“Signed, [Un]Sealed, Delivered” – New York Bankruptcy Court Rejects Uncontested Motion to Seal; Sets Gold Standard for Public Access to Court Filings

Contributed by Doron P. Kenter.
In Togut v. Deutsche Bank AG, Cayman Islands Branch (In re Anthracite Capital, Inc.) et al., Chief Judge Morris of the United States Bankruptcy Court for the Southern District of New York recently provided us with important guidance regarding what may or may not be protected from public inspection in bankruptcy proceedings.  In her decision, she reminds us of the core principle of public access to court proceedings and admonishes us to only sparingly seal otherwise public documents.
Section 107(a) of the Bankruptcy Code codifies the common law right to inspect and copy judicial records, which are presumed to be accessible to the public and subject to examination without charge.  In turn, section 107(b) creates a narrow exception to this presumption, requiring courts to protect parties from disclosure of “confidential . . . commercial information” or “scandalous or defamatory matter.”  Bankruptcy Rule 9018 accordingly permits the bankruptcy court to “make any order which justice requires” in connection with invoking section 107.  Drawing on extensive precedent, Anthracite provides useful guideposts in understanding the nature and extent of section 107 of the Bankruptcy Code.
Background
On March 15, 2012, the chapter 7 trustee for Anthracite Capital commenced four adversary proceedings against a number of major financial institutions.  The complaints in the adversary proceedings purportedly included highly confidential commercial information.  Accordingly, the trustee moved to file the complaints under seal, noting that the sealing order should be put in place until confidentiality issues could be worked out.  Six weeks after authorizing the complaints to be filed under seal, the court signed an order authorizing the other documents in the adversary proceedings to remain under seal.  Thereafter, while the parties continued to represent that they were negotiating a settlement, the sealing order was extended from time to time until March or April of 2013, at which time the court extended the sealing order until April 26, 2013 and directed further briefing on the issue.
In March 2013, the trustee and one of the defendants filed a joint motion to, among other things, seal certain documents, including the initial complaints and a settlement agreement, for a period of 30 years.  At the hearing to consider the motion, counsel for the United States Trustee stated that he believed the standard for sealing the documents had been satisfied, and that he did not oppose the motion.
Analysis
Notwithstanding the absence of objection, the court rejected the various parties’ arguments in favor of sealing the various documents in the adversary proceeding.  In ruling that the parties must publicly file (redacted) versions of the pleadings in the adversary proceedings, Chief Judge Morris sent a clear message that litigants in bankruptcy proceedings must meet a high bar to file pleadings and settlements under seal and to keep them under seal beyond the most necessary timetable.
Recognizing the “strong presumption and public policy in favor of public access to court records” (citing Borders), the court paused to note that the power to seal public documents is solely derived from section 107(b) of the Bankruptcy Code, and that any such limitations on the public’s right to access these documents is “warranted only under rare circumstances.”  The court further stated that any parties requesting such extraordinary relief must demonstrate that a particular document is “confidential” or “scandalous” (or, presumably, defamatory), and that in any event, the court had no authority to seal public documents or information derived from public documents.  In discussing the considerations to take into account in determining whether to seal documents filed in a bankruptcy case, the court rejected each of the parties’ arguments in turn.
First, the movants argued that their motion should be assessed pursuant to the ten factors set forth in In re Hemple, which provides guidance regarding whether to seal documents in a bankruptcy case.  The parties argued that their settlement was contingent on the agreement remaining under seal.  They suggested that this “no seal, no deal” condition was a sufficient basis for sealing the pleadings.  The court, however, rejected this argument, noting that the court in Hemple refused to seal the settlement at issue and that even if the Hemple factors should be applied, they should only be considered after one of the articulated exceptions in section 107 is met.  Further, court stated that it should not seal the record simply because the parties negotiated for a “no seal, no deal” provision.  If the parties could obtain a sealing order simply because they required that such an order be entered, the power to seal would be taken away from the bankruptcy court and given to the litigants, which would directly conflict with the Bankruptcy Code (and its stated intent) and the common law.
Second, turning to whether the pleadings included “scandalous” or “defamatory” material, the court again recognized the high bar for sealing public filings, and, relying on ample precedent, reiterated the principle that parties seeking to have complaints redacted for these reasons must show that the material is either: (i) “‘scandalous’ because it was grossly offensive, irrelevant to the proceeding, and submitted for an improper use; or (ii) ‘defamatory’ because the statements ‘can be clearly shown to be untrue without the need for discovery or a mini-trial.’”  The parties had argued that the information in the adversary proceedings was “scandalous,” insofar as it could cause “reputational harm and unfair commercial injury” to the defendants.  Relying on a recent decision from the United States Bankruptcy Court for the Eastern District of New York, however, the court recognized that “scandalous” information can be either (i) “matter that is both grossly disgraceful (or defamatory) and irrelevant to the action or defense” or (ii) “any allegation that unnecessarily reflects on the moral character of an individual or states anything in repulsive language that detracts from the dignity of the court.”  Notwithstanding the movant’s suggestions that disclosure of the pleadings could result in “negative publicity and reputation harm,” and presented “a genuine risk of directly affecting [the named defendants’] lives, reputations and continued ability to make a living in their chosen professions,” the court concluded that the standard for sealing the pleadings had not been met.  The court observed that, had the defendants wanted to defend their reputations, the defendants could have responded to the allegations as they saw fit (such as by filing an answer to the complaint).  The fact that they chose not to exercise that right was of no moment – the allegations were not irrelevant, grossly offensive, or submitted for an improper purpose.  Negative publicity and reputational harm did not suffice to warrant what would effectively have been a permanent sealing order.
Third, Chief Judge Morris rejected the parties’ argument that the pleadings should be sealed because they contained confidential commercial information, which must be protected pursuant to section 107(b)(1) of the Bankruptcy Code.  The court recognized that information is not “commercial” simply because it relates to business affairs, noting that secrecy for its own sake is not enough.  Instead, confidential commercial information refers only to confidential business information that may be used “to the detriment of the movant,” such as pricing formulae, marketing strategies, and terms of agreements with suppliers.  Because the movants had not specifically identified any such dangers, even severe reputational harm did not rise to the level of “confidential commercial information” that should be sealed pursuant to section 107(b).
In addressing various other arguments and considerations, the court reiterated its central message – that even though section 107(b) of the Bankruptcy Code requires sealing orders under certain circumstances, the bar to that relief is a high one, and nothing expands the specific statutory language in that section of the Bankruptcy Code.  If necessary, the parties could redact any particularly harmful information (indeed, the court has given them that opportunity).  However, courts are charged to protect the paramount public interest of free access to court proceedings, even over the protestations of the specific parties in interest.
The decision in Anthracite reminds us that bankruptcy court proceedings are not simply disputes between certain parties – they are a part of a judicial system founded on free access to information and public proceedings.  Private forums for dispute resolution may exist, but (absent a showing of real and specific harm) the bankruptcy court is not one of them.