Bankruptcy Vendors Under Fire for Mishandling Private Info

Recent errors by bankruptcy service vendors are prompting some judges and attorneys to critically examine how those providers handle sensitive information.

The vendors, known as claims agents, have drawn attention over the last month in a Norwich, Connecticut-based Catholic diocese bankruptcy when one of them accidentally disclosed private information about sex abuse survivors. The survivors said the incident was traumatizing and promptly sued.

Around the same time, several claims agents in separate cases faced accusations from the Justice Department of harming the “basic integrity” of the bankruptcy system by failing to disclose that they were selling creditor data to another private company.

Claims agents are supposed to make the bankruptcy process easier for claimants, many of whom have very little knowledge about the legal system. Companies such as Epiq Corporate Restructuring LLC and Omni Agent Solutions are a key conduit between large debtors, creditors, and the court, providing critical information and making complex Chapter 11 cases more accessible. But in some situations, claims agents have introduced new problems.

The Norwich diocese disclosure, in particular, is unacceptable, multiple attorneys said. Creditor confidentiality is a core principle of bankruptcies intended to resolve mass tort litigation involving personal matters such as sex abuse or asbestos- and opioid-related harms. If claimants aren’t convinced they will remain anonymous, many won’t participate in cases that likely offer their only chance of receiving compensation, bankruptcy law professors said.

“If they’re going to be in this market, they should all have the capacity to ensure against this kind of error,” Melissa Jacoby, a bankruptcy professor at the University of North Carolina School of Law, said.

Still, claims agents generally succeed in making the bankruptcy process more efficient, while lessening the burden on the court clerk and lowering costs for debtors, the professors said. When they do their job right, few people notice. Some mistakes, though, are inevitable, if rare, Pamela Foohey, a bankruptcy professor at Benjamin N. Cardozo School of Law, said.

“It’s going to happen with every organization,” Foohey said.

Protecting Information

US Bankruptcy Judge James Tancredi, who oversees the Norwich case, said the disclosure raised concerns for bankruptcy courts across the country. He suggested at a Feb. 15 hearing that court clerks could do a better job than claims agents in handling sensitive data in cases limited to a few hundred claimants.

“This obviously is a very disappointing moment” for the “institutionalized approach” to bankruptcy cases, Tancredi said during the hearing in the US Bankruptcy Court for the District of Connecticut.

The Norwich Diocese survivors whose information was released recently sued Epiq for $42 million. The disclosure caused many of the survivors to “feel additional shame and trauma,” they said in the Feb. 8 complaint.

“We take very seriously any matters related to the security and privacy of our clients’ data and sensitive claimant information, and continuously strive to have the most robust processes in place to protect it,” Epiq said in a statement.

Epiq, which is the claims agent in at least two other Catholic diocese bankruptcies, said at the February hearing that the disclosure was the result of human error. The company is taking steps to ensure the incident doesn’t happen again, executives said at the hearing.

Omni, the claims agent the diocese selected to replace Epiq, said it had advanced privacy safeguards developed as the claims agent in the USA Gymnastics and Boy Scouts of America bankruptcies—both of which involved sex abuse survivors’ sensitive or personal information.

Epiq prompted another data disclosure controversy for selling claimant data to a separate private company, drawing the ire of US Bankruptcy Judge Sean Lane in the Southern District of New York. In striking down Epiq’s data-selling agreement, the judge reasoned that Epiq was acting as an agent of the court clerk—impermissibly trying to make money off of creditor data. The data being sold, Lane said, belonged to the court.

Four other claims agents had entered into similar agreements with a company called XClaim Inc., prompting Chief Bankruptcy Judge Martin Glenn in the Southern District to open a proceeding looking into the matter. The firms are Epiq; Omni; BMC Group Inc.; Donlin, Recano & Co. Inc.; and Stretto Inc.

The agents violated a “fundamental bankruptcy tenet” by failing to disclose that they were selling creditor data, the Justice Department’s bankruptcy watchdog, the US Trustee, said in a January court filing.

The firms’ contracts with XClaim have since been terminated. The claims agents named said they were not required to disclose their relationship with XClaim, and that the Justice Department was overstating its case.

High Stakes

For debtors, there’s a natural tension, in bankruptcy, between balancing their legal costs with they’ll have left to pay creditors.

Claims agents are valued for providing administrative services in bankruptcy cases more cheaply than law firms, bankruptcy attorneys said. They also provide free, easy access to court documents on their websites, a service that especially benefits survivors in mass tort cases that have sought bankruptcy protection to resolve widespread claims, such as in diocesan sex abuse cases.

“Every dollar you spend on something like Epiq, which I think is necessary in a diocese case, is money that you’re taking away from the survivors,” Foohey said.

The existence of multiple claims agents incentivizes each one to provide better service and protect privacy, Christopher Bradley, a bankruptcy professor at the University of Kentucky’s Rosenberg College of Law, said. If a firm messes up, there are alternatives, as the Norwich case shows.

Claims agents do a good job of performing specialized tasks and easing the administrative burden in bankruptcy cases, Bradley said. But the growing popularity of using bankruptcy to resolve mass tort liability—addressing a wide range of personal harms—makes the Norwich disclosure an important reminder of what the stakes are for individual claimants, he said.

“You want to encourage people to come forward,” he said. “And it’s disastrous for the process and for the whole purpose of the thing if they can’t come forward in confidence.”