The B Word (“Bankruptcy”) May Be the Death of Your Bad Debt Collection or Lawsuit

In an environment where the revenue picture is blurry, 20/20 hindsight on delinquent bills can overtake your vision. In times like these, the cash lost to people who haven’t paid up on your invoice is too much pain to bear. Hence, it is a common for debt collection and lawsuits to increase in a downturn.

But the debtors are not without legal tools. In fact, if they aren’t afraid of the “B” word, they can lock their creditors out. The B word is none other than bankruptcy. And when a debtor company hits the B button (which in fairness may be a legitimate maneuver), the “automatic stay” can literally erase your lawsuit for unpaid bills. 

In fact the “protection” in “bankruptcy protection” usually refers to the automatic stay, which comes into play the moment the bankruptcy filing is made.

The automatic stay is a statutory tool that amounts to an injunction to freeze nearly any collection actions against the debtor for debts incurred prior to the bankruptcy filing. And the “automatic” refers to the fact that the debtor does not even have to seek a court order for the stay. The automatic stay puts a pause on: lawsuits, foreclosures, collections, and others.The automatic stay is not a scarecrow. It is a very potent weapon that should cause a creditor pause. In fact, creditors should avoid violating an automatic stay at all. Not only does commencing a lawsuit after a stay violate the stay, thereby voiding the lawsuit, but it could actually expose the creditors to a reverse claim for damages from the debtor! 

As with all things legal, the automatic stay is not without ways to poke holes. Creditors can ask the bankruptcy court to allow a lawsuit to continue. However, more often than not these requests are denied. So when chasing down that someone who hasn’t paid their bills, one should factor the debtor’s financial state and the possibility that a bankruptcy filing may be on the horizon into the financial calculus of a lawsuit.

Second Life and Second Jurisprudence

If any one doubts the power of the new Internet look no further than Second Life–that virtual wonderland-where you can thrill to the view of your palatial gated manor and take flight in your jet car to visit the gay, straight or “furry” neighbors.

It only seems like a fantasy until you realize that servers populated like small cities complete with laws and all the trappings of society compete for our waking life. Why is a universe with all the social dynamism of the ”real” world called “virtual,” especially when your Second Life can make you real cash. Is jurisprudence (and no I do no mean the law) prepared for all this world has to offer? Are we prepared for a future when “on line” versus “real world” is no longer a valid distinction. Second Life and other “metaverses” offer a rich vision of how the net will change our lives and then came the lawyers.

While even now the real world struggles mightily in defining property Rights (consider the Supreme Court decision on the limitations of eminent domain in Kelo v. City of New London), the virtual world cannot expect to be shielded from the shrill call of “hey that’s mine!” When the call is heard, will the bar respond with a litany of unmitigated liability.

Property rights are the cornerstone of any modern civilization. And as the societies that don’t live on servers have grappled with this essential principle, so too will the Second Life’s out there. With few exceptions, the virtual world relies on a pastiche of honor systems and internal rules to maintain “law and order.” And when that doesn’t work, there is the Terms of Service Agreement. However, as greater emphasis on commerce competes with socializing, then theft, fraud and the call for “human liberties” will undoubtedly make the virtual world behave more like the real one. And frankly the draconian tone of a Terms of Services agreement is a far cry from what the founding fathers had in mind in 1776. 

Consider the case of Marc S. Bragg (he is also accepting donations to pursue his suit and he has succeeded in evading a removal for arbitration). By allegedly exploiting a technical loophole in Second life that enabled him to acquire virtual properties at a significantly reduced price he caught the eye of the wrong people. Thinking that he had found his way to being a binary billionaire, his cottage industry was summarily seized and destroyed. One pictures acres of pixels razed by polygon storm troopers. Far less dramatic was the push of a button to make Bragg’s empire vanish– his account terminated based on a violation of the Terms of Service Agreement. Confronted with what argues is an illegal taking, as an attorney and as an American, he did his duty… he filed suit.

While I and others do not see this case as a dispute over property rights (largely because terms of service agreement appears to cover this situation which really hinges on a breach of contract principle; rather than property rights), it does speak of things to come. For example, does Bragg have a proportionality argument? Is Second Life evolving into a public arena that must apply state and/or federal laws rules and regulations, what about the constitution? 

In existence for nearly a decade the new generation of MMORG’S aggressively blur the lines between life m the flesh and life or the other side of a keyboard. It’s much easier to be flip about losing a plus five sword of orc smashing then about the loss of a virtual factory that generates REAL money for Virtual employees and investors. It this trend continues, and there’s no indication it won’t, a crisis is looming. And certainly at that time there will be more than enough call within the legal community to establish real world legal systems in wonderland. 

Now is the time, not when a crisis occurs, when we should examine cyber jurisprudence in a cyber society. Left to their own devices, lawyers have a way of siphoning the joy out of anything. Stories like Bragg’s probably have most attorneys drafting retainers for the personal injury claims of the 21st century rather than trying to shape a sustainable legal framework for cyber society. As we have discovered in the real world, the Internet has rarely offered easy opportunities to co-opt existing law. 

Yet, we are presented with an unprecedented opportunity to re-imagine the role of law, to redefine its relation with people, to create a legal system heretofore undreamed of. The architects of Second Life, Wikipedia, and others are anything but traditional. Why shouldn’t lawyers be similarly uninhibited? What should the role of an advocate be in a world of polygon avatars? As lawyers, our first question should not be how to make real law apply to the virtual? It should be: how do we make new institutions for a new world?