There are no secrets in bankruptcy, or at least only in very limited circumstances, according to a recent decision in In re Laurel Canyon MK2, LLC from Judge Barash of the United States Bankruptcy Court for the Central District of California.  In this case, the bankruptcy court considered the debtor’s application to file a prepetition settlement agreement under seal on the basis that the parties had agreed to maintain its confidentiality.  Based upon the court’s analysis of recent decisions and applicable statutory requirements, the court denied the debtor’s application to file the settlement agreement under seal. 

Background

In In re Laurel Canyon MK2, LLC, the debtor submitted an application to file a settlement agreement under seal.  Pursuant to the terms of the settlement agreement, a state court judgment was entered against the debtor in favor of the counterparty.  The debtor alleged that the counterparty was attempting to enforce the state court judgment in a manner that violated the terms of the settlement agreement, and the debtor was seeking relief from the bankruptcy court to enforce the terms of the settlement agreement.  The debtor moved to keep the settlement agreement confidential on the grounds that the parties were obligated to keep the settlement agreement confidential.

The Bankruptcy Court Denied the Debtor’s Application

Relying upon established precedent and the plain language of section 107(a) which creates a strong presumption in favor of public access to all papers filed in a bankruptcy case, the court denied the debtor’s application to file the settlement agreement under seal.

First, the court analyzed whether an exception under section 107(b) of the Bankruptcy Code would apply to “(1) protect an entity with respect to a trade secret or confidential research, development, or commercial information; or (2) protect a person with respect to scandalous or defamatory matter contained in a paper filed in a case under this title.”  Following Togut v. Deutsche Bank AG, Cayman Islands Branch (In re Anthracite Capital, Inc.) et al., a decision we previously covered in our blog post, “Signed, [Un]Sealed, Delivered” – New York Bankruptcy Court Rejects Uncontested Motion to Seal; Sets Gold Standard for Public Access to Court Filings, the court determined that the “only cause articulated for this relief is that the parties agreed at the time of the settlement agreement to maintain its confidentiality,” which the court rejected as “not cause to authorize the filing under seal of a settlement agreement.”

Next, the court noted that its review of the settlement agreement did not identify any contents that would constitute (i) a trade secret or confidential research, development, or commercial information or (ii) any material that is scandalous or defamatory matter.  The court clarified that a settlement agreement is not considered to be “commercial information” simply because it relates to business affairs.  Instead, based upon applicable case law, the court concluded that there must be information that would cause “unfair advantage to competitors by providing them information as to the commercial operations of the debtor.”

Furthermore, the court raised the possibility that the debtor’s application had been rendered moot.  Specifically, the court noted that in a related state court action that was removed to the court’s jurisdiction, the publicly filed complaint disclosed much of the substance of the settlement agreement.

Conclusion

Although the decision in Laurel Canyon MK2, LLC is not completely unexpected in its outcome, it serves as a useful reminder that parties should exercise caution when entering into a written agreement with the expectation that the contents of such agreement will remain confidential, particularly when there is the possibility that one of the parties may file for bankruptcy and cause the written agreement to become subject to litigation in the bankruptcy proceeding.

In previous posts, “Signed, [Un]Sealed, Delivered” – New York Bankruptcy Court Rejects Uncontested Motion to Seal; Sets Gold Standard for Public Access to Court Filings and Can You Keep a Secret? Can the Bankruptcy Court? Bankruptcy Courts Must Adequately Demonstrate the Basis for Sealing Proceedings from the Public, Media, we have discussed the tension between (i) section 107(a) of the Bankruptcy Code, which protects the public’s general right of access to court documents and (ii) section 107(b) which codifies the narrow exceptions to this policy, namely confidential commercial information and scandalous material.  Recent decisions have made clear that bankruptcy courts are strongly inclined to uphold the public policy in favor of public access to court records under section 107(a).  In addition, bankruptcy courts are also restricted under section 107(b) in their ability to limit the public’s right to access court documents, and, thus, requests to override this policy should be granted only in rare circumstances.  This case is no exception.

Benjamin Franklin, an astute observer of the human condition, wryly remarked that “three can keep a secret, if two of them are dead.”  Recent decisions, including Laurel Canyon MK2, LLC, provide bankruptcy practitioners with an additional moniker to this old adage: “three can keep a secret, if two of them are dead,and none of them are in bankruptcy.”