Is a confidentiality agreement in a state court settlement enforceable in a subsequent bankruptcy?
That’s the issue in Meghji v. Casla Realty LLC (In re Celsius Network LLC), Adv.P. 24-04002 in SDNY Bankruptcy Court (decided October 17, 2024).
The facts are unusual. Here’s what happened.
Fraudulent Transfer Adversary
The “Litigation Administrator” under a confirmed plan in the Chapter 11 bankruptcy case of In re Celsius Network LLC , Case No. 22-10964 in the SDNY Bankruptcy Court, files a Complaint against Defendant to avoid transfers of Debtor’s property to Defendant.
Motion to Transfer Venue
In response, Defendant files a Motion to transfer venue of the Complaint:
- “to the Puerto Rico state court, based on a prior judgment that retained jurisdiction over the same claims”; or
- “in the alternative, to the United States Bankruptcy Court for the District of Puerto Rico.”
Such Motion (filed September 9, 2024, at 22:07:47 o’clock, at Doc. 14):
- identifies a prior lawsuit in a Puerto Rico state court on the same issues raised in the Litigation Administrator’s Complaint;
- identifies a Settlement Agreement between the parties to the Puerto Rico lawsuit;
- identifies a state court judgment, entered in reliance upon the Settlement Agreement, that dismisses the state court complaint with prejudice and retains jurisdiction to enforce the Settlement Agreement;
- describes the terms of the Settlement Agreement, including a $68,375.00 wire transfer, a mutual release and a covenant not to sue; and
- attaches a copy of the Settlement Agreement as Exhibit 10.
Motion to Seal—Filed
Seventeen minutes later (at 22:24:13 o’clock on September 9, at Doc. 15), Defendant files its “Emergency Motion Requesting Sealing Order,” which represents that the Motion to transfer venue “contains confidential information regarding a settlement agreement” and attaches a copy of the Settlement Agreement as its Exhibit 10. Such Exhibit 10 contains a paragraph titled “Confidentiality of Agreement,” which provides:
- the parties “agree to keep the terms of this Agreement and the facts and circumstances underlying the Litigation confidential”; and
- provides exceptions for (i) legal, financial and tax advisors, and (ii) enforcing the Settlement Agreement or its confidentiality provision.
Motion to Seal—Denied
The next day (September 10, 2024, at 13:34:49 o’clock, at Doc. 16) the Bankruptcy Court denies Defendant’s Emergency Motion because of “a strong presumption and public policy in favor of public access to court records.” Such presumption is limited only by the provisions of § 107(b) of the Bankruptcy Code, which provides:
“the bankruptcy court may-(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.”
The Court adds that the “trade secret or other confidential research, development, or commercial information” exception in § 107(b)(1):
- is narrow; and
- the party seeking a protective order bears the burden of showing that a § 107(b) exception applies.
In this case, the Emergency Motion:
- says that the Settlement Agreement “contains confidential information regarding [the Settlement Agreement] that cannot be disclosed to third parties”; but
- does not “contain a single citation or legal argument that supports the entry of such an order under the relevant standard.”
Motion for Reconsideration—Filed
Nine days later (on September 19, 2024, at Doc. 19), Defendant files its Motion for Reconsideration that discusses applicable legal standards like this:
- common law presumes a right to public access to judicial records that is rooted in the public’s First Amendment right to know about the administration of justice; and
- § 107 codifies that presumption, while creating statutory exemptions in a bankruptcy case because, (i) important countervailing interests can, in given circumstances, overwhelm the usual presumption and defeat access, and (ii) the right to inspect and copy judicial records is not absolute.
Defendant argues:
- sealing a confidential settlement agreement is left to the sound discretion of the trial court; but
- in bankruptcy cases, once a party seeks protection of information that falls within one of the § 107(b) categories, the court is required to protect the requesting party and has no discretion to deny the application; and
- § 107(b) does not require a party seeking its protections to demonstrate “good cause.”
Motion for Reconsideration—Denied
On October 17, 2024, the Bankruptcy Court enters its Memorandum Opinion and Order (Doc. 28) denying Defendant’s request for reconsideration.
As to the merits of Defendant’s request to seal, the Bankruptcy Court says in such Memorandum Opinion that Defendant improperly focuses the bulk of its arguments on whether the settlement is a judicial record and hence “subject to the right of public access.”
Defendant’s analysis is problematic on two fronts: “(1) it starts in the wrong place, and (2) it is faulty.”
–Starts in Wrong Place
Defendant’s analysis starts in the wrong place—on whether the Settlement Agreement is a “judicial record.”
That’s the wrong place because Defendant’s Settlement Agreement is undoubtedly a “public record” in this case (under § 107), because it is filed on the Bankruptcy Court’s electronic docket—as Exhibit 10 to Defendant’s Doc. 19 Motion.
The plain meaning of § 107(a) mandates that all papers filed in a bankruptcy case are public records open to examination unless the court decides to protect information in them under § 107(b).
The right place to start is § 107(b). Defendant does not explain why the Settlement Agreement qualifies for sealing under § 107(b).
- Decisions applying the common law to sealing confidential information in only certain types of court records . . . are inapposite.
Defendant argues that the Settlement Agreement is not a judicial record because it was not filed with the state court in Puerto Rico. But that misses the point: Defendant turned the Settlement Agreement into a public record in this bankruptcy, under § 107, by attaching it as an exhibit to the Motion to transfer venue.
–Is Faulty
The Complaint in this case asserts that transfers of Debtor’s property to Defendant are avoidable. And so, the public has a clear interest in the disclosure of the Settlement Agreement from the Puerto Rico lawsuit.
Defendant argues that the Court should respect the confidentiality clause in the Settlement Agreement because (i) Defendant does not seek approval of the Settlement Agreement from this Court, and (ii) therefore, the rule that “private arrangements between the parties” in which the court “plays no role whatever” should govern (i.e., the confidentiality clause should prevail).
However, Defendant waived any such argument by not raising it in its Sealing Motion. Defendant cannot use a motion for reconsideration to take a second bite at that apple.
More importantly, Defendant misses the point that (i) bankruptcy law provides several bases for avoiding fraudulent transfers, and (ii) private party settlement agreements cannot shield avoidable transfers.
Conclusion
That’s a fascinating set of facts and analyses on confidentiality issues in bankruptcy under § 107(b).
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