Steve McCroskey: Jacobs, I want to know absolutely everything that’s happened up ‘til now.

Jacobs: Well, let’s see. First the earth cooled. And then the dinosaurs came, but they got too big and fat, so they all died and they turned into oil. . . .

-Airplane II: the Sequel

One of the hallmarks of bankruptcy is that it provides a fair and open forum for the resolution of claims against the debtor. Another primary goal of the corporate bankruptcy process is to create an efficient and meaningful process for resolving claims and either (i) reorganizing the debtor as a going concern or (ii) fairly distributing the debtor’s assets in accordance with the statutory order of priority. But what happens when these two goals conflict?

Sticky situations can often arise when the bankruptcy process involves proceedings that are kept under seal, behind closed doors, or for certain parties’ eyes only. Disputes are often resolved in back room deals. Confidential information may be useful for certain parties’ decision-making but may be harmful if released to the public, and parties may be more forthcoming and productive in chambers conferences with the presiding judge and with key players in the case. But balancing these considerations against the overarching goal of transparency and due process can be quite tricky. We’ve previously written about similarsticky situations.

A recent decision from the United States District Court for the Western District of North Carolina highlights these tensions. In Legal Newsline v. Garlock Sealing Technologies LLC, the court faced these very questions in an appeal arising from Garlock’s bankruptcy case. In that bankruptcy case, the bankruptcy court conducted a hearing to estimate Garlock’s liability for present and future mesothelioma claims. In connection with that assessment, attorneys for the mesothelioma victims were accused of fraud, deceit, and other prohibited practices – allegations that were of particular interest to the public, the press, and other entities that continued to deal with these attorneys in connection with other asbestos-related claims. Predictably, the information provided in connection with the estimation hearing and with the allegations against the plaintiffs’ counsel was of a highly sensitive nature and was subject to a series of protective orders and designations as confidential.

The bankruptcy court determined, over objections, that the estimation hearing should be closed to the public, by virtue of the fact that certain documents to be used in connection with the hearing were confidential and subject to protective orders and because a closed hearing would provide for the efficient administration of justice. Legal Newsline appealed to the district court, arguing that the record of the hearing and all of the evidence relied on by the court in connection with the estimation proceeding should be made public, including to the press.

On appeal, the district court reversed the bankruptcy court’s ruling, holding that, in sealing a hearing or a document, a court must “state the reasons for its decision to seal, supported by specific findings, and the reasons for rejecting alternatives to sealing to provide this court with sufficient information for meaningful appellate review.” In other words, the presumption must be that proceedings are public and open to interested parties and the press, and parties seeking to seal any proceedings must demonstrate a sufficient basis for the court to deviate from that presumption, after providing the public with sufficient opportunity to challenge the relief being sought. If no less drastic relief is available, the court must then state its reasoning (together with specific supporting evidence) for overcoming this presumption against sealing information or proceedings that would otherwise be public. In brief, even though a court “may seal any number of documents, proceedings, or applications for appropriate reasons[,]” the courtroom is “the ultimate public forum,” and a judge “simply cannot delegate” the responsibility of determining what should be made public by giving deference to the attorneys’ own designations and protective orders.

In light of this holding, the district court remanded the matter to the bankruptcy court, with instructions to (i) provide the public with an opportunity to challenge such designations and (ii) consider any reasonable alternatives to sealing. Only then, if the court were to determine that any materials should be sealed, it must do so only after “provid[ing] sufficient information supporting that decision for meaningful appellate review[,]” including a recitation of the facts and considerations taken into account in making this determination.

Legal Newsline v. Garlock was premised on the specific case law and the local rules inherent in the Fourth Circuit and the Middle District of North Carolina, but it raises important questions regarding the propriety of sealed proceedings, particularly in high-profile bankruptcy matters, which may frequently benefit from “behind closed doors” discussions and proceedings. In an age of fast-moving and easily accessible information, courts and interested parties in ongoing bankruptcy proceedings will continue to face difficult questions regarding just what should be done openly, what may be done in the safety and security of a closed courtroom, and what exactly must be shown to warrant any non-public proceedings.

Postscript: It was nearly lost on us that the court’s decision emanated from the bankruptcy case of Garlock Sealing. Although the debtor’s name was not a metonym arising from the subject of this dispute, we cannot help but think that the literary gods are smiling (or perhaps groaning).