Opinion
18-31788
12-15-2022
In re: GLENN A. DILLAHUNT, RACHAEL C. DILLAHUNT, Debtors.
Chapter 7
MEMORANDUM ORDER DENYING TRUSTEE'S MOTION FOR THE ENTRY OF AN ORDER SEALING MOTION OF TRUSTEE TO SETTLE AND COMPROMISE AND APPLICATION TO EMPLOY SPECIAL COUNSEL TO THE TRUSTEE (DOC. 40)
Guy R. Humphrey, United States Bankruptcy Judge
I. Introduction
Before the court is the Trustee's Motion for the Entry of an Order Without Further Notice of Hearing Approving the Sealing of Motion of Trustee to Settle and Compromise (Doc. 39) and Application to Employ Special Counsel to the Trustee (Doc. 32). Doc. 40. Upon review of the Motion to Seal, the court concludes that the trustee has failed to establish a basis under 11 U.S.C. § 107(b) to seal the documents at issue. Therefore, they must be made available for public viewing on the court's docket.
II. Factual and Procedural Background
Glenn and Rachael Dillahunt filed a Chapter 7 petition on June 10, 2018. Doc. 1. Paul Spaeth ("the Trustee") was subsequently appointed as the Chapter 7 trustee. In their schedules, the Dillahunts disclosed Rachael Dillahunt's status as a plaintiff in a class action lawsuit against Bayer ("the Bayer Litigation"). Doc. 1 at 15. The Dillahunts later amended their schedules in June 2021 and provided updated information on the Bayer Litigation. The amended portion states, "Debtor Wife originally listed a claim in a class action against Bayer. Recent information has indicated she may receive a gross settlement of $55,000, to be reduced by attorney fees, costs, and medical expenses." Doc. 35 at 6. Both sets of schedules were served on all creditors and parties in interest. Doc. 1 at 51-52; Doc. 35 at 8-9.
In March 2021 the Trustee sought court permission to employ Jennifer Lentz and the Lentz Firm to represent the bankruptcy estate in the Bayer Litigation. In his application to employ special counsel ("the Application") (doc. 32), the Trustee explained:
Debtor Rachael Dillahunt is a Plaintiff in a mass tort lawsuit against Bayer alleging injuries related to the implant of an Esure (sic) birth control [device] pending in the Superior Court of California, County of Los Angeles (Lima, et al v. Bayer, et al, Case No. BC676522). Although the case has been settled, a determination has not yet been made as to what, if any, portion of settlement funds will be allocated to Debtor Rachael Dillahunt. This will be determined by a Special Master in the case.Doc. 32 at 2, ¶ 3. The attached service certificate showed that the Application was served on all ECF participants in the case, the Dillahunts, and proposed special counsel. The court granted the Application on April 28, 2021. Doc. 33.
The Trustee filed his Motion of Trustee to Settle and Compromise Personal Injury Claim ("the Settlement Motion") (doc. 39) on August 3, 2022. The Settlement Motion stated:
Now comes [the Trustee] . . . and hereby moves pursuant to Bankruptcy Rule 9019(a) that the Court approve a settlement and compromise reached by the Trustee with Bayer relating to alleged injuries of Debtor Rachael C. Dillahunt relating to an Esure (sic) birth control implant . . . .
. . . [T]he proposed gross settlement amount is Fifty Five Thousand Dollars ($55,000.00) less certain deductions as described below, for a net total to the estate of $30,882.83, less a personal injury exemption payable to Ms. Dillahunt totaling $23,700.00, leaving net proceeds to the estate in the amount of approximately $7,182.83.Doc. 39 at 2. The Settlement Motion further explained:
Debtor Rachael Dillahunt is a Plaintiff in a mass tort lawsuit against Bayer alleging injuries related to the implant of an Esure (sic) birth control device pending in the Superior Court of California, County of Los Angeles (Lima, et al v. Bayer, et al, Case No. BC676522 ). A determination has now been made by a Special Master appointed in the mass tort case as to the portion of settlement funds ($55,000.00) to be allocated to Debtor Rachael Dillahunt.Id., ¶ 3. The Settlement Motion also included an accounting of the gross settlement amount and deductions for attorney fees, expenses, and common benefit assessments. Id. at 3-4, Ex. A-B. The Trustee did not attach the settlement agreement to the Settlement Motion or otherwise file it on the docket, but he did provide the U.S. Trustee with a copy. The Settlement Motion was served on all creditors and parties in interest. Id., Ex. C.
More than a month later, on September 19, 2022, the Trustee filed this motion to seal the settlement motion and the application to employ special counsel ("the Motion to Seal") (Doc. 40). The Trustee asserts that both the Settlement Motion and the Application contain confidential commercial information and should therefore be sealed upon the Trustee's request in accordance with § 107(b)(1) and Rule 9018. Doc. 40. The Trustee contends that the terms of the settlement are confidential commercial information and states that confidentiality is a term of the settlement agreement. Id. at 5. Further, "the Defendant in the subject litigation has insisted upon confidentiality as a condition of any settlement." Id.
On September 30, 2022 the court issued a scheduling order (Doc. 41) and established November 18, 2022 as the deadline for any party in interest to file a memorandum in support of or in opposition to the Motion to Seal "specifically addressing whether it is appropriate under 11 U.S.C. § 107 to seal the Chapter 7 Trustee's filings (doc. 32 & 39)." Doc. 41 at 1. In response to the Motion to Seal, Andrew Vara, United States Trustee for Region 9 ("the UST"), objected (doc. 44). The UST argues that neither the Settlement Motion nor the Application can be appropriately sealed because the settlement terms do not constitute confidential commercial information. Instead, the UST asserts that the information must remain available to the public because "[t]he Trustee has not satisfied his burden of demonstrating that the Settlement Agreement, and the information thereto as set out in the Applications and Motions at issue, may be sealed under Section 107 of the Bankruptcy Code and Fed.R.Bankr.P. 9018." Doc. 44 at 4, ¶ 11.
The Trustee filed a supplemental memorandum (doc. 45). The Trustee acknowledged that "the details of the proposed settlement have been disclosed to creditors and parties in interest through the filing and service of the Trustee's motion to settle and compromise." Doc. 45 at 1. The Trustee stated that "the defense in the subjection litigation . . . has taken the position that a motion to seal must be filed to protect the confidentiality of the settlement going forward." Id. The Trustee declined to argue that the information he seeks to seal meets the requirements of § 107(b) or Rule 9018. Instead, he explained: "The Trustee has not received details from the defense that would enable him to argue that the information (settlement terms) sought to be sealed constitute[s] a trade secret or confidential research, development, or commercial information or constitute[s] scandalous or defamatory matters . . . ." Id. at 2. The Trustee contended that, despite this, the court should seal this information to ensure the settlement goes forward, asserting that "there simply is no harm in sealing the requested documents." Id.
In its scheduling order, this court stated it would set an evidentiary hearing upon the request of any party in interest on or before November 18, 2022. Id. As no such request was made, the court took the matter under advisement.
III. Legal Analysis
A. Overview of Bankruptcy Code § 107 and Bankruptcy Rule 9018
Section 107 of the Bankruptcy Code addresses public access to bankruptcy court records:
(a) Except as provided in subsections (b) and (c) and subject to section 112 [11 U.S.C. § 112], a paper filed in a case under this title and the dockets of a bankruptcy court are public records and open to examination by an entity at reasonable times without charge.
(b)On request of a party in interest, the bankruptcy court shall, and on the bankruptcy court's own motion, 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.
(c)(1) The bankruptcy court, for cause, may protect an individual, with respect to the following types of information to the extent the court finds that disclosure of such information would create undue risk of identity theft or other unlawful injury to the individual or the individual's property:
(A)Any means of identification (as defined in section 1028(d) of title 18 [18 U.S.C. § 1028(d)]) contained in a paper filed, or to be filed, in a case under this title.
(B)Other information contained in a paper described in subparagraph (A). * * *11 U.S.C. § 107. It is well-established that § 107 supplants the common law with respect to the sealing of bankruptcy court records. See Gitto v. Worcester Telegram & Gazette Corp. (In re Gitto Global Corp.), 422 F.3d 1, 8 (1st Cir. 2005) ("Because § 107 speaks directly to the question of public access, however, it supplants the common law for purposes of determining public access to papers filed in a bankruptcy case."); Neal v. Kansas City Star (In re Neal), 461 F.3d 1048, 1053 (8th Cir. 2006) (quoting Gitto, 422 F.3d at 8) ("[I]ssues concerning public disclosure of documents in bankruptcy cases should be resolved under § 107, not under the common law."); Father M. v. Various Tort Claimants (In re Roman Catholic Archbishop), 661 F.3d 417, 431 (9th Cir. 2011) (similar); Phar-Mor, Inc. v. Defendants Named Under Seal (In re Phar-Mor, Inc.), 191 B.R. 675, 679 (Bankr.N.D.Ohio 1995) ("Because Congress enacted an express statutory scheme, issues concerning public disclosure of documents in bankruptcy cases should be resolved under § 107.").
Bankruptcy Rule 9018 also addresses the redaction and sealing of bankruptcy court records and serves to implement § 107. It provides:
On motion or on its own initiative, with or without notice, the court may make any order which justice requires (1) to protect the estate or any entity in respect of a trade secret or other confidential research, development, or commercial information, (2) to protect any entity against scandalous or defamatory matter contained in any paper filed in a case under the Code, or (3) to protect governmental matters that are made confidential by statute or regulation. If an order is entered under this rule without notice, any entity affected thereby may move to vacate or modify the order, and after a hearing on notice the court shall determine the motion.Fed. R. Bankr. P. 9018.
Section 107 codifies a broad right of public access to court documents in bankruptcy cases, subject to very limited exceptions. Neal, 461 F.3d at 1053; Father M., 661 F.3d at 430. This statute reflects the federal common law's long-standing recognition of an extensive right of public access to court records and a strong presumption in favor of public access to all court records. See generally Shane Grp., Inc. v. Blue Cross Blue Shield of Mich., 825 F.3d 299, 305-06 (6th Cir. 2016); In re Shields, 2022 U.S. App. Lexis 21248, at *1 (6th Cir. Aug. 1, 2022); Myers v. Am. Educ. Servs., No. 1:18-cv-144, 2020 U.S. Dist. LEXIS 260649, at *1-2, 2020 WL 12688343, at *1 (S.D. Ohio Mar. 13, 2020); In re Thomas, 583 B.R. 385 (Bankr. E.D. Ky. 2018). The statutory framework of § 107 has been described as imposing stricter requirements for sealing court records than the fairly rigorous standard applied by the common law. See Father M., 661 F.3d at 430; Woody Partners v. Maguire (In re One Jet, Inc.), 630 B.R. 761, 763-64 (Bankr. W.D. Pa. 2021) (distinguishing the court's narrow sealing powers under § 107 from the broader common law sealing jurisprudence). As one court explained: "Unlike the common law, which permits a court to exercise its 'supervisory power' and seal documents 'when justice so requires,' section 107 expressly limits the circumstances under which the Court may restrict public access." Woody Partners, 630 B.R. at 764 (emphasis added and citation omitted).
B. Applicability of § 107 to the Settlement Information
Section 107 lists only three exceptions to the otherwise mandatory public disclosure of documents filed in a bankruptcy case: a) confidential commercial information such as trade secrets and confidential research (§ 107(b)(1)); b) scandalous or defamatory information (§ 107(b)(2)); and c) personal identifiers and other such information which may expose a person to identity theft or other such injury (§ 107(c)(1)). See Father M., 661 F.3d at 430. Thus, the court is empowered to seal records only when the information to be sealed falls into one of these three categories. The burden of proving that the information fits into one of these categories rests on the party seeking protection under § 107. Goldstein v. Forbes (In re Cendant Corp.), 260 F.3d 183, 194 (3d Cir. 2001); Thomas, 583 B.R. at 391; In re Fibermark, Inc., 330 B.R. 480, 496-97 (Bankr. D. Vt. 2005).
Rule 9037 also provides for the redaction or sealing of personal identifiers, such as social security numbers, birth dates, financial accounts, and names of minor children. Fed.R.Bankr.P. 9037.
Here, in the Motion to Seal, the Trustee suggests that the settlement information constitutes confidential commercial information. However, the Trustee does not provide any support for his claim or otherwise explain why the settlement terms should be considered confidential commercial information. Indeed, he later declined in his supplemental memorandum to argue that the information he seeks to seal fits within any of these three narrow categories and acknowledged that he could not provide any evidence to support such a finding. Doc. 45 at 2. Instead, he asks the court to find that the documents at issue contain protectable confidential commercial information because the proposed settlement is confidential by its terms and "the Defendant in the subject litigation has insisted upon confidentiality as a condition of any settlement." Doc. 40 at 5. The Trustee suggests that the settlement and benefit to the estate may be lost if the court declines to seal these documents. Courts addressing similar arguments have consistently held that the inclusion of confidentiality terms in a settlement agreement is not in itself a sufficient basis for sealing documents or information under § 107. Thomas, 583 B.R. at 392; Togut v. Deutsche Bank AG (In re Anthracite Capital, Inc.), 492 B.R. 162, 172 (Bankr. S.D.N.Y. 2013). As another bankruptcy court made clear:
The Movants argument that the "no seal, no deal" condition is reason enough for sealing a document under § 107 is not only wrong under the law, it is also illogical. If that were the standard for sealing, every settlement in a bankruptcy case would be sealed whenever a party insisted that a document be sealed. Such a test would remove the need for analysis under § 107 and would directly conflict with the statute, the common law, and the legislative history of § 107.Togut, 492 B.R. at 172. Therefore, litigants may not rely on a mutual agreement to seal documents or confidentiality term when asking a court to seal documents. Instead, the moving party must show that the settlement information it seeks to seal contains protectable confidential commercial information within the meaning of § 107(b). As explained below, the Trustee has not done so here.
Commercial information is "information which would cause an unfair advantage to competitors by providing them information as to the commercial operations of [the other party]" or "information that is so critical to an entity's operations that disclosing the information will unfairly benefit that entity's competitors . . . [and] must reasonably be expected to cause commercial injury." Thomas, 583 B.R. at 391 (quoting In re Frontier Group, L.L.C., 256 B.R. 771, 773 (Bankr.E.D.Tenn. 2000) and In re Waring, 406 B.R. 763, 768-69 (Bankr.N.D.Ohio 2009)). The Trustee has not alleged that the release of the settlement amount or any other information within the documents he seeks to seal would provide an unfair advantage to Bayer's competitors or otherwise cause commercial injury to Bayer. Indeed, other courts have held that settlement amounts do not fall into any of the § 107 protected categories and cannot be sealed. See e.g., Woody Partners, 630 B.R. at 764 ("The amount of a financial settlement very clearly does not fall within any of the statutorily protected categories described above."). While addressing a similar situation in which a settling defendant sought to seal settlement terms, another court explained, "Lest be any confusion, section 107 simply offers no protection for a settling defendant's bargaining position in future litigation of similar claims." Id. The Trustee has proffered no evidence that would allow the court to conclude that any of the settlement information is protectable under § 107(b) as commercial information. See McCaffrey v. Mortgage Sources Corp., No. 08-2660-KHV, 2010 U.S. Dist. LEXIS 109508, at *4, 2010 WL 4024065, at *1 (D. Kan. Oct. 13, 2010) ("The Court should seal documents based only on articulable facts known to the Court, and not based on unsupported hypothesis or conjecture.").
It is difficult to conclude that this information is in fact confidential when it has been publicly available throughout the case. As the UST correctly asserts, these documents have been served on all creditors and parties in interest in this case and have been available on the public docket for a number of months. The court determines that the Trustee has not met his burden and finds that the settlement information is not confidential commercial information and cannot be sealed under § 107.
The court also takes judicial notice of similar settlements in this district involving Bayer that were never sealed. See In re Woods, 3:17-32105 (June 29, 2017) (doc. 88); In re Lee, 3:19-30933 (Mar. 27, 2019) (doc. 29); In re Houston, 3:16-31108 (Apr. 12, 2016) (doc. 38); In re Monie, 3:20-bk-31117 (Apr. 27, 2020) (doc. 25).
C. The Public Interest in Open Access to Bankruptcy Settlement Records
The court will also address the Trustee's contention that no one will be harmed if the settlement information is sealed regardless of whether it meets the § 107 standard. On the contrary, the public has a weighty interest in open access to court records in this context. "[W]hen a trustee seeks to settle a claim on behalf of the bankruptcy estate, the public policy of open access to court records comes fully into play, and a searching judicial inquiry is required before approving the settlement." In re Oldco M Corp., 466 B.R. 234, 238 (Bankr. S.D.N.Y. 2012).
Accordingly, courts have frequently cited the bankruptcy court's role in approving settlements involving the bankruptcy estate as a circumstance militating against the sealing of information. See Togut, 492 B.R. at 172-73; Thomas, 583 B.R. at 392-93. "Bankruptcy courts have 'significant discretion to approve' settlements, and they may do so if a settlement is 'fair and equitable,' . . . [and] in the best interests of the bankruptcy estate." In re Murray Energy Holdings Co., 615 B.R. 461, 472 (Bankr. S.D. Ohio 2020) (quoting Rankin v. Brian Lavan & Assocs., P.C. (In re Rankin), 438 Fed.Appx. 420, 426 (6th Cir. 2011) and Gold v. GMC (In re Signet Indus. Inc.), 165 F.3d 28, 1998 U.S. App. LEXIS 22652, at *9, 1998 WL 639168, at *3 (6th Cir. Sept. 10, 1998) (table decision)). The presumption of public access to court records underlying both § 107 and the common law is at its strongest when judges exercise this sort of discretionary power. See Togut, 492 B.R. at 173 (quoting Geltzer v. Andersen Worldwide, S.C., No. 05 Civ. 3339(GEL), 2007 U.S. Dist. LEXIS 6794, at *7, 2007 WL 273526, at *2 (S.D.N.Y. 2007)) ("Information most clearly due for disclosure includes any 'document which is presented to the court to invoke its powers.' . . . A stipulation of settlement in a matter in which the Court must approve the substance of the settlement is most certainly such a document. The press and public could hardly make an independent assessment of the facts underlying a judicial disposition, or assess judicial impartiality or bias, without knowing the essence of what the court has approved."). And while the court has already reviewed this information and approved the compromise, the importance of this information remaining open to the public does not dissipate. As noted by many courts,
[P]ublic access promotes not only the public's interest in monitoring the functioning of the courts but also the integrity of the judiciary… "Public access serves to promote trustworthiness of the judicial process, to curb judicial abuses, and to provide the public with a more complete understanding of the judicial system, including a better perception of fairness." As Judge Easterbrook, writing for the Seventh Circuit, stated: "The political branches of government claim legitimacy by election, judges by reason. Any step that withdraws an element of the judicial process from public view makes the ensuing decision look more like a fiat and requires rigorous justification."Doe v. Pub. Citizen, 749 F.3d 246, 266 (4th Cir. 2014) (citations omitted). Thus, while this court has reviewed the information provided to determine the appropriateness of the settlement, the need for that information to remain on the public docket continues so that the public may continually have the opportunity to observe the functions of the court.
D. Least Restrictive Means Requirement
The court also notes that even if a party establishes that certain information or records should be sealed from the public, the sealing must be narrowly tailored to restrict from public view only the information appropriate for sealing. See Togut, 492 B.R. at 180 (quoting In re Borders Group, Inc., 462 B.R. 42, 47 (Bankr. S.D.N.Y. 2011) ("When protection is required under § 107, the Court has discretion in deciding how to protect commercial information as § 107 does not mandate sealing-only protection . . . Redacting documents to remove only protectable information is preferable to wholesale sealing. The policy favoring public access supports making public as much information as possible while still preserving confidentiality of protectable information."); In re Celsius Network LLC, 644 B.R. 276, 289 (Bankr. S.D.N.Y. 2022) ("Redacting documents to remove only protectable information is preferable to wholesale sealing."); see also Lipman v. Budish, 974 F.3d 726, 753 (6th Cir. 2020) (quoting Shane Grp., 825 F.3d at 305-06) (discussing sealing under the common law standard) ("[E]ven where a party can show a compelling reason why certain documents or portions thereof should be sealed, the seal itself must be narrowly tailored to serve that reason. The proponent of sealing therefore must 'analyze in detail, document by document, the propriety of secrecy, providing reasons and legal citations.'") Here, the Trustee has not explained why redaction of the settlement terms he seeks to seal would not have been sufficient to protect this information, even had the court determined it protectable under § 107(b).
IV. Conclusion
The Motion to Seal does not meet the requirements for sealing court records under § 107. Accordingly, the Motion to Seal is denied. All of the filings on the docket for this case will be available on the public docket.
IT IS SO ORDERED.