federal regulatory or law enforcement agency, Congress, or any person with supervisory authority over the employee from discharge or employment discrimination for reporting information the employee reasonably believes is a violation of criminal fraud statutes, any SEC rule or regulation, or any federal law relating to fraud against shareholders.[12] The qualifications for whistleblower protection under Dodd-Frank are similar but not synonymous, although both acts often protect the same individuals for reporting misconduct. The exact variations and effects of which were at issue before the Supreme Court in Digital Realty Trust.[13]

III. The Confusion Behind Dodd-Frank’s Whistleblower Standards

Dodd-Frank universally defines a “whistleblower” as “any individual who provides . . . information relating to a violation of securities law to the Commission, in a manner established, by rule or regulation, by the Commission.”[14] The anti-retaliation provisions prohibit an employer from discharging, harassing, or discriminating against a whistleblower “because of any lawful act done by the whistleblower” in three circumstances.[15] First, “in providing information to the Commission in accordance with this section.”[16] Second, “in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information.”[17] And third, “in making disclosure that are required or protected under” SOX, the Securities Exchange Act of 1934, the criminal anti-retaliation prohibition at 18 U.S.C. § 1513(e), or “any other law, rule, or regulation subject to the jurisdiction of the Commission.”[18] The cross reference to SOX within the third category of qualifying conduct obviously led to confusion about how, and specifically to whom, an employee must report securities law violations in order to avoid discrimination.[19]

By cross referencing laws outside of Dodd-Frank, including SOX, this third category of behavior protects disclosures to agencies and individuals other than the SEC.[20] But internal disclosure directly conflicts with the definitional requirement of whistleblowers under the same section of Dodd-Frank. The confusion about whether an employee must make external reports to the SEC before his termination or discrimination was only furthered by the rules and regulations for the implementation of Dodd-Frank. Contrary to the text of Dodd-Frank, the SEC defined “whistleblower” differently for the award program and anti-retaliation protections of Dodd-Frank.[21] Under Rule 21F-2, an individual who “provide[s] the Commission with information . . . relat[ing] to a possible violation of the Federal securities laws” is a whistleblower for purposes of Dodd-Frank’s award program.[22] In a second definition, Rule 21F-2 defines whistleblower for anti-retaliation purposes as a person who “possess[es] a reasonable belief that the information you are providing relates to a possible securities law violation . . . and [y]ou provide that information in a manner described in” the three categories of conduct above.[23] This second definition expressly applies whether or not the person qualifies as a whistleblower under the award program.[24] Rule 21F-2 in conjunction with the statutory cross reference to internal reports independently protected by SOX means, according to the SEC, that an individual could get anti-retaliation protections as a whistleblower without reporting violations to the SEC.[25]

IV. The Supremes Provide a Narrow Definition for Whistleblowers under Dodd-Frank

Which definition and conduct qualified whistleblowers for Dodd-Frank protection was up in the air until the Supreme Court weighed in during February. In Digital Realty Trust, Inc. v. Somers,[26] the Court held that an employee must provide information to the SEC before his termination to be entitled to the anti-retaliation and award provisions of Dodd-Frank.[27] Digital Realty Trust terminated Paul Somers after he reported the company’s elimination of internal controls, a SOX violation, to Digital Realty’s senior management.[28] Because Somers did not seek the requisite administrative remedy within 180 days as required by SOX, his only chance at recovery for his allegedly retaliatory discharge was Dodd-Frank, which allows a whistleblower to initially file a complaint in federal court within a more lenient six-year limitation.[29] Unfortunately, Somers’s anti-retaliation claim under Dodd-Frank failed in a crucial way—he was not a whistleblower according to the language of the statute itself.

Even though Somers’s conduct—reporting SOX violations internally to his supervisor—is protected under both acts, Dodd-Frank only protects internal reporting by those who report “to the Commission” before their employers retaliate.[30] The Court rejected pressure to give deference to the SEC’s definitions in Rule 21F-2, unlike courts below, because “Congress has directly spoken to the precise question at issue.”[31] Similarly, the Court rejected arguments that shrinking the protection of Dodd-Frank from previous application and ordinary meaning to require external reporting to the SEC would lead to absurdity.[32] Quite simply, the Court pointed to the explicit definitions within Dodd-Frank for the answer and rejected a purposive approach that had previously allowed courts to reach more fair results.[33]

Conclusion: The Murky State of Whistleblower Protections

Now it is clear that an employee who only reports a securities law violation to an internal supervisor and is subsequently terminated or demoted is not a Dodd-Frank whistleblower, although he may be protected by SOX.[34] Under Dodd-Frank, a whistleblower must report suspected securities law violations to the SEC. Internal reporting, although not precluded, is not sufficient. The differences between the qualifications may not make much difference if whistleblowers act fast, but that requires enough of an understanding of these laws to comfort an employee in his decision to report misconduct to anyone at all. And the type of reporting may weigh heavily on the remedies available to whistleblowers.

Although both acts protect employees who report corporate misconduct, fraud, or violations of SEC rules or regulations from employer retaliation, they do not provide identical remedies or avenues of recovery for whistleblower claims.[35] Terminated whistleblowers may be entitled to “all relief necessary to make the employee whole,” including back pay with interest, reinstatement, and special damages resulting from discrimination and accompanying litigation costs under SOX, but must exhaust administrative remedies before heading to federal court.[36] A complaint must be filed with the Secretary of Labor within 180 days of the termination.[37] But an aggrieved employee may be able to avoid the 180-day deadline to file a complaint with the Secretary of Labor and immediately file a complaint for retaliatory discrimination in federal court if he is also protected from retaliation by Dodd-Frank.[38]

Where this leaves an employee under state law is less clear. For example, Louisiana’s “whistleblower” statute only protects an employee who advises his employer of a violation of state law in good faith.[39] Because violations of state Blue Sky laws are likely to also violate federal securities laws, whistleblowers may have claims under SOX, Dodd-Frank, and state whistleblower protections. Taking advantage of this opportunity requires an in-depth understanding of the qualifications of each statute and quick maneuvering. An employee needs to blow his whistle both internally and externally all before any employer discrimination, or risk the ultimate price for paying the truth—“career suicide.”[40]

[1] Thomas DeMichele, If You Tell the Truth, You Don’t Have to Remember Anything, Fact/Myth (Aug. 22, 2016), http://factmyth.com/factoids/if-you-tell-the-truth-you-dont-have-to-remember-anything/ (While this quote is widely attributed to Mark Twain, it is questionable whether he coined it. If the Twain connection is a myth, then the debate over its attribution to Twain proves the words of the quote) [https://perma.cc/A7M4-G6LE].

[2] 18 U.S.C. § 1514A (2018); 15 U.S.C. § 78u-6.

[3] See, e.g.,Asadi v. G.E. Energy (USA), 720 F.3d 620 (2013); Berman v. Neo@Ogilvy, L.L.C., 801 F.3d 145 (2015); Somers v. Digital Realty Trust Inc., 850 F.3d 1045 (2017).

[4] Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018).

[5] See 15 U.S.C. § 78u-6(h)(1)(A)(iii); 18 U.S.C. § 1514A(a)(1)(A)-(C).

[6] See Brooke Masters, Enron’s fall raised the bar in regulation, Fin. Times, Dec. 1, 2011,https://www.ft.com/content/9790ea78-1aa9-11e1-ae14-00144feabdc0 [https://perma.cc/PVY7-VSAL].

[7] 124 Stat. 1376.

[8] Digital Realty Trust, 138 S. Ct. at 773 (citing Lawson v. FMR L.L.C., 571 U.S. 429, ___ (2014)).

[9] Id. at 773–74 (quoting S. Rep. No.111-176, 111-112 (2010)).

[10] S. Rep. No. 111-179, p. 38 (2010).

[11] 15 U.S.C. § 78u-6(b)(1) (2018).

[12] 18 U.S.C. § 1514A(a)(1)(A)-(C).

[13] Digital Realty Trust, 138 S. Ct. 767.

[14] 15 U.S.C. § 78u-6(a)(6) (emphasis added); Digital Realty Trust, 138 S. Ct. 767.

[15] 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii).

[16] 15 U.S.C. § 78u-6(h)(1)(A)(i).

[17] 15 U.S.C. § 78u-6(h)(1)(A)(ii).

[18] 15 U.S.C. § 78u-6(h)(1)(A)(iii).

[19] Id.; see, e.g., Asadi v. G.E. Energy (USA), 720 F.3d 620, 624 n.6 (2013) (citing to Kramer v. Trans-Lux Corp., 2012 WL 4444820 (D. Conn. Sept. 25, 2012)); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 994 n.9 (M.D. Tenn. 2012); Egan v. TradingScreen, Inc., 2011 WL 1672066, at *4–5 (S.D.N.Y. May 4, 2011).

[20] 18 U.S.C. § 1514A; 15 U.S.C. § 78u-6.

[21] 75 Fed. Reg. 70488 (2010); 15 U.S.C. § 78u-6(j).

[22] 17 C.F.R. § 240.21F-2(a)(1) (2018).

[23] 17 C.F.R. § 240.21F-2(b)(1)(i)-(ii) (2018); 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii).

[24] 17 C.F.R. § 240.21F-2(b)(1)(iii).

[25] Compare17 C.F.R. § 240.21F-2(a)(1), with 17 C.F.R. § 240.21F-2(b)(1)(iii) . See also 80 Fed. Reg. 47829 (2015) (SEC reiterated that a providing information to the SEC is not a condition precedent to anti-retaliation protection of a whistleblower).

[26] Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018).

[27] Id.

[28] Id.

[29] Id.

[30] 15 U.S.C. § 78u-6(a)(6) (2018); 15 U.S.C. § 78u-6(h)(1)(A)(iii) (2018).

[31] Digital Realty Trust, 138 S. Ct. at 781–82 (quoting Chevron USA v. Natural Res. Def. Council, 467 U.S. 837, 842 (1984)).

[32] Id.at 767–77.

[33] Id.(citing Burgess v. United States, 553 U.S. 124 (2008) for the interpretive rule that a statute’s explicit definition must be followed regardless of any variations from ordinary meaning).

[34] Id.

[35] 18 U.S.C. § 1514A (2018); 15 U.S.C. § 78u-6.

[36] 18 U.S.C. §§ 1514A(b)(1), (c).

[37] 18 U.S.C. § 1514A(b)(2)(D).

[38] Id.

[39] La. Rev. Stat. § 23:967 (2018).

[40] Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 774 (2018) (quoting S. Rep. No.111-176, 111-112 (2010)).

by Charles H. Martin, Senior Associate

Introduction

After nearly four years, Energy Future Holdings Corp. (“EFH”) is poised to finally exit bankruptcy.[1] EFH is a Dallas-based energy company that provides electric power generation, transmission, and distribution services in Texas.[2] According to its bankruptcy filing, EFH is the largest electric energy provider in Texas.[3] It, along with 70 of its subsidiaries, filed for Chapter 11 protection under the United States Bankruptcy Code in the Bankruptcy Court for the District of Delaware on April 29, 2014, to restructure nearly $49 billion in debt.[4]

Events Leading Up to the Bankruptcy Filing

Much of EFH’s debt resulted from the leveraged buyout (“LBO”) of its predecessor company, TXU Corp. (“TXU”), which was the largest in history at the time.[5] TXU was one of the most profitable utilities in the country prior to the merger.[6] Investors, principally KKR and Texas Pacific Group, invested $8 billion in equity and obtained commitments for another $37.35 billion in financing—not all of which was expected to be drawn or used at closing—to purchase TXU.[7] Investors purchased TXU using a reverse triangular merger, whereby an acquisition subsidiary created and owned by Texas Energy Future Holding LP merged with and into TXU, the surviving company.[8] TXU then changed its name to Energy Future Holdings Corp. and began transitioning the company into several indirect subsidiaries, including Texas Competitive Energy Holdings (“TCEH”)—which owns Luminant and TXU—and Oncor Electric Delivery Holdings Company LLC.[9] The LBO resulted in $31.5 billion new debt issued; it left EFH with approximately $41.3 billion in outstanding debt, with approximately $28.8 billion at the TCEH level.[10] EFH remained profitable after the acquisition, but decreasing natural gas prices decreased profitability and ultimately caused the company to file for bankruptcy protection.[11]

Plan of Reorganization

In a typical Chapter 11 reorganization, the debtor reorganizes its debt by extending the payment due date and reducing the total amount paid.[12] Larger reorganizations may, for example, also involve the sale of large assets with the sale proceeds going to creditors.[13] The debtor will file a plan of reorganization with the court[14] and some creditors, depending on whether or not the creditor’s claim is impaired or unimpaired,[15] will have the opportunity to vote to accept or reject the plan.[16] Once the plan has been accepted, the bankruptcy judge will confirm the plan.[17] Then, the debtor will execute the plan and exit bankruptcy.[18] The effect of confirmation, among other things, is to discharge the debtor of all debt incurred prior to confirmation of the plan.[19]

The bankruptcy judge confirmed EFH’s plan on February 27, 2018.[20] The final restructuring plan consists of two main phases, both of which are outlined below.

The First Phase: Discharging $33.8 Billion in Debt and Rising from the Ashes

The first phase of the restructuring occurred in August 2016.[21] EFH spun off its largest indirect subsidiary, TCEH, into a separate company.[22] The first lien debt, comprising approximately $24.38 billion in secured debt,[23] was converted into equity with the first lien debt holders receiving 427.5 million shares of TCEH common stock.[24] Through this transaction, which was tax free,[25] TCEH discharged approximately $33.8 billion in debt.[26] TCEH eventually renamed itself Vistra Energy.[27]

The Second Phase: Selling off to Sempra

The second phase of the restructuring entails the acquisition by Sempra Energy of EFH and its 80% stake in Oncor Energy Holding Company LLC for $9.45 billion in cash, plus debt assumed, for a total enterprise value of $18.8 billion.[28] The deal was subject to regulatory approval by the Texas Public Utility Commission (“TPUC”).[29] Sempra is the fifth suitor of EFH and its indirect subsidiary Oncor.[30] First, Hunt Consolidated (“Hunt”) proposed to acquire EFH in 2016 for $18 billion.[31] Hunt was unable to secure the necessary regulatory approval and the deal fell apart.[32] Second, NextEra Energy proposed to buy EFH for $18 billion, but this deal also fell apart.[33] Third, Berkshire Hathaway Energy (“BHE”) proposed to purchase EFH for $9 billion in cash.[34] After BHE made its bid, Elliot Management began raising capital to outbid BHE by $300 million for a total bid of $9.3 billion, marking the fourth bid.[35] Both bids, however, were unsuccessful and paved the way for Sempra’s bid of $9.45 billion in cash and $9.3 billion in debt assumed, which was similar to the BHE proposal.[36] The TPUC approved the Sempra deal at a March 2018 meeting.[37]

Conclusion

After completion of the second phase of its plan, EFH is poised to successfully restructure its balance sheet and exit bankruptcy. With the sale to Sempra, the company that entered bankruptcy effectively no longer exists.[38] Former creditors now own Vistra Energy, renamed from TCEH when it was EFH’s largest indirect subsidiary, and Sempra now owns Oncor and what remained of the debtor after the Vistra Energy spinoff. Through the spinoff and assumption of debt as part of the Sempra deal, approximately $43.1 debt was unloaded from EFH’s balance sheet.[39] The remaining cash from the Sempra deal will be sufficient to pay other creditors and the administrative expenses under the plan, including at least $600 million in legal and other professional fees.[40]

[1]See Order Confirming the First Amended Joint Plan of Reorganization of Energy Future Holdings Corp., Energy Future Intermediate Holding Co., LLC, and the EFH/EFIH Debtors Pursuant to Chapter 11 of the Bankr. Code, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).

[2]Public Utility Commission of Texas, EFH Bankruptcy FAQs pt. 1, at 1, https://www.puc.texas.gov/agency/topic_files/Energy_Future_Holdings_Bankruptcy_FAQs.pdf [https://perma.cc/KZ2M-NTEZ].

[3]Voluntary Petition at 6, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).

[4]Id.

[5]Peter Lattman, A Record Buyout Turns Sour for Investors, N.Y. Times, Feb. 22, 2012, https://dealbook.nytimes.com/2012/02/28/a-record-buyout-turns-sour-for-investors/ [https://perma.cc/JU59-XAZA]. A leveraged buyout is an acquisition of a company using borrowed money that is later secured with the assets of the company being acquired. Leveraged Buyout (LBO), Investing Answers, http://www.investinganswers.com/financial-dictionary/businesses-corporations/leveraged-buyout-lbo-961 (last visited March 9, 2018) [https://perma.cc/PDG5-RU7D]. In a typical LBO, the debt-to-equity ratio is 10% to 90%. Id. In some case, the acquiring company will secure financing through banks and private equity firms, and in other instances the acquiring company will secure financing through issuing bonds. Id. Because of the high debt to equity ratio, the bonds are not investment grade and are instead classified as junk bonds. Id.

[6]Lattman, supranote 6; Order Confirming the First Amended Joint Plan, supranote 2, at 53.

[7]TXU Corp., Definitive Proxy Statement at 8 (Form DEF 14A) (July 25, 2007).

[8]Id.

[9]Press Release, KKR, TXU Corp. Announces Completion of Acquisition by Investors Led by KKR and TPG (Oct. 10, 2007), http://media.kkr.com/media/media_releasedetail.cfm?releaseid=332996 [https://perma.cc/U7M6-3KYX]; Energy Future Holdings Corp., Annual Report, Exhibit 21(a), Subsidiaries of Energy Future Holdings Corp. (Form 10-K) (March 1, 2016), https://www.sec.gov/Archives/edgar/data/1023291/000102329116000017/efh-12312015x10k.htm [https://perma.cc/BP49-698K].

[10]Order Confirming the First Amended Joint Plan, supranote 2, at 44.

[11]Id. at 52. In 2015, natural gas-fueled generation accounted for approximately 53% of electricity generation capacity in Texas. Id. at 49. Accordingly, the price of electricity is tied to the cost of natural gas. Id. at 50. Between 2005 and 2008, natural gas prices were steadily increasing, thus the price of electricity was increasing, which increased the profitability of EFH and its subsidiaries. Seeid. at 51. But following improvement in fracking technology, natural gas prices started to decline until dropping to as low as $2.04 per MMBtu in May 2012. Id. at 52. The decrease in natural gas prices resulted in a decreased profitability of EFH and its subsidiaries. Id. at 52.

[12]Elizabeth Warren, et al., The Law of Creditors and Debtors 359 (7th ed. 2014).

[13]Id. at 360.

[14]11 U.S.C. § 1121(a).

[15]Seeid. at § 1124 (explaining that generally a claim is unimpaired when the plan “leaves unaltered the legal, equitable, and contractual rights” of the claimholder). If a claim is unimpaired, the claimholder is conclusively presumed to accept the plan. Id. at § 1124(f).

[16]Id. at § 1126.

[17]Id. at § 1129.

[18]Id. at § 350(a).

[19]Id. at §1141(d). In contrast, a Chapter 7 debtor who files a voluntary petition is discharged of all debt incurred prior to the filing, i.e. pre-petition debt. Seeid. at § 727(b) (“[D]ischarge under . . . this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter . . . .”); § 301(b) (“The commencement of a voluntary case under a chapter of this title constitutes an order for relief under such chapter.”).

[20]Order Confirming the First Amended Joint Plan, supranote 2, at 1.

[21]Matt Chiappardi, EFH Gets Green Light for First Phase of Ch. 11 Exit, Law360, Aug. 26, 2016, https://www.law360.com/articles/833135/efh-gets-green-light-for-first-phase-of-ch-11-exit [https://perma.cc/82BM-KPCA]; Order Confirming the Third Amended Joint Plan of Reorganization of Energy Future Holdings Corp., et. al., Pursuant to Chapter 11 of the Bankr. Code as it Applies to the TCEH Debtors and EFH Shares Services Debtors at 1, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).

[22]Third Amended Joint Plan of Reorganization of Energy Future Holdings Corp., et. al., Pursuant to Chapter 11 of the Bankr. Code at 70, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).

[23]Disclosure Statement for the First Amended Joint Plan of Reorganization of Energy Future Holdings Corp., et. al., Pursuant to Chapter 11 of the Bankr. Code at 33, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014). The first lien debt can be further broken down into the following: a $22.635 billion credit facility; $1.75 billion first lien notes; and $1.235 billion in commodity hedges and interest rate swaps. Id. at 33.

[24]Press Release, Texas Competitive Energy Holding Corp., TCEH Corp., Parent Company for Luminant and TXU Energy, Emerges from Chapter 11 as a Competitive, Well-Capitalized Company (Oct. 4, 2016), https://www.prnewswire.com/news-releases/tceh-corp-parent-company-for-luminant-and-txu-energy-emerges-from-chapter-11-as-a-competitive-well-capitalized-company-300338561.html [https://perma.cc/P665-R7YZ].

[25]Vistra Energy Corp., Annual Report at 48 (Form 10-K) (period ending Dec. 31, 2016), https://s21.q4cdn.com/410616722/files/doc_financials/annual/Vistra_2016-Annual-Report-Final.pdf [https://perma.cc/A63N-BV25].

[26]Id. at 49.

[27]History, Vistra Energy, https://www.vistraenergy.com/history/ (last visited March 8, 2018) [https://perma.cc/H65C-Q2HQ].

[28]Press Release, Sempra Energy, Sempra Energy Announces Agreement To Acquire Ownership Interest In Oncor (Aug. 21, 2017) https://www.prnewswire.com/news-releases/sempra-energy-announces-agreement-to-acquire-ownership-interest-in-oncor-300506912.html [https://perma.cc/RGU2-8L8G]; Disclosure Statement for the Joint Plan of Reorganization,supranote 16, at 12–14.

[29]See Order Confirming the First Amended Joint Plan, supranote 2, at 86.

[30]Jeff Mosier, Fifth time’s the charm? Sempra reveals details on its plan to win Texas electricity giant Oncor, The Dallas Morning News, Aug. 25, 2017, https://www.dallasnews.com/business/oncor/2017/08/25/fifth-times-charm-sempra-lays-plans-win-texas-electricity-giant-oncor [https://perma.cc/BZ4T-W9TU].

[31]Press Release, Hunt Consolidated, Inc., Hunt Consolidated, Inc. Consortium Selected by Energy Future Holdings As Plan For Bankruptcy Solution (Aug. 10, 2015) https://www.prnewswire.com/news-releases/hunt-consolidated-inc-consortium-selected-by-energy-future-holdings-as-plan-for-bankruptcy-solution-300125944.html [https://perma.cc/EY34-TDA3]. As part of the deal, Hunt proposed to split Oncor into two companies, with the first company owning the assets and the second company leasing the assets from the first company. Mark A. Davidson, Texas Oncor Buyout Approved – With Reservations, The National Law Review, March 24, 2016, https://www.natlawreview.com/article/texas-oncur-buyout-approved-reservations [https://perma.cc/Z555-FHVP]. The company owning the assets would be structured as a real estate investment trust (“REIT”). Id. Under a REIT structure, 90% of the REIT’s income must be paid to shareholders through dividends, and taxation of the REIT is passed through to shareholders. Id. This would result in an estimated $250 million in tax savings. Id.

[32]Id.

[33]See Vince Sullivan, EFH Says It’s Nearing Resolution of NextEra’s Plan Objection, Law360, Feb. 23, 2018, https://www.law360.com/articles/1015521/efh-says-it-s-nearing-resolution-of-nextera-s-plan-objection [https://perma.cc/EA2T-LTG3]. The merger agreement between NextEra and EFH provided for a $275 million termination fee. Id. After the deal fell apart, NextEra filed a claim against EFH for this fee. Id. The bankruptcy judge disallowed the claim, and NextEra appealed. Id. To resolve the issue, which was necessary for confirmation of the bankruptcy plan, EFH placed $275 million in a reserve fund pending resolution at the appellate level. Id.

[34]Michael J. De La Merced, Berkshire Hathaway Makes a $9 Billion Bid for Energy Future Holdings, N.Y. Times (July 7, 2017), https://www.nytimes.com/2017/07/07/business/dealbook/warren-buffett-energy-future-oncor.html [https://perma.cc/U964-E38Z].

[35]Jessica DiNapoli & David French, Elliott lawyer says third bidder may top Buffet’s Oncor bid, Reuters (Aug. 18, 2017), https://www.reuters.com/article/us-oncor-m-a/elliott-lawyer-says-third-bidder-may-top-buffetts-oncor-bid-idUSKCN1AY28Y [https://perma.cc/97JB-PS6F].

[36]Another Flop Means Warren Buffett Isn’t Having His Best Year, Fortune (Aug. 21, 2017), http://fortune.com/2017/08/21/warren-buffett-oncor-deal/ [https://perma.cc/PB8F-N3QA]; Scott Deveau, Noah Buhayar, & Matthew Monks, Oncor Is Buffett’s Latest Dealmaking Flop, Bloomberg (Aug. 21, 2017), https://www.bloomberg.com/news/articles/2017-08-21/berkshire-s-flop-on-oncor-adds-to-buffett-s-dealmaking-woes[https://perma.cc/R6X3-V63V]; Mark Curriden, A three-minute call and two multi-billion-dollar wire transfers: The end of Energy Future Holdings, The Texas Lawbook (March 14, 2018), https://www.bizjournals.com/dallas/news/2018/03/14/a-three-minute-call-and-two-multi-billion-dollar.html[https://perma.cc/KN4G-8QLS].

[37]Cara Salvatore, Regulators OK $9.5B Oncor Sale, Capping EFH Bankruptcy, Law360 (March 8, 2018), https://www.law360.com/articles/1020153/regulators-ok-9-5b-oncor-sale-capping-efh-bankruptcy [https://perma.cc/82C4-LQFX].

[38]Mark Curriden, A three-minute call and two multi-billion-dollar wire transfers: The end of Energy Future Holdings, The Texas Lawbook(March 14, 2018), https://www.bizjournals.com/dallas/news/2018/03/14/a-three-minute-call-and-two-multi-billion-dollar.html (“At 9:34 a.m., the sale of Oncor to Sempra was complete. At that same minute, Dallas-based Energy Future Holdings, which only two years ago was the largest power company in Texas with 8,900 employees, ceased to exist.”) [https://perma.cc/6L5F-CXGE].

[39]This calculation was reached by adding the $33.8 billion in debt that was discharged through the Vistra Energy spinoff to the $9.3 billion in debt that was assumed under the Sempra deal. Both aspects of the reorganization were discussed previously.

[40]Mark Curriden, Energy company’s bankruptcy generating Enron-sized legal fees, The Texas Lawbook, March 29, 2018, https://www.chron.com/business/energy/article/Energy-company-s-bankruptcy-generating-12789018.php [https://perma.cc/S235-WFAH]. EFH’s general counsel speculated that professional fees will hit $1 billion, making this bankruptcy one of the most expensive in history. Id.

by Bryan Kidzus, Senior Associate

Article III, Section 1 of the United States Constitution grants life tenure to all federal judges in courts established under Article III. The text reads, “The Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behaviour . . . .”[1] One of the driving factors to grant federal judges life tenure is the premise that a judiciary in a free and functioning democracy must be independent of any other branch of government.[2] The independence of a judiciary serves two functions, the first to create a check on the other two branches; the second to remove judges from the political process in order to ensure “a steady, upright, and impartial administration of the laws.”[3]  Alexander Hamilton and the majority of the framers of the Constitution believed the best way to ensure the independence of the judiciary was to install judges for a term of “good behavior.”[4] For the past 225 years federal judges have enjoyed what commentators have described as the best job security in the country.[5] The decision to appoint judges to a life tenure conditioned on good behavior is not without its opponents.[6]

Commentators have also called for a dramatic change to this seeming permanence for a variety of reasons, including the increase in life expectancy in the United States since the country’s founding, the inherent issues associated with age-related mental decline, such as senility, and the recognition that no other democracy grants life tenure to judges[7].

The grant of life tenure for federal judges was met with resistance.[8] In fact, Anti-Federalists felt that the granting of life tenure to federal judges would make them “independent, in the fullest sense of the word” leading to an out of control judiciary responsible to no “power under heaven.”[9] The fear, stated as an aphorism, was that power corrupts, and absolute power corrupts absolutely.[10] More simply, the judiciary would become a power of the federal government checked only by the undefined and nebulous words “good behavior” in the constitution. Alexander Hamilton countered this trepidation in his Federalist Paper Number 78. In it, Hamilton assured the public that the federal judiciary was by its nature not in a position to cause harm to, or infringe on, the individual rights of the citizens of the United States.[11] This argument was predicated on the notion that the federal judiciary neither held the sword—a function of the executive branch—nor the purse—a function of the legislative branch.[12] Hamilton further posited that the judiciary is the weakest branch of the government, as it has “neither FORCE nor WILL, but merely judgments and must ultimately depend upon the aid of the executive arm even for the efficacy of its judgments.”[13]

This inability of the Supreme Court to effectuate its decisions was exemplified in Worcester v. Georgia.[14] In 1832, the Court ruled against the State of Georgia in a case involving the seizure and encroachment of Indian lands.[15] Following the ruling, President Andrew Jackson refused to comply—he is famously reported as having said, “[Chief Justice] John Marshall has made his decision; now let him enforce it.”[16] President Jackson’s blatant disregard for the Supreme Court’s ruling led directly to the Trail of Tears and the forceful removal of Native Americans from the eastern United States.[17] Another example of the Court’s reliance on the executive branch, this time leading to a more positive outcome, is the desegregation that followed the unanimously decided Brown v. Board of Education.[18] These two cases undoubtedly support Hamilton’s assertions regarding the powerlessness of the federal judiciary. The question, however, still remains as to whether an increased average life expectancy alters the reasoning given by the founders to grant life tenure to federal judges.

At the time of ratification, life expectancy in the United States was much lower than it is now. Life expectancy from birth during the “Liberty Era,” years covering 1750 to 1800, was 35 years.[19] The global average for life expectancy around that time was 29 years.[20] In 2001, the global average was 67 years.[21] The Center for Disease Control currently lists the life expectancy in the United States as 79 years.[22] An increase in life expectancy in general, however, does not correlate directly to increases in the average time an appointed federal judge has been on the bench. Specifically, John Marshall, who assumed the role of Chief Justice of the Supreme Court in 1801, served in that capacity on the bench for 34 years.[23] In fact, Chief Justice Marshall was 79 when he passed away, far exceeding the life expectancy in the country at that time and matching the current life expectancy in the United States.[24]

Though the statistics listed above provide that life expectancy has greatly increased since the “Liberty Era,” a part of the picture is missing. The life expectancy in the United States once an individual reached the age of 20 in 1850[25] increased to an age that is dramatically closer to the current life expectancy in the United States.[26] The life expectancy of a 20-year-old in 1850 was 60 years, and the current life expectancy of a 20-year-old is 77.[27] By altering the starting point for the expectation of remaining years of life, the disparity between then and now substantially decreases, the obvious effect of high infant mortality. Compared to the early years of the country, there is an increase of 17-years for life expectancy. This of course is far less than the 39 years that would be the difference if the life expectancy at birth metric was used. It is highly plausible to conclude, though data on the subject is not readily available, that the life expectancy increase of individuals elevated to the federal judiciary would decrease the difference in life expectancy of judges in the early decades of the nation and judges currently on the bench.

The life tenure guaranteed by the Constitution is of continued importance to democratic society. Life tenure serves an important democratic interest in preserving an independent judiciary from unnecessary political influence. Additionally, the increased life expectancy in the United States has not had a significant effect on the true-life expectancy of appointed judges. Life tenure is a novel and effective approach to the self-evident need of an independent judiciary that will continue to propel federal interests.

[1]U.S. Const. art. III, § 2.

[2]SeeThe Federalist No.78 (Alexander Hamilton) (“Whoever attentively considers the different departments of power must perceive, that, in a government in which they are separated from each other, the judiciary, from the nature of its functions, will always be the least dangerous to the political rights of the Constitution; because it will be least in a capacity to annoy or injure them.”).

[3]Id.

[4]Id; see also U.S. Const. art. III, § 1.

[5]SeeSteven G. Calabresi & James Lindgren, Term Limits for the Supreme Court, 29 Harv. J. L. and Pol’y770, 771 (2006).

[6]Id.; see also The Federalist No.78 (Alexander Hamilton).  

[7]Calabresi & Lindgren, at 771.

[8]See Federalist No. 78(evidencing the need felt by Alexander Hamilton, publishing under the pseudonym “Publius,” to convince the Anti-Federalists about the benefits of life tenure and how it ensures an independent judiciary.)

[9] The Complete Anti-Federalist 358 (Herbert J. Storing ed., 1981) (quoting Robert Yates, writing under the pseudonym “Brutus” in The Power of the Judiciary (Part I), The New York Journal, March 1788).

[10]Id.; see also Niccolò Machiavelli & Robert M. Adams, The prince: a revised translation, backgrounds, interpretations, marginalia (1992));.For further elaboration by Lord Acton, a 19th-century British politician, see Lord Acton Letter to Archbishop Mandell Creighton (Apr. 5, 1887).

[11]Federalist No. 78 (“[T]he judiciary, from the nature of its functions, will always be the least dangerous to the political rights of the Constitution; because it will be least in capacity to annoy or injure them.”).

[12]Id.

[13]Id.

[14]Worcester v. Georgia, 31 U.S. 515 (1832).

[15]Id.

[16]See Tim Alan Garrison, Worcester v. Georgia (1832), New Ga. Encyclopedia, https://www.georgiaencyclopedia.org/articles/government-politics/worcester-v-georgia-1832 (last updated Feb. 20, 2018) (“The decision of the Supreme Court has fell still born, and they find that it cannot coerce Georgia to yield to its mandate.”) [https://perma.cc/2FQD-DBB5].

[17]“The Trail of Tears – The Indian Removals,” USHistory.org, http://www.ushistory.org/us/24f.asp (last visited Apr. 16, 2018) (Following the Worcester v. Georgiadecision the Cherokee tribe was forcibly removed from their lands in Georgia and President Jackson did nothing to enforce the holding of the Court. Further, in Federal troops were eventually used to forcibly remove remaining tribes men, women and children.) [https://perma.cc/AP4B-TRFX].

[18]Brown v. Bd. of Educ., 347 U.S. 483 (1954) (Instead of giving direction for the implementation of desegregation, the Court instead asked attorney generals of the states to submit plans of how to proceed with desegregation. Ultimately, President Eisenhower was forced to send U.S. military soldiers and federalize the Arkansas National Guard in order to enforce the ruling); see also Jean Edward. Smith, Eisenhower: in war and peace(2013).

[19]Max Roster, Life Expectancy, Our World in Data, https://ourworldindata.org/life-expectancy (2017) [https://perma.cc/5B3S-VL96].

[20]Id.

[21]Id.

[22]Life Statistics, Nat’l Ctr. for Health Statistics, Ctrs. for Disease Control,https://www.cdc.gov/nchs/fastats/life-expectancy.htm (last updated May 3, 2017) [https://perma.cc/722Z-52D5].

[23]John Marshall, Oyez,https://www.oyez.org/justices/john_marshall (last visited Mar. 12, 2018) [https://perma.cc/4HFX-7JM7].

[24]Id.

[25]Information prior to this date is difficult to obtain concerning age-based expectancy tables.

[26]Life Expectancy by Age, 1850–2011, infoplease, https://www.infoplease.com/us/mortality/life-expectancy-age-1850-2011 (last visited Mar. 12, 2018) [https://perma.cc/GX2G-PQPE].

[27]Id.

by Jacquelyn Duhon, Issue Editor

I. Introduction

Social media’s ubiquitous presence in modern society has impacted every facet of life, and the legal realm is no exception. When information posted to a personal social media account becomes relevant to a lawsuit, it becomes unclear what is and is not discoverable to parties in a lawsuit. Many social media websites allow a user to adjust the privacy settings on his profile to restrict his audience size to certain individuals as desired,[1] therefore creating different expectations of privacy in “public” posts and “private” posts. A growing number of courts have addressed the scope of discovery of postings to and communications through social media websites.[2]

II. The Forman Decision Extends Discovery to Facebook

The most recent case on the matter arises out of New York in Forman v. Henkin, a horseback rider who fell from a horse and allegedly suffered spinal and traumatic brain injuries brought a personal injury action against the owner of the horse.[3] The defendant sought unlimited authorization to obtain the plaintiff’s entire private Facebook account, arguing that the postings would be material and necessary to the defense.[4] The Court of Appeal held that the plaintiff’s pre-accident and post-accident photographs posted privately on the plaintiff’s Facebook account and the data revealing the timing and number of characters in post-accident messages posted privately on the plaintiff’s account were discoverable.[5]

III. Statutory Basis for Discovery Suggests Social Media is Available

The statute governing the scope of discovery embodies the policy determination that liberal discovery encourages fair and effective resolution of disputes on the merits, minimizing the possibility for ambush and unfair surprise.[6] The rights to disclosure under N.Y. CPLR § 3101(a) is not unlimited, and the court recognized that discovery must be “evaluated on a case-by-case basis with due regard for the strong policy supporting open disclosure,”[7] and the request must be reasonably calculated to yield information that is material and necessary.[8]

New York discovery rules do not condition a party’s receipt of disclosure on a showing that the items the party seeks actually exist; rather, the request only needs to be appropriately tailored and reasonably calculated to yield relevant information.N.Y. CPLR § 3101(a).

The Forman court agreed that when it comes to production of social media records, there should not be a heightened threshold that depends on what content the account holder has chosen to share on the public portion of the account;[9] in fact, the court held that the account holder’s privacy settings should not govern the scope of disclosure of social media posts.[10] The commencement of an action, however, does not automatically make a party’s entire social media presence, both public and private, automatically discoverable.[11]

The court demonstrated that a one-size-fits-all approach was not ideal and that to assess whether relevant material is likely to be found, a court should consider the nature of the event giving rise to the litigation and the injuries claimed as well as any other information specific to the case at hand.[12] In essence, a court should “issue an order tailored to the particular controversy that identifies the types of materials that must be disclosed while avoiding disclosure of nonrelevant materials.”[13] One can see from the order in Forman an attempt to protect the plaintiff from unnecessarily disclosing sensitive or embarrassing posts with no real relevance but the exemption from disclosure any nudity or romantic encounters.[14]

The court does not state that private materials, if relevant, may be subject to discovery and are not automatically off-limits because of their private nature.[15] The threshold question, once again, is not whether the social media posts are private or public but whether they are reasonably calculated to contain relevant information.[16]

IV. The Forman Court Allows Discovery of Facebook

The court, following these principles, ruled that the Appellate Division should not have restricted the disclosure of the plaintiff’s Facebook account to only those photographs that the plaintiff intended to introduce at trial.[17] The plaintiff’s acknowledged habit of posting photographs showed her regular activities led to a reasonable basis that photographs posted after the accident would show her post-accident activities or limitations—though the only publicly available photograph available on the plaintiff’s account was not relevant.[18]

Additionally, data revealing the timing and the number of characters in post-accident messages posted privately on the plaintiff’s account were ruled discoverable because the data was directly relevant to the plaintiff’s claim that she suffered cognitive injuries that caused difficulty writing and using a computer.[19]

V. Conclusion

Social media users are increasingly aware of the privacy implications involved in their posts, and questions regarding its use will continue to be presented to the courts. Until there are specific rules for discoverable content within social media, courts will be left to pave the path. In Forman, the court allows discovery of private social media posts as they were directly relevant to the case. This case sets a precedent for other courts around the country beginning to deal with the same discovery issues.

[1]Facebook, https://www.facebook.com/help/325807937506242 (last visited Mar. 12, 2018) [https://perma.cc/UKK3-6VMH].

[2]Courts are not always in sync with whether private social media posts are accessible in discovery. See Mailhoit v. Home Depot U.S.A., Inc., 285 F.R.D. 566 (C.D. Cal. 2012); Davenport v. State Farm Mut. Auto. Ins. Co., 2012 WL 555759 (M.D. Fla. Feb. 21, 2012); Nieves v. 30 Ellwood Realty L.L.C.,966 N.Y.S.2d 808 (N.Y. App. Term 2013). But seeFawcett v. Altieri, 960 N.Y.S.2d 592(N.Y. App. Div. 2013).

[3]Forman v. Henkin, 30 N.Y.3d 656, 659, 93 N.E.3d 882, 885 (2018).

[4]Id.

[5]Id.

[6]N.Y. CPLR § 3101(a).

[7]Forman, 2018 WL 828101, at *3.

[8]Id.at *2.

[9]Id.at *4.

[10]Id.

[11]Id..

[12]Id. at *5.

[13]Id.

[14]Id.

[15]Id.at *6.

[16]N.Y. CPLR § 3101(a).

[17]Forman, 2018 WL 828101, at *5.

[18]Id.

[19]Id.at *6.