Confidentiality Orders And Sealing Records In Bankruptcy Court: What Is The Standard?

Transparency and due process are fundamental and primary objectives of a functioning legal system.  U.S. courts have historically recognized a presumption of public access to court records.  Nixon v. Warner Commc’ns Inc., 435 U.S. 589, 597-98 (1978). This preference for public access is rooted in the public’s first amendment right to know about the administration of justice.

This public access helps to protect the integrity, quality, and respect in our judicial system.  In re Analytical Sys., 83 B.R. 833 (Bankr. N.D. Ga. 1987).  The policy interest in favor of public access is at its best where issues concerning the integrity and transparency of bankruptcy proceedings are involved.

Courts have held in the past that unrestricted access to bankruptcy records generally fosters confidence among creditors regarding the fairness of the bankruptcy system.

This may be true in a broad sense, but in the real world of the litigation process, however, it is often true that parties and the court may need to protect certain types of information from release to the general public.  Settlements, deals, and negotiations are generally more fruitful if conducted privately than in the full view of the public eye.  Disputes can arise that are often best resolved in private settings.

Or, the release of certain information may be damaging and may interfere with larger policy objectives.  Thus a tension can develop between the objectives of transparency and due process, and the practical realities of court cases.  Is there a way to square these two possibly conflicting issues?

One recent case from the Western District of North Carolina presented these issues with some illustrative clarity.  The case in question was Legal Newsline v. Garlock Sealing Technologies LLC.  In this case, a bankruptcy court was conducting certain hearings to determine the corporate debtor’s liability for certain types of medical claims.  Because some of the parties to the case were being accused of very serious types of transgressions, those parties sought broad protective orders and sealing requests for some information related to the case.  The bankruptcy court granted the sealing requests, believing that the release of the information would be damaging and not conducive to the interests of justice.  The opposing side appealed the ruling to the District Court, arguing that the information was of public concern and should be made generally available.

The district court reversed the bankruptcy court’s decision, ruling that that the bankruptcy needed to:

  1. Specify the reasons for its decision to seal the record, and make specific findings in that regard;
  2. State the reasons why other alternatives to sealing were inappropriate, so that an appellate reviewer might fully understand the original decision to seal.

The district court basically reiterated the historical precedents, finding that sealing court records is not something that should be done in a cavalier manner.  If a record is to be sealed, there had better be a good reason, and those reasons should be put in the record so that an appellate court might understand the factual basis for the decision.  Other less drastic alternatives should also be explored before the remedy of sealing was used.  Blanket confidentiality orders, if sought by a debtor, are highly disfavored.  Some debtors in bankruptcy cases have taken the position that their “entire business” operations are confidential and need to be “protected.”

However, such blanket confidentiality orders allow the debtor too much control over the flow of information, and may impede the legitimate needs of creditors to know what is going on with a case or a claim.  In addition, overbroad confidentiality requests can drive up the costs of litigation for the parties, by forcing them to undertake special procedures that (e.g., redacting documents) that might not be otherwise necessary.  Debtors should not have this type of unreasonable control over the flow of information in a case, courts have traditionally ruled.  In the influential case of In re Orion Pictures Corp., 21 F.3d 24, 27 (2d Cir. 1994), the Second Circuit explained that “[i]n most cases, a judge must carefully and skeptically review sealing requests to insure that there really is an extraordinary circumstance or compelling need.”  In other words, the circumstances need to be “extraordinary” and the corresponding need must truly be “compelling.”  Even then, other alternatives need to be explored first.

In today’s fast-paced world of information collection, dissemination, and production, it is likely that confidentiality, sealing of records, and disputes over these things will become more frequent than in the past.  Debtors seeking such remedies should be mindful of the standard they must meet.

Read More:  Is “Insolvency” Required Before Filing Bankruptcy?

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