Losing Competitive Advantage Doesn’t Justify Redacting a Settlement Agreement

A creditor’s loss of bargaining leverage with third parties does not justify sealing portions of a settlement agreement, according to Bankruptcy Judge James L. Garrity, Jr. of New York.

The sealing dispute arose in the chapter 11 reorganization of Ditech Financial LLC, a servicer and originator of home mortgage loans. Several years before bankruptcy, Ditech purchased servicing rights for a pool of mortgage loans from a major bank. Ditech also acquired some $740 million in servicing advances.

Relying on an indemnification agreement, Ditech later sought to recover $23 million from the bank in unreimbursed servicing advances. Ditech and the bank eventually filed a motion for approval of a settlement agreement.

Ditech and the bank prevailed on Judge Garrity to sign an ex parte order authorizing them to redact the description of claims that the bank was not settling. When the U.S. Trustee objected, they agreed to provide the unsecured and the consumers’ creditors’ committees with an unredacted version to be seen only by the committees’ professionals.

The consumers’ committee filed a limited objection to the settlement, imploring Judge Garrity to unseal the settlement agreement and its description of the claims not being settled. Because the earlier ex parte redaction order allowed him to revisit the issue, Judge Garrity acceded to the committee’s request in an unreported opinion on July 19.

The bank contended that a description of the unsettled claims represented “commercial information” that the court can redact under Section 107(b)(1). Judge Garrity explained that the court must redact portions of a court filing if it is “commercial information” and must require public disclosure if it is not.

The “heavy burden” was on the debtor and the bank because the redaction order was entered ex parte, Judge Garrity said.

To justify redaction, the bank explained that it was in parallel negotiations with other servicers making similar claims regarding indemnification for servicing advances. The bank contended that the other servicers would obtain a competitive advantage by knowing the types of claims that the bank was willing to exclude from the settlement.

Judge Garrity rebuffed the bank’s argument. He said that “the cases are clear that bargaining leverage in future unrelated cases does not rise to the level of ‘commercial information’ under Section 107(b).” He went on to paraphrase a district judge in New York and said “there is no discernable public interest or interests of the Debtors in preserving [the bank’s] leverage in negotiations with other parties with respect to different loan servicing agreements.”

Judge Garrity vacated the prior redaction order and directed the debtors to file the settlement agreement in unredacted form.