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Texas Bankruptcy Court ‘Likes’ Facebook and Twitter Accounts as Property of the Reorganized Debtor

Texas Bankruptcy Court ‘Likes’ Facebook and Twitter Accounts as Property of the Reorganized Debtor

In a recent opinion in In re: CTLI, LLC (Tactical Firearms), Judge Jeff Bohm in the United States Bankruptcy Court for the Southern District of Texas ordered a debtor to handover its Facebook and Twitter accounts to the reorganized debtor. The Court found that the Facebook and Twitter accounts were property interests under the bankruptcy code because business social media accounts provide valuable access to customers and potential customers. The Facebook and Twitter accounts were created in the debtor’s business name, were linked to the debtor’s web page and were used to market and promote the business. As a result, the Facebook and Twitter accounts were part of the debtor’s bankruptcy estate and were included as assets of the reorganized debtor under the confirmed Chapter 11 plan of reorganization.

The Court’s opinion in In re: CTLI, LLC, provides helpful guidance for companies and individuals seeking clarity on the ownership of social media accounts. In particular, the court focused on the following questions:

  • Was the social media account created in the name of the business?
  • Was the social media account linked to the business’s web page.
  • Was the social media account used for business purposes?

If the answer to all three is “Yes,” then the social media account is presumptively property of the business. The court also addressed the professional goodwill of an individual closely associated with a business’s social media account. According to the court, the bankruptcy estate includes only the value of the social media account reflected by the business goodwill, not the individual’s goodwill. The court found that because a business social media account is “in a sense a manifestation of the business’s accrued goodwill…[that] whatever goodwill the individual caused to be associated with the business remains property of the business.”

But there is a bigger picture here. In its conclusion, the court stated: “[T]o ignore the value of social media assets would do injustice to debtors and creditors alike.” The value of information and digital assets is increasing and is not likely to slow down any time soon. And unlocking this value in a bankruptcy context is a logical corollary. But with these assets come complicated legal issues involving intellectual property rights and privacy concerns. Just last month, RadioShack’s attempted bankruptcy sale of 117 million customers’ personal information drew objections based on alleged violations of state and federal privacy laws. Regarding social media accounts, however, the court in CTLI concluded that “principles that have been developed to deal with the myriad forms of property passing through bankruptcy provide clear guidance as to how to treat such assets.”

This is just the beginning. Bankruptcy courts will continue to confront issues involving social media assets for one primary reason: Social media is now an indispensable part of the modern business model. Look at YouTube. YouTube has over 50 million unique Twitter followers. With a click of a button, YouTube can advertise, promote and market its business to 50 million Twitter users without spending a penny. On the other hand, a 30 second Super Bowl commercial costs $4.5 million or an average of $150,000 per second. Though there were over 100 million viewers for the 2015 Super Bowl, that’s a high price to pay when a company can potentially reach millions of people for free. You may be thinking, “Ok. That’s YouTube. How about an example that is not a Google subsidiary.” Fair enough. As of 2014, there were over 30 million small businesses with Facebook pages. In a study tracking over 689 million online shopping sessions, Facebook alone accounted for 60% of all referral traffic to online retailers with an average order value per shopping session of $92.27.

Social media has transformed the commercial landscape. Consider that on March 30, 2015, Elon Musk teased a new Tesla product line on Twitter and, 24 hours later, Tesla’s market capitalization rose by nearly $1 billion. As more businesses adopt and rely on social media, the value of business social media assets will be emphasized. Couple this with the rise of retail Chapter 11 filings (especially as traditional retailers attempt to incorporate e-commerce models to remain competitive) and you are likely to see more information assets, including social media accounts, in the bankruptcy bargain-bin.

J. Mitchell Carrington, II

Mitch Carrington