Corinne Ball
Corinne Ball ()

Judge Martin Glenn’s recent decision in an adversary proceeding related to the General Motors bankruptcy showcases the difficulties parties, especially ones concerned with protecting the identity of their owners, may encounter when requesting that bankruptcy courts seal or redact confidential information that is required under the Bankruptcy Rules, which are the counterparts of the Federal Rules of Civil Procedure. Bankruptcy Rule 7007 was the focus in Motors Liquidation Company Avoidance Action Trust et al v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Company), Adv. Pro. No. 09-0054 (MG) 2016 WL 7187298 (Bankr. S.D.N.Y. Dec. 9, 2016) (Motors). Parties concerned with protecting sensitive information should be ready to provide concrete, factual arguments in favor of filing documents under seal. Recent New York decisions, and the Motors decision in particular, provide guidance to practitioners as to possible effective strategies for protecting such sensitive information.

Filing Under Seal

The Bankruptcy Code generally requires that all papers be filed publicly and without redactions. While exceptions exist, N.Y. bankruptcy courts view the exceptions narrowly and have described filing under seal or redacting documents to be an “extraordinary measure[].” In re Anthracite Capital, 492 B.R. 162, 171 (Bankr. S.D.N.Y. 2013). This presumption in favor of disclosure is not insurmountable, as §107(b) of the Bankruptcy Code provides that a court must protect an entity’s trade secrets, or confidential research, development or commercial information. 11 U.S.C. §107. While the commercial information exception does not provide a “safe harbor for those who crave privacy,” it does protect information that is critical to the business operations of the party seeking protection. Anthracite Capital, 492 B.R. at 178. Application of these exceptions is generally strict, as courts usually only look to whether the information falls within an enumerated exception.

In Anthracite, the bankruptcy court ruled that the terms of a settlement did not fall within the public filing exception found in §107(b). Indeed, in that case the court reasoned that the exception was narrow, designed to protect debtors, and set a very high bar for establishing that the information for which a seal or redaction is requested falls within the exception. Importantly, in Anthracite, throughout the case, the court did permit various pleadings and discovery responses to be filed under seal, but clarified that its willingness to do so was premised upon the impression that such sealing would be temporary and ultimately followed by a publicly available resolution. Indeed, the court acknowledged that sealing various documents was intended and did operate to facilitate a settlement. Nevertheless, the court concluded that the public policy favoring the public’s right to know, as well as confidence in the courts, was more important and directed that the settlement be filed unredacted and without seal.

Balancing the public’s right to know against the need for confidentiality raises difficult questions given the desirability of hedge fund participation in various bankruptcy matters, especially in providing liquidity to creditors, as well as debtors. Hedge funds are important participants in the markets for stressed and distressed securities, providing banks and other investors with a much-needed exit from a stressed or distressed company. While cognizant of the public policy concerns for transparency and confidence in the courts, the resolution of often complex and frequently large matters in bankruptcy cases may occasionally involve hedge funds taking an opposing position.

Can Corporate Ownership Statements Be Redacted?

In Motors, the bankruptcy court held that the parties to the proceeding could not filed redacted versions of the corporate ownership statements required by Bankruptcy Rule 7007. Two groups of hedge funds, the “Moving Term Loan Lenders” and the “BlackRock Funds” (the Movants) had both moved to redact their corporate ownership statements to remove the names of holders of 10 percent or more of the equity interests in their respective funds (the Holders).

The Movants argued that the identity of the Holders constituted “confidential commercial information” under §107(b) of the Bankruptcy Code, an exception to public filing requirements. The Movants pointed to the highly competitive nature of the hedge fund market, and the damaging impact that revealing the identity of the Holders would have on the Movants’ business. Having to reveal the identity of the Holders would expose the Movants to “unfair poaching by competitors.” Moving Term Loan Lenders Brief, at 7 [Docket No. 774]. Further, as certain investors are known to have particular risk profiles or tax strategies, revealing their ownership interest in a fund could reveal the risk profile or tax strategy of the fund itself, which would be itself confidential commercial information. Finally, the Movants argued that the underlying purpose of corporate ownership statements is to guard against conflicts of interest with the court. Filing a redacted version of the statement publicly and allowing the court to review the full submission in camera would serve this interest while protecting the confidential information. The required statement was only one of many pleadings that would be filed and did not present the same final resolution of litigation that was at the core of the Anthracite decision.

Decision

Judge Glenn was not swayed by the Movants’ arguments. First, the Movants only cited to unpublished orders allowing corporate ownership statements to be filed under seal. Second, the court was unconvinced by the Movants’ evidentiary submissions. Specifically, the court did not find sufficient proof that disclosing the Holders would “expose [the Movants'] hearts and souls to competitors waiting to pounce on them.” Motors, 2016 WL 7187298, at *7. The court explained that the Movants had not submitted any declarations in support of their motion and that “statements made by lawyers in briefs are not evidence.” Motors, 2016 WL 7187298, at *7. The mere fact that a party has kept information confidential, standing alone, did not mean to the court that it constituted commercial information falling within the §107(b) exception. Third, the court rejected the argument that corporate ownership statements are only necessary to satisfy to the judge that no conflict of interest exists. Instead, Judge Glenn noted that public filings also increase the public’s confidence in the judiciary, as the information relied upon by the court demonstrates the court’s impartiality.

Indeed, the approach to sealing and redaction does not seem to be uniform among bankruptcy courts. The Delaware bankruptcy court seems more at ease with redaction, sealing and maintaining confidentiality. Many core discovery documents in the Energy Future Holdings case, for example, were subject to a confidentiality order and not publicly available. In re Energy Future Holdings, No. 14-10979 (CSS) (Bankr. D. Del.). Instead, these documents were only available to litigants who entered into a confidentiality arrangement. In the past, there were major differences in the application of Bankruptcy Rule 2019, requiring disclosure by counsel of the clients that it represented and their role in the case, as well as their holdings. Ultimately, Bankruptcy Rule 2019 was amended to address the differing applications of the rule and yet retain its core purpose, which was to identify litigants and their role in the case.

Conclusion

While the Motors court expressed skepticism that the identities of owners of 10 percent or more of the equity interests of a party could ever constitute confidential commercial information, the reasoning of the decision does suggest several strategies for parties concerned with protecting sensitive information. Navigating from the Anthracite decision, a litigant in New York must meet the high bar established to enable the court to find that the information in question falls within the “narrow” exception of §107(b). Moreover, litigants must address why a specific filing requirement, such as Bankruptcy Rule 7007 (which mimics the Federal Rules of Civil Procedure), does not raise fundamental policy concerns regarding the public’s confidence in the courts and why the confidentiality requested is narrowly suited to address the commercial concern. While other courts may have greater flexibility, in New York, it is prudent to provide evidentiary support so that the court does not find itself sealing disclosures without a demonstration of cause and an evidentiary ruling that the information either falls within the narrow exception of §107(b) or otherwise enables the court to rule that the confidential treatment requested facilitates the progress of the litigation and prospects for settlement and does not undermine the public policy favoring disclosure. This principle extends to the competitive landscape of the parties themselves. Information regarding competitors who would benefit from the revelation of sensitive information could also buttress a factual argument in favor of redaction or sealing a filing.

Further, as courts favor redaction over sealing a document in its entirety, parties should specifically identify improper information and be ready to supply specific arguments as to why such information must be protected. Parties should consult carefully with their advisors as to the best way to effectuate the requested confidential treatment, bearing in mind that evidentiary submissions, such as an affidavit, and perhaps even the hearing on the request for confidentiality, would also need to be accorded confidential treatment. The New York courts must also use caution in this area as confidentiality concerns should be managed and addressed without causing disruption in the litigants’ business, not only the debtors’ business, especially in circumstances that are only interim in nature, such as discovery. Of course, litigants must also respect the public policy favoring disclosure. In the end, however, as one of the central commercial courts, the New York bankruptcy court should take into account other federal rulings on these questions and facilitate a resolution that acknowledges legitimate commercial needs which do not overly burden the policy favoring disclosure.

Judge Martin Glenn’s recent decision in an adversary proceeding related to the General Motors bankruptcy showcases the difficulties parties, especially ones concerned with protecting the identity of their owners, may encounter when requesting that bankruptcy courts seal or redact confidential information that is required under the Bankruptcy Rules, which are the counterparts of the Federal Rules of Civil Procedure. Bankruptcy Rule 7007 was the focus in Motors Liquidation Company Avoidance Action Trust et al v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Company), Adv. Pro. No. 09-0054 (MG) 2016 WL 7187298 (Bankr. S.D.N.Y. Dec. 9, 2016) (Motors). Parties concerned with protecting sensitive information should be ready to provide concrete, factual arguments in favor of filing documents under seal. Recent New York decisions, and the Motors decision in particular, provide guidance to practitioners as to possible effective strategies for protecting such sensitive information.

Filing Under Seal

The Bankruptcy Code generally requires that all papers be filed publicly and without redactions. While exceptions exist, N.Y. bankruptcy courts view the exceptions narrowly and have described filing under seal or redacting documents to be an “extraordinary measure[].” In re Anthracite Capital, 492 B.R. 162, 171 (Bankr. S.D.N.Y. 2013). This presumption in favor of disclosure is not insurmountable, as §107(b) of the Bankruptcy Code provides that a court must protect an entity’s trade secrets, or confidential research, development or commercial information. 11 U.S.C. §107 . While the commercial information exception does not provide a “safe harbor for those who crave privacy,” it does protect information that is critical to the business operations of the party seeking protection. Anthracite Capital, 492 B.R. at 178. Application of these exceptions is generally strict, as courts usually only look to whether the information falls within an enumerated exception.

In Anthracite, the bankruptcy court ruled that the terms of a settlement did not fall within the public filing exception found in §107(b). Indeed, in that case the court reasoned that the exception was narrow, designed to protect debtors, and set a very high bar for establishing that the information for which a seal or redaction is requested falls within the exception. Importantly, in Anthracite, throughout the case, the court did permit various pleadings and discovery responses to be filed under seal, but clarified that its willingness to do so was premised upon the impression that such sealing would be temporary and ultimately followed by a publicly available resolution. Indeed, the court acknowledged that sealing various documents was intended and did operate to facilitate a settlement. Nevertheless, the court concluded that the public policy favoring the public’s right to know, as well as confidence in the courts, was more important and directed that the settlement be filed unredacted and without seal.

Balancing the public’s right to know against the need for confidentiality raises difficult questions given the desirability of hedge fund participation in various bankruptcy matters, especially in providing liquidity to creditors, as well as debtors. Hedge funds are important participants in the markets for stressed and distressed securities, providing banks and other investors with a much-needed exit from a stressed or distressed company. While cognizant of the public policy concerns for transparency and confidence in the courts, the resolution of often complex and frequently large matters in bankruptcy cases may occasionally involve hedge funds taking an opposing position.

Can Corporate Ownership Statements Be Redacted?

In Motors, the bankruptcy court held that the parties to the proceeding could not filed redacted versions of the corporate ownership statements required by Bankruptcy Rule 7007. Two groups of hedge funds, the “Moving Term Loan Lenders” and the “BlackRock Funds” (the Movants) had both moved to redact their corporate ownership statements to remove the names of holders of 10 percent or more of the equity interests in their respective funds (the Holders).

The Movants argued that the identity of the Holders constituted “confidential commercial information” under §107(b) of the Bankruptcy Code, an exception to public filing requirements. The Movants pointed to the highly competitive nature of the hedge fund market, and the damaging impact that revealing the identity of the Holders would have on the Movants’ business. Having to reveal the identity of the Holders would expose the Movants to “unfair poaching by competitors.” Moving Term Loan Lenders Brief, at 7 [Docket No. 774]. Further, as certain investors are known to have particular risk profiles or tax strategies, revealing their ownership interest in a fund could reveal the risk profile or tax strategy of the fund itself, which would be itself confidential commercial information. Finally, the Movants argued that the underlying purpose of corporate ownership statements is to guard against conflicts of interest with the court. Filing a redacted version of the statement publicly and allowing the court to review the full submission in camera would serve this interest while protecting the confidential information. The required statement was only one of many pleadings that would be filed and did not present the same final resolution of litigation that was at the core of the Anthracite decision.

Decision

Judge Glenn was not swayed by the Movants’ arguments. First, the Movants only cited to unpublished orders allowing corporate ownership statements to be filed under seal. Second, the court was unconvinced by the Movants’ evidentiary submissions. Specifically, the court did not find sufficient proof that disclosing the Holders would “expose [the Movants'] hearts and souls to competitors waiting to pounce on them.” Motors, 2016 WL 7187298, at *7. The court explained that the Movants had not submitted any declarations in support of their motion and that “statements made by lawyers in briefs are not evidence.” Motors, 2016 WL 7187298, at *7. The mere fact that a party has kept information confidential, standing alone, did not mean to the court that it constituted commercial information falling within the §107(b) exception. Third, the court rejected the argument that corporate ownership statements are only necessary to satisfy to the judge that no conflict of interest exists. Instead, Judge Glenn noted that public filings also increase the public’s confidence in the judiciary, as the information relied upon by the court demonstrates the court’s impartiality.

Indeed, the approach to sealing and redaction does not seem to be uniform among bankruptcy courts. The Delaware bankruptcy court seems more at ease with redaction, sealing and maintaining confidentiality. Many core discovery documents in the Energy Future Holdings case, for example, were subject to a confidentiality order and not publicly available. In re Energy Future Holdings , No. 14-10979 (CSS) (Bankr. D. Del.). Instead, these documents were only available to litigants who entered into a confidentiality arrangement. In the past, there were major differences in the application of Bankruptcy Rule 2019, requiring disclosure by counsel of the clients that it represented and their role in the case, as well as their holdings. Ultimately, Bankruptcy Rule 2019 was amended to address the differing applications of the rule and yet retain its core purpose, which was to identify litigants and their role in the case.

Conclusion

While the Motors court expressed skepticism that the identities of owners of 10 percent or more of the equity interests of a party could ever constitute confidential commercial information, the reasoning of the decision does suggest several strategies for parties concerned with protecting sensitive information. Navigating from the Anthracite decision, a litigant in New York must meet the high bar established to enable the court to find that the information in question falls within the “narrow” exception of §107(b). Moreover, litigants must address why a specific filing requirement, such as Bankruptcy Rule 7007 (which mimics the Federal Rules of Civil Procedure), does not raise fundamental policy concerns regarding the public’s confidence in the courts and why the confidentiality requested is narrowly suited to address the commercial concern. While other courts may have greater flexibility, in New York , it is prudent to provide evidentiary support so that the court does not find itself sealing disclosures without a demonstration of cause and an evidentiary ruling that the information either falls within the narrow exception of §107(b) or otherwise enables the court to rule that the confidential treatment requested facilitates the progress of the litigation and prospects for settlement and does not undermine the public policy favoring disclosure. This principle extends to the competitive landscape of the parties themselves. Information regarding competitors who would benefit from the revelation of sensitive information could also buttress a factual argument in favor of redaction or sealing a filing.

Further, as courts favor redaction over sealing a document in its entirety, parties should specifically identify improper information and be ready to supply specific arguments as to why such information must be protected. Parties should consult carefully with their advisors as to the best way to effectuate the requested confidential treatment, bearing in mind that evidentiary submissions, such as an affidavit, and perhaps even the hearing on the request for confidentiality, would also need to be accorded confidential treatment. The New York courts must also use caution in this area as confidentiality concerns should be managed and addressed without causing disruption in the litigants’ business, not only the debtors’ business, especially in circumstances that are only interim in nature, such as discovery. Of course, litigants must also respect the public policy favoring disclosure. In the end, however, as one of the central commercial courts, the New York bankruptcy court should take into account other federal rulings on these questions and facilitate a resolution that acknowledges legitimate commercial needs which do not overly burden the policy favoring disclosure.