Delaware Supreme Court Holds That While Timing May Not Be Everything, It Is Really Important When Looking For The Exit
Nearly one year ago, Vice Chancellor J. Travis Laster decided to apply Delaware’s most onerous standard of review, entire fairness, to the decisions of TripAdvisor, Inc. and Liberty TripAdvisor Holdings, Inc. to reincorporate in Nevada. Palkon v. Maffei, 311 A.3d 255 (Del. Ch. 2024). See Vice Chancellor Laster Rules That It Is “Reasonably Conceivable” That Nevada Provides Greater Protection Against Fiduciary Liability Than Delaware. Nor surprisingly, that ruling was appealed to the Delaware Supreme Court, which today issued its opinion reversing the Vice Chancellor’s ruling.
Vice Chancellor Laster applied the entire fairness standard because the proposed reincorporation would involve a controlling stockholder and the receipt of a non-ratable benefit in the form of the enhanced liability protections under Nevada law. The Delaware Supreme Court disagreed with the Vice Chancellor on the role of timing in determining whether an alleged benefit was no-ratable. The Supreme Court believes that temporality is a key factor in determining materiality. The Court concluded that the plaintiffs’ allegations did not satisfy the requirement of pleading a material benefit because they failed to allege “anything more than speculation about what potential liabilities Defendants may face in the future”. Accordingly, the business judgment rule is the applicable standard of review.
This decision may be beneficial to both Delaware and Nevada in the long run. If the Delaware Supreme Court had decided the other way, businesses might avoid incorporating in Delaware due to a fear that Delaware has become a Hotel California. See TripAdvisor Suit Invites Delaware To Become The Hotel California.
I SPY!: Court Finds No Standing In Spy Pixels Case
Hi, CIPAWorld!
The District of Massachusetts just issued a huge win for the defendant in a spy pixels class action and dismissed the case altogether for lack of standing!
In Campos v. TJX Companies, Inc., No. 24-cv-11067, 2025 WL 360677 (D. Mass. Jan. 31, 2025), Plaintiff Campos filed a putative class action against Defendant TJX Companies (“TJX”), alleging that Plaintiff TJX embedded a “spy pixel” in its promotional emails which collected certain information about the email and its recipients, including the email address, the subject of the email, when it was opened and read, the recipient’s location, the length of time the recipient spent reading the email, whether it was forwarded or printed, the recipient’s email service, et cetera. Although Plaintiff conceded that she subscribed to TJX’s email list, she said that TJX nevertheless collected this information without her consent or the consent of other class members. Plaintiff claimed that this lack of consent formed the basis of TJX’s violation of the Arizona Telephone, Utility and Communication Service Records Act, which makes it a crime for a person to “[k]nowingly procure, … [a] communication service record of any resident of [Arizona] without the authorization of the customer to whom the record pertains or by fraudulent, deceptive or false means.” Id. at *1 (second and third alterations added).
In response, TJX filed, inter alia, a Rule 12(b)(1) motion to dismiss for lack of standing, arguing that the Plaintiff could not establish an injury-in-fact. To determine whether Plaintiff suffered an injury-in-fact based on a violation of privacy, as claimed here, the Court explained that there must be a “‘close relationship’ between, on one hand, Defendant’s alleged procurement of Plaintiff’s data relating to her opening of promotional emails and, on the other hand, a traditionally actionable harm under common law.” Id. at *3 (internal citation omitted).
The Plaintiff first likened her injuries to the tort of intrusion upon seclusion, which requires an intentional intrusion and one that “would be highly offensive to a reasonable person.” Id. The cause of action is aimed at protecting deeply personal, private, or confidential matters. The Court, however, wasn’t buying it:
Some of this information clearly does not implicate Plaintiff’s privacy or seclusion. For instance, Plaintiff’s email address was certainly not private, given that she provided it to Defendant when she consented to receive the promotional emails. Nor was there anything particularly privacy about the email’s subject or other content, as Defendant authored the email and therefore would have known the subject and content with or without the pixels and thus without any impact on any privacy interest asserted by Plaintiff.
Id. at *4 (emphasis added). While the Court found that the individualized data about whether, when, where, and for how long Plaintiff read TJX’s emails presented a closer question, the Court still found this distinguishable from the idea of covert surveillance. Specifically, it explained that “a glimpse into Plaintiff’s email inbox is a far cry from peeking into her upstairs window, particularly where she voluntarily subscribed to Defendant’s emails and where there is no allegation that the spy pixels intruded into any other private area of her email inbox or computer.” Id. (emphasis added).
In a footnote, the Court noted that “Plaintiff’s allegation that the spy pixel tracked whether the email was forwarded gives the Court some pause, as it comes the closes to tracking ‘unrelated personal messages.’” Id. at *6, n.3 (emphasis added). However, it dismissed this issue because Plaintiff did not allege that the pixels could track the recipient or the content of the forwarded message. Indeed, “the simple act of forwarding, without more, does not rise to the level of substantial intrusion into Plaintiff’s private affairs.” Id.
Plaintiff also attempted to liken her harm to other privacy statutes which give rise to standing, but to no avail. First, she analogized her harm to cases under the TCPA. The Court rejected this argument on the basis that plaintiffs in TCPA cases received unconsented to and unsolicited communication, whereas Plaintiff subscribed to TJX’s messages and frequently opened them. Second, it found that Plaintiff’s reliance on the Video Privacy Protection Act, which prohibits disclosure of an individual’s rental and sale records, was misplaced because Plaintiff did not allege any such disclosure. And finally, it found that the information protected by the Illinois Biometric Information Privacy Act—a retina or iris scan, fingerprint, voiceprint, or scan of hand or face geometry—to be decidedly more personal than the information at issue in Plaintiff’s Complaint.
Accordingly, the Court dismissed Plaintiff’s complaint for lack of standing. Plaintiff’s allegations just didn’t cut it—without a concrete injury, there’s no standing, and without standing, there’s no case. This ruling reinforces that not every data collection claim fits within traditional privacy harms, especially when the user voluntarily engages with the service. It’s a significant win for defendants facing similar claims and one to keep an eye on moving forward.
BIG BROTHER OR BIG BUSINESS?: E! Entertainment’s Fashion Police Might Need Troutman Amin Instead
Greetings CIPAWorld! Twice in one day? You know it must be big. This case is an absolute must-read for data privacy professionals and law students looking to break into the field. If you’re studying privacy law or tech policy or just want to see how cutting-edge legal arguments are shaping the future of digital rights, this one’s for you. Brace yourselves because we are about to dive deep into this well-drafted Complaint recently filed. A California resident has filed a sweeping class action lawsuit against E! Entertainment Television, alleging the media company’s website secretly tracks and monetizes visitor data without consent—turning users into unwitting participants in a vast digital advertising machine. See Weiler v. E! Ent. Television, LLC, No. 25STCV02509 (Cal. Super. Ct. filed Jan. 29, 2025). The Complaint, filed in Los Angeles Superior Court by Plaintiff, provides an unprecedented look into the complex web of online tracking, data brokerage, and real-time ad auctions that powers many popular websites. Plaintiff, who has regularly visited the website from 2016 through October 2024, represents potentially thousands of California residents who have had their data collected without consent.
When visitors access eonline.com, the website allegedly automatically installs two powerful tracking systems on their browsers—the Bounce Exchange Tracker operated by data broker Wunderkind and the ADNXS Tracker run by Microsoft. These trackers immediately start collecting visitors’ IP addresses, which reveal their approximate physical location, along with detailed device information like browser type, operating system, and other identifying characteristics that create a unique digital fingerprint.
Let me simplify this. Think of it like a digital license plate—once a site tags you, your activity can be traced across the web, even if you think you’re browsing anonymously. Much like a telephone number guides a call to its destination, an IP address routes data packets between devices on the internet. The traditional IPv4 format offers approximately 4.3 billion unique addresses, while the newer IPv6 system provides vastly more combinations to accommodate the growing internet.
I know I’m geeking out with these technical sophistications here, but this is fascinating as technology advances! Public IP addresses assigned by Internet Service Providers are globally unique and can reveal a user’s approximate location, while private IP addresses are used only within local networks. This distinction is essential to address, no pun intended, because private IP addresses don’t reveal geolocation, while public ones do and are extensively used in advertising.
The trackers also collect what’s known as “Device Fingerprint Information,” which includes the user-agent string (detailing precise browser and system specifications), device capabilities, supported image formats, compression methods, and persistent identifiers like PUID, GUID, UID, and PSVID. If cookies are the old-school way of tracking you, device fingerprinting is the cutting-edge upgrade—harder to delete, more invasive, and nearly impossible to avoid. Under California’s Invasion of Privacy Act (“CIPA”) § 638.50(b), these trackers qualify as “pen registers” because they capture “routing, addressing, or signaling information” without obtaining required court approval. What’s more, the lawsuit argues that these trackers also function as “trap and trace devices” under CIPA because they don’t just track outbound signals—they monitor inbound data as well, identifying where users connect from, which could further bolster the claim that E! Entertainment is violating privacy laws by monitoring user activity without disclosure.
Wunderkind’s technology goes far beyond simple data collection. According to the Complaint, it “analyze[s] everything about visitor behavior, from purchase history to traffic sources to engagement patterns to even the moment a visitor is abandoning a site using its patented exit-intent technology.” In other words, it’s not just watching—it’s waiting for the exact moment you hesitate before clicking away to push you toward engagement. Black Mirror episode, anyone? The company maintains what it calls “the largest first-party data set out of comparable solutions on the market,” using this vast collection of information to track users across multiple devices and platforms. This means that Wunderkind isn’t just tracking user behavior on E! Online—it’s enriching Microsoft’s bidstream data with additional details, allowing advertisers to bid on pre-profiled users rather than just generic ad impressions.
The lawsuit explains how this data collection feeds into a sophisticated advertising ecosystem called “real-time bidding” (“RTB”), where users’ personal data is turned into a commodity in a split-second auction. Imagine a stock market for human attention—except you don’t get a say in who’s buying or selling access to you. At the center of this system is Microsoft’s ADNXS Tracker, which functions as a “demand-side platform” (“DSP”). Its “impression bus” system processes ad requests, applies user data, and manages the entire bidding process. When someone visits E! Online, Microsoft’s ADNXS system doesn’t just load a webpage—it launches a high-speed digital auction. First, a “Supply Side Platform” sends user data to Microsoft’s Advertising Exchange, which includes device identifiers, IP address, zip/postal code, GPS location, browsing history, and other personal information, collectively known as “bidstream data.” Microsoft’s system then overlays segment data from its server-side cookie store, accumulating information through Microsoft Advertising segment pixels and client-uploaded data files.
The Advertising Exchange then broadcasts this data to multiple DSPs, who evaluate it to determine whether to bid for their advertising clients. At this point, your data isn’t just floating around in cyberspace—it’s being assessed, categorized, and priced in milliseconds. The Complaint alleges that Microsoft’s impression bus processes and facilitates RTB transactions but also plays a broader role in Microsoft’s ad-serving infrastructure, meaning data could be stored beyond just a single ad request. The lawsuit raises a major concern: even advertisers who lose the auction still receive and retain the visitor’s data. This means that a single visit to E! Online can result in personal data being shared with countless third parties—many of whom the visitor has never even heard of.
The Federal Trade Commission (“FTC”) has raised serious concerns about this real-time bidding process. The FTC warns that RTB incentivizes websites to share as much user data as possible to get higher ad valuations, particularly location data and browsing history. The process also enables sensitive data to be transmitted across geographic borders without restriction. The FTC has previously taken enforcement action against real-time bidding companies, such as Xandr (formerly owned by AT&T and later acquired by Microsoft), highlighting the potential legal exposure of E! Entertainment’s practices.
Wunderkind, meanwhile, allegedly uses the tracking data to build highly detailed consumer profiles that follow people long after they leave E! Online. As a registered data broker in California, Wunderkind maintains vast databases of consumer information that it sells to advertisers, brands, and even other data brokers. The complaint alleges that Wunderkind’s code on E! Online captured Weiler’s browser details and transmitted this information to its servers. The lawsuit argues that by allowing this data collection without obtaining explicit consent, E! Entertainment has essentially turned its audience into a product—monetizing their personal information while keeping them in the dark.
The Complaint argues these practices violate the CIPA, prohibiting certain tracking technologies without court approval. The Complaint cites explicitly recent court decisions from 2024, including Shah v. Fandom, Inc., No. 24-CV-01062-RFL, 2024 WL 4539577, at *6 (N.D. Cal. Oct. 21, 2024) and Mirmalek v. L.A. Times Commc’ns L.L.C., No. 24-cv-01797-CRB, 2024 WL 5102709, at *3-4 (N.D. Cal. Dec. 12, 2024), which found that similar trackers constituted “pen registers” due to CIPA’s “expansive language.” If the court agrees that Microsoft’s and Wunderkind’s trackers fall under this classification, E! Entertainment could face serious legal and financial consequences—including statutory damages of up to $5,000 per violation.
As digital privacy gains continued importance and online tracking faces scrutiny, this case may significantly impact how media and entertainment companies manage visitor data. While companies like E! Entertainment may argue that data-driven advertising is necessary in today’s economy, privacy advocates see lawsuits like this as long-overdue accountability for an industry that has long operated in the shadows. This case challenges E! Entertainment, and an entire industry focused on tracking, profiling, and monetizing consumers without their knowledge.
Remember, just because you can’t see tracking happening doesn’t mean it isn’t there.
As always,
Keep it legal, keep it smart, and stay ahead of the game.
Analyzing President Trump’s “Defending Women From Gender Ideology Extremism And Restoring Biological Truth To The Federal Government” Executive Order
On January 20, 2025, President Trump issued an Executive Order titled, “Defending Women From Gender Ideology Extremism And Restoring Biological Truth To The Federal Government” (the “EO”). The EO declares that “[i]t is the policy of the United States to recognize two sexes, male and female.” The EO explicitly rejects “gender ideology,” which, according to the EO, includes the notion “that males can identify as and thus become women and vice versa” and “it is possible for a person to be born in the wrong sexed body.”
Key Provisions of the Executive Order
Aside from declaring that the United States will only recognize two sexes—male and female—the other key points in this EO are as follows:
Definition of Sex. The EO defines the term “sex” as a person’s “immutable biological classification as male or female.” This specifically excludes the concept of “gender identity,” which the EO deems subjective.
Sex-Based Distinctions on Federal Policies. Federal agencies are required to use the term “sex,” not “gender,” in all their policies and official documents in enforcing sex-based distinctions.
Government-Issued Identification Documents. Government-issued identification—such as passports, visas, and federal employment records—must reflect the holder’s biological sex as defined in the EO. This reverses the Biden administration’s policy permitting Americans applying for a passport to use “X,” along with the option for male or female, as a gender marker. Andrea Lucas, acting Chair of the Equal Employment Opportunity Commission (“EEOC”) announced in a recent press release that she has “[e]nded the use of the ‘X’ gender marker” for those filing charges of discrimination (“Press Release”).
“Privacy in Intimate Spaces” Designated for Women. The EO mandates that single-sex spaces designated for women, including women’s prisons and rape shelters, are designated by biological sex and not by gender identity.
Investigation and Litigation to Enforce Sex-Based Rights. The EO directs the Attorney General, Secretary of Labor, and EEOC to “prioritize investigations and litigation to enforce the rights and freedoms identified” in the EO. In the Press Release issued by Ms. Lucas, she also announced that one of her priorities for investigations and litigations “is to defend the biological and binary reality of sex and related rights, including women’s rights to single-sex spaces at work.”
Rescission of Prior EEOC Guidance on Workplace Harassment. The EO explicitly rescinds certain guidance issued by the prior administration related to transgender individuals and gender identity based claims. This rollback includes the EEOC’s guidance on workplace harassment—which contains numerous references to gender identity harassment and discrimination—and other policies directed at LGBTQI+ individuals.
Limitation on the Scope of the Supreme Court’s Decision in Bostock v. Clayton County. The EO directs the Attorney General to immediately issue guidance narrowing the interpretation of the Supreme Court’s decision in Bostock v. Clayton County—holding that “sex discrimination” under Title VII of the Civil Rights Act includes discrimination on the basis of sexual orientation and gender identity.
Implications for Private Employers
Employers should anticipate and address questions from employees, especially from LGBTQI+ employees and allies, regarding any policy changes. Employers with policies prohibiting discrimination, harassment, and retaliation on the basis of gender, gender identity, and gender expression can reassure their employees of the company’s commitment to a safe and inclusive workplace.
Given the EEOC’s stated priority to create “single-sex spaces at work,” employers may find themselves facing conflicting obligations under federal and state law. Employers should stay informed on the developments at the federal level. Such developments might include, for example, litigation instituted by the new EEOC over restroom access and biological sex—which Ms. Lucas indicated could be a priority. Employers must also remain mindful of their obligations under state laws that explicitly prohibit discrimination, harassment, and/or retaliation on the basis of gender identity and sexual orientation.
Employers should anticipate changes to the EEOC “Know Your Rights: Workplace Discrimination is Illegal” poster, which covered employers are required to post on premises. The poster is undergoing revision pursuant to the EO.
Employers should expect changes in reporting options for identification forms that include the sex of their employees. For example, it is possible that, in light of the EO, certain government forms may no longer permit employers to include non-binary or similar gender identity information of their employees.
What’s Next?
President Trump’s EO mandates that each agency report on their implementation progress within 120 days. For now, little is known about how agencies will comply with the EO. Although we expect various agencies to begin releasing administrative guidance comporting with the EO in the coming months. Given that some of the EO’s directives may be in conflict with established legal precedent, litigation challenging the EO is possible.
General Contractor Defeats Owner’s Notice Argument and Prevails in Seattle Condo Dispute
The Washington Court of Appeals recently affirmed a jury verdict and $30 million judgment for general contractor Skanska. The case involves the construction of the 41-story Nexus condominium tower in downtown Seattle. As is often the case, one of the central issues was whether Skanska was entitled to be paid for alleged changes to its scope of work. The owner made a familiar argument: Skanska had not followed the contractual procedures for giving notice and obtaining authorization to perform change order work but had instead relied on more informal communications, including oral directives, emails, and meeting minutes.
The Court of Appeals rejected those arguments finding sufficient evidence for the jury to have concluded that the parties agreed to modify or waive strict compliance with the formal requirements of the contract. This evidence included the owner’s practice of regularly approving change order work that did not follow the contract requirements. Based on the parties’ course of conduct the court found sufficient evidence to support the jury’s award in Skanska’s favor. In addition to recovering its unpaid balance, Skanska was also awarded interest and attorneys’ fees as the prevailing party, including its appellate attorney fees. The court remanded the case for a recalculation of prejudgment interest on certain change order work but otherwise affirmed.
A copy of the court’s decision is available here.
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Insurance in the Know (Part 3): Recoupment of Defense Costs Is Not a “Right” in a Standard CGL Policy
The foundation of a policyholder’s agreement to pay premiums for a standard commercial general liability policy (CGL) is the insurer’s agreement to defend the policyholder against lawsuits and shoulder the costs of the defense. The insurer has “the right and duty to defend any ‘suit’” containing any allegation that potentially falls within the policy’s coverage. In other words, the insurer has agreed to defend the entire suit, even if it also includes non-covered claims. But along with that duty, the insurer has the valuable right to control the defense and use its resources to combat a finding of liability against the policyholder that would trigger its duty to indemnify. (Note that an insurer may have a conflict of interest in a “mixed action” alleging both covered and non-covered claims, requiring the insurer to pay for the policyholder’s choice of independent counsel, which we’ve covered previously.)
What a standard CGL does not give the insurer the right to do is seek recoupment of defense costs. Period. Yet insurers often attempt to do just that if it is later determined (usually through a declaratory judgment action) that none of the claims in the suit was covered.
Reserving a Non-Existent Right Doesn’t Make It So
In a mixed action or when potential coverage is doubtful, the insurer is obligated to reserve the right to later deny coverage and explain the reservation to the policyholder. These so-called reservation-of-rights letters may also include the insurer’s assertion of a “right” to seek reimbursement of defense costs for claims ultimately determined to be non-covered, including those claims with the potential for coverage that triggered the defense duty in the first place.
Despite the absence of any such right in the wording of the insurance contract and lack of additional consideration, some courts, most notably in California, have upheld a right of recoupment based on the equitable doctrines of implied-in-fact contract and unjust enrichment. Their theory is that the policyholder (1) could have objected to recoupment and instead impliedly consented to that condition by accepting the defense, or (2) was unjustly enriched because it ultimately turned out the insurer had no defense duty.
These rationales turn the insurer’s broad duty to defend on its head, permitting insurers to retroactively narrow the CGL’s principal benefit to policyholders. The result is certainly not equitable given that insurers could readily resolve the issue by amending policy wording to specifically enshrine a right to recoupment. Fortunately, the number of courts rejecting insurers’ recoupment arguments now predominates, perhaps in part due to the American Law Institute’s position in the Restatement of the Law of Liability Insurance that recoupment is unavailable absent an express right in the policy itself.
When a CGL insurer elects to defend a claim subject to a reservation of rights, policyholders should challenge unwarranted assertions of a right to recoup defense costs as nothing more than a unilateral attempt to diminish the very benefit the insurer agreed to provide.
Read Part One and Part Two.
TOO LATE: 7-Eleven Sued in TCPA Class Action for Allegedly Failing to Comply With Call Time Limitations–And This Is Crazy If its True
So the other day TCPAWorld.com reported on Circle K being caught in a massive TCPA class action due to marketing content in its opt in messages.
Eesh.
Well now competitor convenience store 7-Eleven is caught in a TCPA class action of its own and it also stems from low-hanging-fruit TCPA compliance issues that should never have happened (if it did.)
Background– the TCPA imposes call time limitations om messaging in some contexts. Messages cannot be sent before 8 am or after 9 pm. In some states–such as Florida–where this case is brought–the restrictions are even tighter.
Now interestingly, my read of the TCPA is that it only restricts telephone solicitations to call time hours, which means calls made with consent or an EBR are not subject to those restrictions. That is probably what 7-11 is thinking, but I am not sure. However, these exemptions do not seem to apply to state statutes. So, keep that in mind.
Regardless in the new case of Alexander Fernandez v. 7-Eleven, Plaintiff seemingly admits signing up to a 7-Eleven text club using a keyword (an always dangerous process, but that’s a topic for another day.)
While 7-Eleven does not appear to be using a double-opt in process (also odd) it does seem to be sending messages at off hours. Plaintiff provides screen shots demonstrating messages received at 9:40 and 9:41 pm.
The plaintiff seeks to represent a class of all individuals that received messages out of compliance with call time restrictions based on the called party’s time zone. Will be very interesting to see what data sets exist around such a class.
The plaintiff seemingly intentionally does not allege her phone number, so I am curious whether the area code matches Florida– where Plaintiff apparently lives. This might be a “panhandle special” where someone living in Florida’s central time zone is receiving messages intended for the eastern time zone– resulting in a message being sent at 8:41 being received at 9:41.
Then again, since Florida’s state restriction is 8 pm that wouldn’t seem to matter anyway.
Really interesting one. We will keep an eye on it.
Après Musk, Le Déluge
I began writing about Nevada corporate law more than three decades ago with an article for the California Business Law Reporter entitled “The Nevada Corporation: Is it a Good Bet?” Over the years, I have written several other articles on Nevada corporate law and authored the first treatise on Nevada’s corporate law. During this period, Nevada became one of top states for incorporation of publicly traded corporations, but Delaware continued to command a commanding preeminence.
Then came Chancellor Kathaleen S. McCormick’s decision abrogating Elon Musk’s nearly $56 billion compensation arrangement with Tesla, Inc. Tornetta v. Musk, 310 A.3d 430 (Del. Ch. 2024). Mr. Musk reacted with the following post on X:
Never incorporate your company in the state of Delaware
That post received nearly 55 million views. Suddenly, it became acceptable for large companies such as Tesla to leave Delaware. In the past year several SEC reporting companies have moved or proposed moving to Nevada. See Another Delaware Corporation Announces Stockholder Approval Of Nevada Reincorporation and Several More Companies Propose Move From Delaware To Nevada
Now, the exodus from Delaware appears to be gaining speed with the filing last week by Dropbox of its plan to move to Nevada. See Dropbox Discloses Plan To Move To Nevada. Delaware took another hit over the weekend, when it was reported that Bill Ackman intended to reincorporate his management company in Nevada. Suddenly, the Silver State is looking positively golden.
As the Delaware courts have issued lengthy, finely nuanced, and fact specific rulings, Delaware corporate law has become both less accessible and less predictable. Delaware is choking on its own decisional excesses, but has managed to hang on due to inertia and its reputation. Mr. Musk has simply made it okay for businesses to look elsewhere.
A BIG LOTS Chapter 11 Lesson: Caution Needed When Doing Business with Chapter 11 Debtors
Vendors, landlords, and other creditors often feel a sense of security when doing business with Chapter 11 debtors. The Bankruptcy Code, and even court orders entered at the outset of a bankruptcy case, seemingly provide a myriad of protections to those engaging in business with a company reorganizing under Chapter 11.
Indeed, Chapter 11 debtors often induce continued business by suggesting that they are “required” to pay all post-bankruptcy obligations in full. Nevertheless, these protections and assurances often prove to be optical illusions, leaving creditors holding the bag with significant unpaid post-petition obligations at the end of a bankruptcy case.
The recent Big Lots Chapter 11 bankruptcy filing is a massive warning signal that exposes the significant risks of doing business with Chapter 11 debtors.
Landlord Protections
The Bankruptcy Code provides heightened protections to landlords when dealing with Chapter 11 debtors. Pursuant to section 365(d)(3) of the Bankruptcy Code, a tenant debtor is required to “timely perform all the obligations of the debtor… arising from and after the petition date” under any unexpired lease. This means they must continue to fulfill lease obligations that come due after the bankruptcy filing until the lease is either assumed or rejected by the debtor.
Essentially, a landlord is entitled to receive post-petition rent payments as a high-priority administrative expense claim if the tenant does not pay in a timely manner.
Pursuant to the Bankruptcy Code, shopping center landlords are entitled to additional protections when a lease is assumed and assigned. In such circumstances, a Chapter 11 debtor must cure any defaults and provide “adequate assurance” of future performance under the lease.
If the lease qualifies as “a lease for real property in a shopping center,” a landlord is entitled to “adequate assurance” for certain specific obligations. “Adequate assurance” is intended to protect a landlord from a decline in the value of the subject premises if a lease is assumed. The assurances include requirements that:
the financial condition and operating performance of any assignee be similar;
percentage rent does not decline substantially;
all other provisions of the lease apply, such as exclusive use clauses; and
the tenant mix or balance at the shopping center not be disrupted.
“Adequate assurance” that a landlord will be compensated for any pecuniary loss is a condition to the assumption of a lease of real property in a shopping center. With such protections, landlords may feel a false sense of confidence when dealing with Chapter 11 debtors.
Trade Creditor Post-Bankruptcy Protections
The Bankruptcy Code also provides various protections to vendors that provide goods and services to Debtors after a bankruptcy is filed. Claims for such services are generally entitled to administrative expense priority status over other unsecured creditors. Further, vendors who deliver goods to debtors within twenty days before the bankruptcy filing are also entitled to administrative expense status under Section 503(b)(9) of the Bankruptcy Code.
Additionally, in many cases, Debtors seek orders allowing certain vendors to be treated as critical vendors. Based upon the doctrine of necessity, Debtors not only commit to paying critical vendors for post-petition goods, but must pay critical vendors for pre-bankruptcy claims.
Finally, to confirm a Chapter 11 bankruptcy plan, a debtor must show that it can pay all its administrative claims in full. Similar to landlords, trade creditors may also feel a false sense of post-petition security, given all of these purported protections.
Big Lots Chapter 11 Bankruptcy Leaves Administrative Creditors Massively Exposed
The recently filed Big Lots Chapter 11 bankruptcy case provides a stark illustration of the risks of doing business with a debtor post-bankruptcy. Big Lots’ proposed creditor protections proved to be mirages leaving post-petition claims substantially exposed to non-payment.
Immediately upon filing for bankruptcy protection, Big Lots provided certain assurances to its landlord and vendor community. To secure its Debtor in Possession financing, Big Lots’ Chapter 11 plan committed to a budget that included payment of landlord stub rent claims. Big Lots also commenced a critical vendor program, offering payment of pre-bankruptcy claims in return for continued open credit terms.
Big Lots also commenced a sale process that proposed to sell its business as a going concern, including over 800 stores, to Nexus Capital Partners (“Nexus”). With representations that a continued going concern business was in process, creditors were induced into continued business with Big Lots.
How the Big Lots Chapter 11 Plan Failed
As part of the sale to Nexus, Big Lots was required to deliver certain inventory value. To achieve the necessary asset value, Big Lots used its post-petition trade credit and incurred over $215 million in debt to build up its post-petition inventory. This was in addition to $38 million in 503(b)(9) twenty-day vendor claims, as well as additional post-bankruptcy landlord claims. Simply put, Big Lots exposed its trade credit and landlord constituents to well over $250 million of post-petition credit to close the deal with Nexus.
Due to Big Lots’ inability to deliver its asset value obligations under the Asset Purchase Agreement (APA) – despite pumping up over $200 million in trade credit – Nexus would not close the sale. This left Big Lots exposed to a complete fire-sale liquidation and a massive administratively insolvent estate, with little, if any, of the post-petition obligations to be paid.
GBRP Saves the Day, Sort Of
“Luckily,” total catastrophe was averted by a last-minute sale transaction with Gordon Brothers Retail Properties (“GBRP”) where between 200 and 400 stores will be saved. However, the GBRP transaction only provides minimal hope for recovery to post-bankruptcy vendors and landlords.
As part of its APA, GBRP will pay select post-petition creditors, leaving most vendors and landlords in the cold. GBRP’s APA protects professionals, certain landlords, and go-forward trade creditors without covering the post-petition obligations accrued to date. The proposed APA terms created categories of preferred administrative claimants, with the balance remaining prejudiced by the sale.
For example, Big Lots’ Chapter 11 wind-down budget increased a prior fee reserve for professionals by $13,438,000 for two months of continued service. In addition, certain landlords will be paid $17 million in satisfaction of unpaid administrative rent and Debtors will purportedly remain current on their rent going forward. This, while the $250 million in other post-bankruptcy claims remains largely unpaid.
Big Lots and GBRP carved out approximately $19 million in assets (tax refunds, litigation proceeds, and a percentage of real estate sales), which will remain behind to pay a paltry dividend to administrative claimants.
The creditor community raised concern that the GBRP sale violated the priority scheme of the Bankruptcy Code, by allowing Big Lots to pick and choose among its creditors. The court overruled the creditor community’s cries that proceeds of the GBRP sale be escrowed with distributions and priority to be decided post-closing. The Bankruptcy Court allowed the transaction to proceed per the terms mandated by GBRP.
Avoiding the Big Lots Chapter 11 Outcome
In sum, while numerous trade vendors and landlords engaged with Big Lots after the bankruptcy was filed, feeling secure that their post-petition claims would be paid, they are now left with over $200 million in post-petition debt, with only nominal distributions on the horizon.
Big Lots’ Chapter 11 provides a harsh lesson that no matter what protections or assurances are assumed, creditors must be vigilant in enforcing their post-petition rights and be wary when extending post-petition credit, or otherwise engaging in business with a Chapter 11 debtor.
Real Estate Beneficial Ownership Regulatory Alert: Florida Restricts Real Estate Ownership by Individuals and Entities From “Countries of Concern”
SUMMARY
On 17 August, a Florida judged denied a bid by four Chinese citizens and a real estate brokerage firm for summary judgment to block enforcement of Senate Bill 264. Effective 1 July 2023, Senate Bill 264 (codified under Fla. Stat., ch. 692, pt. III – Conveyances to Foreign Entities) (the Statute), prohibits the direct or indirect ownership of specific categories of real estate by “foreign principals” from a foreign “country of concern,” defined as the People’s Republic of China, the Russian Federation, the Islamic Republic of Iran, the Democratic People’s Republic of Korea, the Republic of Cuba, the Venezuelan regime of Nicolás Maduro, or the Syrian Arab Republic, or any agency of or any other entity of significant control of such foreign country of concern. The Statute prohibits the acquisition of (1) any interest in agricultural land by a foreign principal, (2) any interest in real property located near a military installation or critical infrastructure by a foreign principal, and (3) any real estate interest by a foreign principal of the People’s Republic of China, subject to very limited exceptions. The law is currently in effect; however, the case is still ongoing.
WHAT SHOULD CLIENTS DO NOW AND NEXT?
Failure to comply with the requirements of the Statute may well expose individuals and entities to civil penalties, as well as potential forfeiture of their property. If you are an entity that may potentially have any beneficial owners from a country of concern, you should review ownership structures to determine if any reporting requirements or restrictions will apply to you. Notably, the Statute applies to acquisitions of any interest in land, and it is unclear whether it also could apply to certain leasehold estates. Sellers, buyers, landlords, tenants, and real estate professionals should remain aware of Florida’s requirements for disclosures of foreign principals at the inception of contract negotiations and at closing of real estate purchase and leasing transactions. Florida mortgage lenders and landlords likely will adopt further documentation requirements for verifying the status of borrowers and tenants under “know your client/tenant” inquiries and disclosures.
WHAT REAL ESTATE TRANSACTIONS DOES THE STATUTE APPLY TO?
The Statute applies in three scenarios: (1) agricultural land held by a foreign principal; (2) property near military installations or critical infrastructure held by a foreign principal, and (3) real estate held by a foreign principal from the People’s Republic of China.1
Under these rules, a “foreign principal” is broadly defined and includes an entity or individual that has ties to a “country of concern,” including a person who is domiciled in a country of concern and not a US citizen or lawful US permanent resident, an entity organized or having its principal place of business in a country of concern or a subsidiary of such entity, or any person, entity, or collection of persons or entities described above having a controlling interest in an entity or subsidiary formed for the purpose of owning real property in Florida.2
There is an exemption for an indirect de minimus ownership interest in the underlying land. A foreign principal may acquire and hold an ownership interest if such interest is held as equities in a publicly traded company owning the land and the ownership interest is (a) less than 5% of any class of registered equities or less than 5% in the aggregate in multiple classes of the registered equities or (b) a noncontrolling interest in an entity controlled by a company that is both registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended, and is not a foreign entity.3
Prohibition Related to Agricultural Land
Foreign principals are barred from, directly or indirectly, acquiring an interest in agricultural land.4 For these purposes, “agricultural land” means land classified as agricultural by the property appraiser as required under section 193.461 of the Florida Statutes.5 In general, this is land that must adhere to specific use requirements in order to obtain and maintain the tax advantages of the agricultural classification.
Prohibition Related to Property Near Military Installations or Critical Infrastructure
Foreign principals are also prohibited from acquiring property interests if the underlying property lies within 10 miles of a military installation or critical infrastructure facility.6 The definition of “critical infrastructure facility” is comprised of ten (10) types of facilities that employ security measures that are designed to exclude unauthorized persons, such as electrical power plants, water treatment facilities, seaports, and airports.7 There is a limited residential property exception that allows foreign principals to acquire residential real property of no more than two acres in size if (a) the residential real property is not located within five miles of a military installation, (b) the foreign principal holds a US visa, and (c) the purchase is in the name of the US visa holder.8
Prohibition on the Acquisition of Property by Chinese Concerns
Finally, foreign principals of the People’s Republic of China are prohibited from acquiring any real property located within the state of Florida.9 The limited residential property exception, described above, is available to a natural person who would otherwise be prohibited from acquiring such property.10
Exceptions
Foreign principals who owned an interest in property as describe above prior to 1 July 2023, may continue to hold such interest.11 However, foreign principals will be required to register such ownership with the Florida Department of Agriculture and Consumer Services (FDACS), in the case of agricultural land, and the Florida Department of Commerce (formerly, the Department of Economic Opportunity) (FDC), in all other cases, before 1 January 2024.12
In addition, a foreign principal may acquire prohibited property on or after 1 July 2023, by devise or descent, through the enforcement of security interests, or through the collection of debts, provided that the person or entity registers such ownership and sells, transfers, or otherwise divests itself of such real property within three years after acquiring the real property.13
Compliance and Penalties
Purchase and sale contracts involving assets that include Florida real property must be accompanied by a notice to be acknowledged by the buyer, either as a separate disclosure document or as an element of the contract. Furthermore, at closing of any acquisition or other transfer of Florida real estate, the buyer must provide an affidavit certifying under penalties of perjury that it is not a foreign principal as defined in section 692.201(4) and it is otherwise in compliance with the new Statute.14 Notably, completion of both the notice and the affidavit will require careful review and understanding of the Statute.
The failure to obtain an affidavit will not create a title defect or affect insurability, and absent actual knowledge that the buyer is a foreign principal, the closing agent will not have civil or criminal liability for noncompliance.15 However, interests in land acquired in violation of the ban may result in forfeiture of the property to the state.16 Enforcement is delegated to the FDACS, in the case of agricultural land, and the FDC, in the case of other property, which are empowered to file a lis pendens and petition the circuit court of applicable jurisdiction to enter an order of forfeiture.17 In the case of forfeiture, the state acquires the property subject to the rights of any lienholders.18
In advance of the Florida Real Estate Commission (FREC) promulgation of official forms for Notices to Purchasers and Affidavits for Purchasers with Foreign Interests, the Florida Land Title Association (FLTA) is recommending use of a set of forms that can be obtained at https://www.flta.org/ForeignInterests, which include forms of affidavits for individuals or entities with foreign interests, and a form of notice that contains a summary of the legal prohibitions and compliance requirements.
EFFECTIVE DATES AND REPORTING
The prohibitions on the acquisition of agricultural land by foreign principals, property near military installations or critical infrastructure by foreign principals, and real estate by foreign principal from the People’s Republic of China, as well as the affidavit requirement, became effective on 1 July 2023.19 The Statute does not provide a stated exemption for properties that went under contract before 1 July 2023 but closed (or are scheduled) after that date. Contracts and leases presently under negotiation and future transactions should address the prohibitions and compliance requirements and buyer disclosures. All buyers and tenants, regardless of foreign principal status, will be required to comply with these requirements after 1 July 2023.
As noted above, for property held before 1 July 2023, or acquired after such date by devise or descent, through the enforcement of security interests, or through the collection of debts, foreign principals will have the obligation to report and register their ownership to the FDACS, in the case of agricultural land, or the FDC, in all other cases, before 1 January 2024 or within 30 days of such acquisition.20 Registration will be deemed filed late and subject to fines if filed 30 days after 31 January 2024 or 30 days after such acquisition.21 Failure to register may result in a civil penalty of US$1,000 per day of noncompliance.22
RECENT DEVELOPMENTS
On 22 May 2023, a lawsuit was filed in the U.S. District Court for the Northern District of Florida claiming that the Statute violates the Equal Protection Clause, Due Process Clause, and Supremacy Clause of the U.S. Constitution and the Fair Housing Act and is seeking an injunction against implementation of this Statute.23 The Department of Justice issued a Statement of Interest arguing that the Statute is unconstitutional.24 However, on 17 August 2023, a Florida federal judge denied the plaintiffs motion for preliminary injunction, finding that the plaintiffs did not demonstrate a substantial likelihood of success on the merits of their claims.25 An emergency motion for an injunction pending appeal was quickly filed by the plaintiffs on 21 August 2023, and denied on 23 August 2023.26 On 26 August 2023, the plaintiffs filed for an injunction and expedited appeal with the US Court of Appeals for the Eleventh Circuit. The case is still ongoing.
Meanwhile, the Statute authorizes the FDC, FDACS, and FREC to begin rulemaking concerning compliance and implementation of this Statute. The FLTA forms are precursors to such future rulemaking, and thus eventually will be superseded by such FREC rules and related forms when adopted under the Florida Administrative Code. On 7 August 2023, the FDC and FREC announced plans to propose regulations related to Senate Bill 264.
Florida is not alone in its interest in tracking or prohibiting foreign ownership of certain real estate assets. In addition to the federal reporting regime under the Agricultural Foreign Investment Disclosure Act of 1978, as amended, many states, including Alabama, Arkansas, Idaho, Louisiana, Montana, Ohio, Tennessee, Utah, and Virginia, which have each enacted laws in in 2023, have implemented various restrictions and reporting requirements related to foreign beneficial ownership of real estate. Moreover, the United States is not unique in its interest in the identity of foreign owners of real estate within its borders.
Footnotes
1 Fla. Stat. § 692.201-205 (2023).
2 Fla. Stat. § 692.201(4) (2023).
3 Fla. Stat. §§ 692.202(1), 692.203(1), 692.204(1)(b) (2023).
4 Fla. Stat. § 692.202(1) (2023).
5 Fla. Stat. § 692.201(1) (2023).
6 Fla. Stat. § 692.203(1) (2023).
7 Fla. Stat. § 692.201(2) (2023).
8 Fla. Stat. § 692.203(4) (2023).
9 Fla. Stat. § 692.204(1) (2023).
10 Fla. Stat. § 692.204(2) (2023).
11 Fla. Stat. §§ 692.202(2), 3(a), 692.203(2), (3)(a), 692.204(3), 4(a) (2023).
12 Id.
13 Fla. Stat. §§ 692.202(4), 692.203(4), 692.204(5) (2023).
14 Fla. Stat. §§ 692.202(6), 692.203(6), 692.204(6) (2023).
15 Id.
16 Fla. Stat. §§ 692.202(7), 692.203(7)(a), 692.204(7)(a) (2023).
17 Fla. Stat. §§ 692.202(9), 692.203(7), 692.204(7)(b) (2023).
18 Fla. Stat. §§ 692.202(6)(e), 692.203(6)(e), 692.204(7)(e) (2023).
19 S. 264, 2023 Leg., Reg. Sess. § 12 (2023) (enacted).
20 Fla. Stat. §§ 692.202(2), 3(a), 692.203(2), (3)(a), 692.204(3), 4(a) (2023).
21 Id.
22 Id.
23 Complaint, Shen v. Wilton, Case No. 4:23-cv-208-AW-MAF (N.D. Fla. May 22, 2023).
24 Amicus Curiae Brief by United States, Shen v. Wilton, Case No. 4:23-cv-208-AW-MAF (N.D. Fla. June 27, 2023).
25 Preliminary Injunction Decision, Shen v. Wilton, Case No. 4:23-cv-208-AW-MAF (N.D. Fla. August 17, 2023).
26 Notice of Appeal, Shen v. Wilton, Case No. 4:23-cv-208-AW-MAF (N.D. Fla. August 21, 2023); Order Denying Motion for Injunction Pending Appeal, Shen v. Wilton, Case No. 4:23-cv-208-AW-MAF (N.D. Fla. August 23, 2023).
Even Passive Trusts?!? Maryland Extends Mortgage Lender Licensure Requirements to Holders of Residential Mortgage Loans
The Maryland Office of Financial Regulation (OFR) issued new guidance and emergency regulations extending mortgage lender licensure requirements to include acquirers and assignees of residential mortgage loans on Maryland properties. This guidance stems from the Maryland Appellate Court’s decision in Estate of Brown v. Ward (April 2024), extending the licensing obligations—previously understood to apply to brokers, originating lenders and servicers—to all parties who acquire or are assigned Maryland mortgage loans. The OFR explicitly states those parties include “mortgage trusts, including passive trusts,” unless expressly exempted.
The new guidance took effect immediately when released on January 10, 2025, but the OFR has indicated that enforcement actions will be suspended until April 10, 2025, allowing time for acquirers and assignees (and, yes, even passive trusts) to apply for the necessary licenses “without undue burden.”
Formal Guidance and Emergency Regulations
While the OFR had not previously interpreted Maryland’s Mortgage Lender Law to apply to assignees of mortgage loans, this new guidance, and the emergency regulations introduced to implement this guidance, “clarify” that licensing requirements now extend to assignees and mortgage trusts (yes, that’s right, even passive trusts). As background, the OFR indicates this clarification recognizes the reasoning in Estate of Brown, where the Court determined that an assignee of a HELOC subject to the open-end credit grantor (OPEC) provisions required a mortgage lender license based on (1) the inclusion of assignees in the definition of credit grantor under the OPEC scheme and (2) the common law principle “that an assignee inherits the rights and obligations of the original lender, including the duty to be licensed under Maryland law.”
The OFR’s guidance, however, goes further than the Estate of Brown decision. The OFR extends the Estate of Brown rationale to require a license under either the Maryland Mortgage Lender Law or the Installment Loan Law for any entity acquiring or assigned any mortgage loan.
Additionally, the emergency regulations make minor adjustments to accommodate the licensing of passive trusts:
Principal Officer Requirements: The regulations clarify that for passive trusts, the principal officer (who must have at least three years of experience in the mortgage business) can be the trustee, or if the trustee is an entity, an individual deemed a principal officer of the trustee under the criteria of the existing regulation.
Net Worth Requirements for Passive Trusts: Passive trusts can meet the net worth requirement by providing evidence that they hold or will hold sufficient assets to satisfy the requirement within 90 days of licensure, if the trust’s only assets are mortgage loans that it has not yet acquired.
Estate of Brown v. Ward
In Estate of Brown, the Court ruled that a consumer could use a defense against foreclosure because the assignee of the related HELOC was not licensed under the Maryland Credit Grantor provisions. The Court determined that the assignee—despite not originating the loan—was still required to be licensed to take advantage of the streamlined foreclosure process available to licensed entities.
The Court’s reasoning relied heavily on the statutory definition of “credit grantor” under Maryland law, which was amended to make a “correction” in 1990 to, among other things, include assignees in this definition. The court interpreted this to mean that the licensure requirement – which applies to a credit grantor that “makes” a loan – applies to assignees, in line with the principle that an assignee generally takes on the same rights and obligations as the assignor. This interpretation relied on the Court’s decision in Nationstar Mortgage LLC v. Kemp (2021), which concluded that assignees were subject to statutory usury and fee provisions applicable to “licensees” because assignees inherit the same responsibilities under the law as the original lender. The Estate of Brown decision extended this rationale to hold that because assignees succeed to the same rights and obligations as the assignor there was no indication that the legislature intended to exclude assignees from the licensure provisions.
Next Steps for Acquirers or Assignees of Maryland Mortgage Loans
For those involved in transactions involving Maryland mortgage loans (we’re looking at you sponsors securitizing Maryland mortgage loans), your immediate first step should be to carefully review your activities to determine whether licensure is required and if any exemptions apply. The importance of this first step was emphasized through the OFR’s January 31 bulletin which confirmed that “neither the [Estate of Brown] decision, nor OFR Guidance, overrides the[] statutory exemptions and exclusions” included in the licensure schemes (one of which exists for GSEs and trusts created by GSEs).
Key steps to consider include:
Identify the acquirer or assignee of the loan: Is it a statutory trust, limited liability company or corporation that is a separate legal entity or a common law trust that is not?
Check for applicable exemptions: While no express exemption for trusts is provided, ask if any other exemptions could apply to the trust in your structure.
Determine how the loan is being assigned: In the case of a trust, is the acquisition or assignment structured to transfer title to loan to the trust itself or to a trustee on behalf of a trust?
Assess how title is being recorded: In the case of a trust, is title being recorded in the name of the trust or in the name of the trustee (which is the more typical approach)?
Working through these steps will help determine if the acquirer or assignee is within the scope of the OFR’s guidance and emergency regulations and/or whether an exemption may apply.
With less than 50 business days between now and when the OFR may pursue enforcement actions on April 10, 2025, those who currently hold or may in the future acquire or be assigned Maryland mortgage loans and those who sponsor mortgage trusts or other entities to do so should strongly consider preparing for licensure. That may mean the following:
Register for the Nationwide Multistate Licensing System (NMLS): Maryland license applications must be submitted through the Nationwide Multistate Licensing System (NMLS), and an NMLS account is required.
Determine the “principal officer” to be identified on the license application: A principal officer with at least three years of mortgage lending experience must be designated.
Engage in discussions with your trustees if you have a mortgage trust and determine the “principal officer” may be the trustee or a principal officer of the trustee: Coordination with the trustees of mortgage trust (yes, including passive trusts) will be critical to navigating the licensure requirements and related application, especially if you determine that the principal officer will be an employee of the trustee.
Ensure compliance with net worth requirements: Passive trusts must be able to satisfy the statutory net worth requirement by providing evident of the assets that will be held within 90 days of licensure.
While we are actively participating in the preparation of a legislative proposal intended to further clarify Maryland’s mortgage lender licensure laws in a way that does not unduly impair the secondary trading and the securitization of Maryland mortgage loans, the legislative process can be unpredictable. Start now, rather than passively waiting for April 10, 2025 to arrive. As always, Hunton stands ready to help you navigate these and other regulatory challenges.
Netflix Content Becomes Federal Evidence: EDNY’s OneTaste Prosecution Faces Scrutiny Amid DOJ Transition
Recent developments in the Eastern District of New York’s prosecution of wellness company OneTaste in U.S. v. Cherwitz have raised novel questions about the intersection of streaming content and criminal evidence.1 Defense motions filed in December of 2024 and January 2025 challenge the government’s use of journal entries originally created for a Netflix documentary as key evidence in its forced labor conspiracy case. This occurs during a sea change in DOJ priorities entering a new presidential administration.
After a five-year investigation, EDNY prosecutors in April of 2023 filed a single-count charge of forced labor conspiracy against OneTaste founder Nicole Daedone and former sales leader Rachel Cherwitz. The government alleges the conspiracy unfolded over a fourteen-year span, but in a prosecutorial first did not charge a substantive crime. Over the course of the prosecution, the defendants filed repeated motions with the court asking it to order the government to specify the nature of the offense. Most recently, Celia Cohen, newly appointed defense counsel for Rachel Cherwitz, highlighted in a January 18 motion the case’s unusual nature: “The government has charged one count of a forced labor conspiracy…without providing any critical details about the force that occurred and how it specifically induced any labor.”
In recent defense filings, the prosecution has faced mounting scrutiny over the authenticity of journal entries attributed to key government witness Ayries Blanck. Prosecutors had previously moved in October of 2024 for the court to admit the journal entries as evidence at trial for their case in chief. In a December 30 motion, Jennifer Bonjean, defense counsel for Nicole Daedone revealed that civil discovery exposes that the journal entries presented by the government as contemporaneous accounts from 2015 were actually created and extensively edited for Netflix’s 2022 documentary “Orgasm Inc” on OneTaste.
“Through metadata and edit histories, we can watch entertainment become evidence,” Bonjean argued in her motion. Technical analysis from a court-ordered expert showed the entries underwent hundreds of revisions by multiple authors, including Netflix production staff, before being finalized in March 2023 – just days before a sealed indictment was filed against defendants Cherwitz and Daedone. The defense has argued that this Netflix content was presented to the grand jury to secure an indictment.
The government’s handling of these journal entries took a dramatic turn during a January 23 meet-and-confer session. After defense counsel challenged the authenticity of handwritten journals matching the Netflix content, prosecutors abruptly withdrew them from their case-in-chief. While maintaining the journals’ legitimacy, this retreat from evidence previously characterized as central to their case prompted new defense challenges.
“This prosecution is a house of cards,” argued defense counsel Celia Cohen and Michael Roboti of Ballard Spahr in a January 24 motion to dismiss. Cohen and Roboti, who joined Rachel Cherwitz’s defense team earlier this month, highlighted how the government’s withdrawal of the handwritten journals “exemplifies the serious problems with this prosecution.” Their motion notes that defense witnesses in a parallel civil case have exposed government witnesses as “perjurers” who “have received significant benefits from the government and from telling their ‘stories’ in the media.”
The matter came to head during a January 24 hearing before Judge Diane Gujarati, who had previously denied prosecutors’ request to grant anonymity to ten potential witnesses. When Cohen attempted to address unresolved issues regarding the journals, she was sharply rebuked by the court, which had indicated it would not address the new filing during the scheduled hearing. Gujarati stated that she did not intend to schedule any further conferences before trial. The trial date is scheduled for May 5, 2025.
The case’s challenges coincide with significant changes at DOJ and EDNY under the new Trump administration. EDNY Long Island Division Criminal Chief John J. Durham was sworn in as Interim U.S. Attorney for EDNY on January 21, following former U.S. Attorney Breon Peace’s January 10 resignation. Peace spearheaded the OneTaste prosecution. Durham will serve until the Senate confirms President Trump’s nominee, Nassau County District Court Judge Joseph Nocella Jr.
The timing is particularly significant given President Trump’s January 20 executive order “Ending The Weaponization of The Federal Government.” The order specifically cites the EDNY prosecution of Douglass Mackey as an example of “third-world weaponization of prosecutorial power.” This reference carries special weight as EDNY deployed similar strategies in both the Mackey and Cherwitz cases – single conspiracy charges without substantive crimes, supported by media narratives rather than traditional evidence.
As Durham takes the helm at EDNY, this case presents an early test of how the office will handle prosecutions that blend entertainment with evidence, and whether novel theories of conspiracy without specified crimes will survive increased scrutiny under new leadership. The transformation of Netflix content into federal evidence may face particular challenges as the Attorney General reviews law enforcement activities of the prior four years under the new executive order’s mandate.
The government’s position faces further scrutiny as mainstream media begins to question its narrative. A January 24 Wall Street Journal profile by veteran legal reporter Corinne Ramey presents Daedone as a complex figure whose supporters call her a “visionary,” while examining the unusual nature of prosecuting wellness education as forced labor. The piece’s headline – “She Made Orgasmic Meditation Her Life. Not Even Prison Will Stop Her” – captures both the prosecution’s gravity and Daedone’s unwavering commitment to her work despite federal charges.
1 U.S. v. Cherwitz, et al., No. 23-cr-146 (DG).