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In an issue of first impression, a Massachusetts bankruptcy court will decide whether Toysmart.com, a bankrupt Internet retailer, can sell its customer list despite a guarantee that such information “will never be shared with a third party.” Briefs opposing the proposed sale are due today. The hearing is scheduled for July 26. TRUSTe, a nonprofit agency that certifies the privacy policy of on-line retailers, including Toysmart, plans to oppose the sale. The recent shake-up among dot-coms has sparked a heightened interest in the issue. “As more companies go belly up, this type of incident can happen again and again,” said TRUSTe spokesman David Steer. For many e-commerce companies, customer lists may be their primary — if not their only — asset. Bankruptcy lawyers following the case agreed that the case was without precedent. “It’s a gray area,” said Tina L. Brozman, former Chief Judge of the U.S. Bankruptcy Court for the Southern District of New York and a partner at the New York office of Bingham Dana. Although the main goal of the bankruptcy code is to maximize return for creditors, there are circumstances in which issues of health, safety and welfare will trump, she explained. With matters that are not considered to be of public importance, however, third parties’ rights may be overridden, she said. The Toysmart case “is somewhere in the middle,” Ms. Brozman said. Fascinated by the “$64,000 question,” as described by Larren M. Nashelsky, a partner at the New York office of Morrison & Foerster, lawyers have been scouring the code for clues. Amelia Boss, a professor at Temple University School of Law, predicted the court might look to �365 of the code, which governs assignment of contracts between the debtor and a third party. That section states that barring certain exceptional circumstances, non-assignment clauses are generally unenforceable against a debtor. The court could consider Toysmart’s privacy promise to be in the nature of such an unenforceable non-assignment clause, and approve the sale on those grounds. Yet the bankruptcy court may have a way out of the controversy. Walt Disney Co., which is a majority owner of Toysmart, has offered to buy the customer list and destroy it. Lawrence P. Gottesman, head of the bankruptcy practice at Brown Raysman Millstein Felder & Steiner, noted that if the court takes the offer, it would not set any useful precedent. Situations involving an “embarrassed deep pocket equity holder” are pretty unusual, he explained. The Federal Trade Commission has also gotten involved, suing for an injunction in Massachusetts district court to bar the sale as an unfair trade practice. It may also file a notice of pending action in the bankruptcy court.

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