In a case of first impression in Texas, the United States Bankruptcy Court for the Southern District of Texas held that the former majority member of a chapter 11 LLC debtor had to relinquish control of the LLC's Facebook page and Twitter account because they were property of the LLC's bankruptcy estate. In re CTLI, LLC, Case No. 14-33564, 2015 WL 1588085 (Bankr. S.D. Tex. April 3, 2015). CTLI, LLC was a Texas gun store and shooting range doing business as Tactical Firearms. Under the terms of the confirmed plan, which had been proposed by the LLC's minority member, the minority member became the 100-percent owner of the reorganized debtor. The court's order confirming the plan directed the former majority member to deliver possession and control of the passwords for the debtor's social media accounts to the sole owner of the reorganized debtor. The former majority owner refused to do so, contending that he could not share control over those accounts with the reorganized debtor without violating his individual privacy rights.
Whether social media accounts are "property interests" under Texas law such that they are included within "all legal or equitable interests" comprising a bankruptcy estate under § 541 of the Bankruptcy Code had not been previously decided by any Texas court. In fact, the CTLI court noted that only one other bankruptcy court, applying New York law, had yet treated social media accounts as property, likening them to subscriber lists. The CTLI court found that social media accounts are indeed property interests under Texas law, as they provide "valuable access to customers and potential customers."
The former majority member of the LLC debtor argued that the social media accounts at issue were his personal accounts, pointing out that he frequently made "personal" posts and that the accounts were accessible only through his personal profile. However, the bankruptcy court found that the evidence overwhelmingly supported the contrary conclusion: that the accounts were instead business accounts that belonged to the reorganized debtor. The Facebook page and Twitter account both bore the name of Tactical Firearms, and both contained links to the Tactical Firearms website. The vast majority of the posts made by the former member were business-related, including posts advertising store sales and promoting products. The former majority member also gave administrative access to the Facebook page to a Tactical Firearms employee so that the employee could post on the page.
The CTLI court noted that the fact that the former majority member closely associated his own identity with that of his business did not make the social media accounts his personal accounts. Such a close association is common for many small business owners. Rather, the court found that the proper characterization of the former majority member's interest in the social media accounts was an interest in "professional goodwill." Whatever followers embraced the goodwill of the former member individually, as opposed to the goodwill of the reorganized debtor, could follow the former member to his personal Facebook and Twitter accounts. Finally, because the social media accounts were those of the reorganized debtor, the court found that the former member had waived his right to privacy in any of the messages posted on those accounts in the same manner that an employee waives an expectation of privacy when he uses his work email to send personal messages.
As the use of social media has become increasingly essential for businesses to compete effectively, social media accounts have become significantly valuable intangible assets of businesses. The CTLI decision is noteworthy given the dearth of opinions on the issue of social media accounts as property under state law. The decision may be meaningful to debtors looking to protect the goodwill embedded in these assets in the reorganization process, as well as to secured creditors whose liens may extend to such property.
If you have any questions about this Alert, please contact Lauren Lonergan Taylor, Rudolph J. Di Massa, Jr.; Rosanne Ciambrone; Ron Oliner; any member of our Business Reorganization and Financial Restructuring Practice Group; or the attorney in the firm with whom you are regularly in contact.
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