The Perils of Selling Customer Personal Data During Chapter 11
A distressed company enters into Chapter 11 bankruptcy seeking to reorganize its debts, streamline operations and satisfy creditors so as to emerge solvent. Sale of assets is one method of raising capital to succeed in this venture. Among the assets that may be evaluated for sale are digital resources, including databases containing customers’ personal information such as names, email addresses, purchase histories, and financial details. However, selling customer data is not a simple or risk-free option and is fraught with legal and practical concerns.
Most companies have privacy policies that specifically address the collection, storage and sharing of customers’ personal data. These policies may assure customers that their information will not be divulged to third parties except under specific circumstances. Such promises are a fundamental part of building trust and encouraging customers to do business with the company. If a company now in bankruptcy tries to sell its customer data, that sale could violate the terms of its privacy policy.
The U.S. Bankruptcy Code has provisions designed to protect consumers in the event of a sale or transfer of personally identifiable information (PII) by a debtor in bankruptcy. Under Bankruptcy Code §363(b)(1), if a company has a policy regarding the transfer of PII, then the data can be sold only if the court finds that the sale is consistent with that policy, or if not that certain conditions are met. To facilitate these protections, the court may appoint a Consumer Privacy Ombudsman (CPO). The CPO’s role is to evaluate the privacy implications of the proposed sale and to provide recommendations to the court regarding safeguards to protect the interests of both the consumers and the integrity of their data.
Beyond the bankruptcy court, regulatory agencies such as the Federal Trade Commission (FTC) and various state consumer protection authorities may become involved, particularly if the proposed sale or transfer of data could constitute an unfair or deceptive practice. The FTC, for example, has intervened in some bankruptcy cases, arguing that consumers’ privacy expectations must not be undermined simply because the company is experiencing financial distress. These agencies may insist that any transaction involving customer data be conducted with strict adherence to relevant privacy policies, and that appropriate measures are in place to prevent misuse, unauthorized sharing or exposure of PII.
While customer data can be a valuable asset in Chapter 11, attempting to sell it without fully understanding the legal ramifications can lead to challenges from regulators, litigation, damage to reputation and loss of customer trust. An experienced Chapter 11 attorney can advise company leadership on compliance with privacy policies and on strategies for negotiating with the bankruptcy court and relevant agencies.
The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms, with 12 locations across the region. If your business is facing overwhelming debt, please call 310-271-6223 or contact us online to schedule a consultation.
