The holders of 10% or more of the equity of a party in an adversary proceeding must be disclosed publicly absent evidence that the identity of the owners is “commercial information,” according to a decision by Manhattan Bankruptcy Judge Martin Glenn, interpreting Bankruptcy Rule 7007.1 and Section 107(b)(1) of the Bankruptcy Code.
In his Dec. 9 opinion, Judge Glenn required disclosure of the investors in hedge funds even though no one aside from the U.S. Trustee objected to sealing the lists of the larger owners.
The issue arose in a lawsuit stemming from the bankruptcy of General Motors Corp. and one of the biggest legal blunders in history that may have caused the inadvertent termination of a $1.5 billion security interest. This year, hedge funds involved in the litigation asked Judge Glenn to permit them to seal the identities of their larger investors. He refused.
The pivotal authority is Bankruptcy Rule 7007.1 which requires a party in an adversary proceeding to file a statement disclosing the identities of holders of 10% or more of its equity. Although the rule itself requires disclosure by “corporations,” the Southern District of New York by local rule expanded the disclosure requirement to cover other types of ownership such as partnerships and joint ventures.
The hedge funds argued that the identities of their larger investors was “confidential commercial information” protected from disclosure by Section 107(b) of the Bankruptcy Code. That section requires the court to allow redaction of “a trade secret or confidential research, development or commercial information.”
Citing Second Circuit authority, Judge Glenn said that invoking Section 107(b) entails a “heavy” burden of proof “requiring an ‘extraordinary circumstance or compelling need.’” He quoted the Collier treatise for the proposition that embarrassment or harm to reputation is insufficient. He went on to cite another New York bankruptcy judge for the notion that the commercial information exception “‘is not intended to offer a safe harbor for those who crave privacy or secrecy for its own sake.’”
To justify sealing, the information must be “‘so critical to the operations’” that disclosure “‘will unfairly benefit the entity’s competitors.’”
Judge Glenn said it was “far from clear” that the identities of the larger equity owners “can ever be confidential information.” He did not decide that question because the hedge funds “failed to establish that the required high standard ha[d] been met.”
The hedge funds came up short because they submitted only argument of counsel, not evidence showing that the investors’ identities was commercial information. Just because the information was “‘confidential’ does not mean it is ‘commercial information’ entitled to the extraordinary procedure of sealing,” Judge Glenn said.
Hedge funds have a glimmer of hope that they can justify redaction of the identities of larger owners in future cases, though, because Judge Glenn said the record before him had “no evidentiary basis” to permit sealing because the investors had not met “their evidentiary burden to show why this information is ‘commercial information.’”
By virtue of Bankruptcy Rule 9014, the disclosure requirement in Rule 7007.1 does not apply in contested matters, although bankruptcy judges could make the rule applicable.
To read an ABI story about recent developments in the litigation over the $1.5 billion security interest, click here.