Bankruptcy Behind Closed Doors

Defining the limits of confidential commercial information can also be aided by reviewing cases decided both prior to and after Orion Pictures, where courts have refused to seal court records. The fact that the parties include a confidentiality provision in their agreement is by no means determinative. See In re MUMA Services Inc., 279 B.R. 478, 485 (Bankr. D. Del. 2002). If that were the case, Section 107 would be rendered meaningless. See Id. Furthermore, bankruptcy courts will not allow sealing merely because something is labeled as “confidential commercial information.” For example, in Barney's, the court refused to seal an offering letter where the non-debtor party's motivation for sealing was that it did not want to be associated with the transaction if it ultimately fell through and even though the non-debtor party threatened to withdraw its offer if its name were revealed. 201 B.R. at 705, 707-09. Mere embarrassment will not justify sealing the court's records. See Analytical Systems, Inc., 83 B.R. 833, 836 (Bankr. N.D. Ga. 1987). Also, the Ninth Circuit Bankruptcy Appellate Panel refused to allow the sealing of a list of debenture holders where the debtor argued that list would be used by people seeking to take advantage of the debenture holders or solicit them for an improper purpose. See In re Itel Corp., 17 B.R. 942, 943 (9th Cir. B.A.P. 1982).

Drawing the Line

Among the skills good bankruptcy practitioners develop is the ability to juggle. The goal of a consensual plan of reorganization requires the ability to keep each creditor or equity interest group happy as deals are struck with other creditor groups and hope that when group A learns what group B negotiated, group A will not want to renegotiate. In complex, multi-class plans, there is not a practitioner alive who would not welcome a way to keep secret from one creditor group what another creditor group with similar rights is receiving under a plan and to keep sensitive plan provisions out of the hands of the public and the debtor's competitors. Negotiations would be smoother and it would likely be less costly for the debtor. Competitors would not know what debt burdens the debtor has undertaken and would not be aware of other constraints on the debtor's business that might give an edge to the competitor. Yet, no one to date has had the temerity even to suggest to a court that the plan and its treatment of creditors or equity interest holders be deemed commercial confidential information and be sealed from public view.

So, if it is accepted that the treatment of creditors claims in a bankruptcy is the very essence of what must be made public if the system is to engender the confidence and retain the integrity the courts universally agree must be maintained, then is it appropriate to seal documents if there is a resolution of claims outside of a plan? Is the debtor free, under the guise of Bankruptcy Rule 9019 settlements, to obtain favorable terms in a new contract, or to resolve claims and argue that the resolution and how it came about is confidential commercial information because other creditors, similarly situated, would attempt to use the information to their advantage? The authors submit that it is not and that there should not be two sets of rules that apply depending on whether a plan is the vehicle that contains the sensitive information or the sensitive information is found within a separate motion or other pleading. While the definition of confidential commercial information can be read as broadly or as narrowly as a court wishes to read it, we suggest that the sealing of documents was intended as the rare exception to the general rule that bankruptcy is to be conducted in the open. Courts should resist a debtor's entreaties to seal information that goes to the heart of the bankruptcy process and should be alert to attempts to shift the burden of proof. The fact that competitors may have access to more information about a debtor than they would if the bankruptcy case had not been filed is a factor to be taken into account in deciding to file for relief. It is not a justification to conduct the bankruptcy process in secret with only a handful of key participants able to discern what is taking place and forcing other parties in interest to incur the often substantial costs of fighting a motion to seal in a foreign court to exercise their statutory right to be heard.

Meeting the Burden

To meet its burden under section 107(b), a debtor should be prepared to show what the ramifications will likely be to the estate if the information in question is revealed. A debtor whose sole asset consists of a customer list whose value would be lost if publicly disclosed would never disclose that list. In such a case, the harm to the debtor caused by disclosure is obvious and deserving of protection. The debtor should also be prepared to distinguish the information to be sealed from the kinds of information that go to the heart of the bankruptcy process and are likely to remain subject to public scrutiny. Frequently, debtors needlessly paint with a broad brush seeking to seal entire agreements when all but a few paragraphs do not contain sensitive information. By limiting requests to exceptional circumstances, the court is likely to view those requests more favorably.

Part Two of a Two-Part Article.

Last month, we discussed the perceptible increase in the number of bankruptcy transactions taking place with the underlying arrangements being placed under seal. We discussed disclosure obligations, Section 107 and Bankruptcy Rule 9018, and commercial information, citing Orion Pictures as a leading case on the issue of what constitutes “confidential commercial information.”

When Bankruptcy Courts Will Not Seal Records

Defining the limits of confidential commercial information can also be aided by reviewing cases decided both prior to and after Orion Pictures, where courts have refused to seal court records. The fact that the parties include a confidentiality provision in their agreement is by no means determinative. See In re MUMA Services Inc., 279 B.R. 478, 485 (Bankr. D. Del. 2002). If that were the case, Section 107 would be rendered meaningless. See Id. Furthermore, bankruptcy courts will not allow sealing merely because something is labeled as “confidential commercial information.” For example, in Barney's, the court refused to seal an offering letter where the non-debtor party's motivation for sealing was that it did not want to be associated with the transaction if it ultimately fell through and even though the non-debtor party threatened to withdraw its offer if its name were revealed. 201 B.R. at 705, 707-09. Mere embarrassment will not justify sealing the court's records. See Analytical Systems, Inc., 83 B.R. 833, 836 (Bankr. N.D. Ga. 1987). Also, the Ninth Circuit Bankruptcy Appellate Panel refused to allow the sealing of a list of debenture holders where the debtor argued that list would be used by people seeking to take advantage of the debenture holders or solicit them for an improper purpose. See In re Itel Corp., 17 B.R. 942, 943 (9th Cir. B.A.P. 1982).

Drawing the Line

Among the skills good bankruptcy practitioners develop is the ability to juggle. The goal of a consensual plan of reorganization requires the ability to keep each creditor or equity interest group happy as deals are struck with other creditor groups and hope that when group A learns what group B negotiated, group A will not want to renegotiate. In complex, multi-class plans, there is not a practitioner alive who would not welcome a way to keep secret from one creditor group what another creditor group with similar rights is receiving under a plan and to keep sensitive plan provisions out of the hands of the public and the debtor's competitors. Negotiations would be smoother and it would likely be less costly for the debtor. Competitors would not know what debt burdens the debtor has undertaken and would not be aware of other constraints on the debtor's business that might give an edge to the competitor. Yet, no one to date has had the temerity even to suggest to a court that the plan and its treatment of creditors or equity interest holders be deemed commercial confidential information and be sealed from public view.

So, if it is accepted that the treatment of creditors claims in a bankruptcy is the very essence of what must be made public if the system is to engender the confidence and retain the integrity the courts universally agree must be maintained, then is it appropriate to seal documents if there is a resolution of claims outside of a plan? Is the debtor free, under the guise of Bankruptcy Rule 9019 settlements, to obtain favorable terms in a new contract, or to resolve claims and argue that the resolution and how it came about is confidential commercial information because other creditors, similarly situated, would attempt to use the information to their advantage? The authors submit that it is not and that there should not be two sets of rules that apply depending on whether a plan is the vehicle that contains the sensitive information or the sensitive information is found within a separate motion or other pleading. While the definition of confidential commercial information can be read as broadly or as narrowly as a court wishes to read it, we suggest that the sealing of documents was intended as the rare exception to the general rule that bankruptcy is to be conducted in the open. Courts should resist a debtor's entreaties to seal information that goes to the heart of the bankruptcy process and should be alert to attempts to shift the burden of proof. The fact that competitors may have access to more information about a debtor than they would if the bankruptcy case had not been filed is a factor to be taken into account in deciding to file for relief. It is not a justification to conduct the bankruptcy process in secret with only a handful of key participants able to discern what is taking place and forcing other parties in interest to incur the often substantial costs of fighting a motion to seal in a foreign court to exercise their statutory right to be heard.

Meeting the Burden

To meet its burden under section 107(b), a debtor should be prepared to show what the ramifications will likely be to the estate if the information in question is revealed. A debtor whose sole asset consists of a customer list whose value would be lost if publicly disclosed would never disclose that list. In such a case, the harm to the debtor caused by disclosure is obvious and deserving of protection. The debtor should also be prepared to distinguish the information to be sealed from the kinds of information that go to the heart of the bankruptcy process and are likely to remain subject to public scrutiny. Frequently, debtors needlessly paint with a broad brush seeking to seal entire agreements when all but a few paragraphs do not contain sensitive information. By limiting requests to exceptional circumstances, the court is likely to view those requests more favorably.