5.3 Toysmart case exercises - student module  (Page 9/19)

Decision point three:

Here are some constraints that outline your decision

• As a member of the Creditors' Committee, you have a fiduciary duty to Toysmart creditors in working to distribute fairly the remaining Toysmart assets. This would, all things being equal, lead to recommending selling the Toysmart customer data base
• There are some provisions in the bankruptcy code that may require or allow overriding fiduciary duties given prior legal commitments made by Toysmart. These commitments, in the form of strong privacy guarantees made to customers by Toysmart on its webpage, may constitute an "executory contract." See the Legal Trail table in the Toysmart case narrative and also Larren M. Nashelsky, "On-Line Privacy Collides With Bankruptcy Creditors," New York Law Journal, New York Law Publishing Company, August 28, 2000.
• Finally, Nashelsky makes an interesting argument. While deontological considerations would require setting aside creditor interests and honoring Toysmart privacy promises, a justice-based argument would recommend a compromise. Bankruptcy proceedings start from the fact that harm (financial) has been done. Consequently, the important justice consideration is to distribute fairly the harms involved among the harmed parties. Harm distributions are correlated with benefit distributions. Because Toysmart customers benefited from Toysmart offerings, they should also bear a share of the harms produced when the company goes bankrupt. This requires that they allow the distribution of their PII under certain conditions.

Things to consider in your decision-making

• How do you balance your obligations to PAN with those to other Toysmart creditors as a member of the Creditors' Committee?
• How should you approach the conflict between honoring Toysmart promises and carrying out Creditor Committee fiduciary duties? Do you agree with Nashelsky's argument characterized above?
• Should the Bankruptcy Code be changed to reflect issues such as these? Should privacy promises be considered an “executory contract” that overrides the duty to fairly and exhaustively distribute a company's assets?
• Finally, what do you think about the FTC's recommendation? The Bankruptcy Court's response? The final accommodation between Toysmart and Buena Vista Toy Company?