One of the hallmarks of the U.S. bankruptcy system is ready
access to information concerning any entity that files for
bankruptcy protection. The integrity of that system is premised
upon the presumption that not only creditors and other interested
parties in a bankruptcy case, but also the public at large, should
have the ability to examine any document filed with the bankruptcy
court. Rooted in the common-law right of access to public
documents, full disclosure promotes the legitimacy of the
bankruptcy court as an institution entrusted with impartially
applying the nation's bankruptcy laws and administering
debtors' estates for the benefit of all interested parties.
Unrestricted access to judicial records also fosters confidence
among creditors regarding the fairness of the bankruptcy
system.
However, the right of public access is a qualified one—it
has exceptions. Thus, a bankruptcy court has the power under the
Bankruptcy Code to implement appropriate protective measures where:
(i) disclosure of information would result in the revelation of
trade secrets or confidential commercial information; (ii)
information in a court filing is scandalous or defamatory; or (iii)
disclosure of information would create undue risk of identity theft
or other unlawful injury to an individual or to his or her
property. More generally, "privacy interests" sometimes
lead courts to direct that access to certain court documents be
restricted (e.g., by filing documents under seal). See Morning Mist
Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), No. 11-4376,
2013 BL 102426 (2d Cir. Apr. 16, 2013) ("Important as public
access to court documents may be, it is not an exceptional and
fundamental value. It is a qualified right; and many proceedings
move forward in U.S. courtrooms with some documents filed under
seal . . . .").
Absent one of these particular circumstances, however, the
deep-rooted policy of full disclosure in bankruptcy is difficult to
overcome. A ruling recently handed down by a Delaware district
court illustrates the presumption favoring public access to
information in a bankruptcy case. In In re Motions for Access of
Garlock Sealing Technologies LLC, 488 B.R. 281 (D. Del. 2013), the
court reversed lower-court rulings denying a chapter 11 debtor
access to exhibits accompanying statements filed under Rule 2019 of
the Federal Rules of Bankruptcy Procedure ("Rule 2019")
by attorneys representing multiple asbestos claimants in 12
separate bankruptcy cases. According to the court, "As the
2019 Exhibits are judicial records that were filed with the
Bankruptcy Court, there is a presumptive right of public access to
them," and the appellees failed to rebut that presumption. The
ruling also reflects a growing trend promoting transparency
regarding claims: (i) asserted in asbestos-related bankruptcy
cases; and (ii) submitted to trusts established at the completion
of such cases.
Public Access to Court Documents
The public's general right to inspect and copy public
documents, including judicial records, has long been part of common
law. The existence of such rights, which are based upon the
public's interest in monitoring the workings of the judicial
system, are universally regarded as fundamental to a democratic
state. They are closely allied to the presumption in the First
Amendment of the U.S. Constitution that court proceedings should
ordinarily be open to the press and the public.
Section 107(a) of the Bankruptcy Code recognizes the right of
public access in a bankruptcy case. It provides that "[e]xcept
as provided in subsection (b) and (c) [of this section] and subject
to section 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."
The scope of the provision extends to nearly all documents filed
with the court.
Even so, the common-law right of access to public documents is not
absolute. Confidentiality may be justified if access to information
is sought for an improper purpose or if the information has been
categorically designated as off-limits by Congress. In bankruptcy
cases, this caveat is reflected in sections 107(b) and (c) of the
Bankruptcy Code. Section 107(b) provides as follows:
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.
Section 107(c) authorizes the bankruptcy court to protect
individuals against disclosure of information that would create
undue risk of identity theft or other unlawful personal injury or
injury to property. Section 112 of the Bankruptcy Code similarly
establishes limitations on disclosure of the names of an individual
debtor's minor children.
In Garlock Sealing, the district court considered whether the
right of public access to information filed in a bankruptcy case
extends to exhibits accompanying statements filed under Rule
2019.
Garlock Sealing
Garlock Sealing Technologies LLC ("Garlock"), a
manufacturer of sealing products, filed for chapter 11 protection
in 2010 in North Carolina to deal with current and future asbestos
liabilities by means of a trust established pursuant to section
524(g) of the Bankruptcy Code. In connection with its efforts to
estimate its liability for mesothelioma claims, Garlock sought
access to information filed in 12 other asbestos-related
bankruptcies.
Specifically, Garlock sought information contained in exhibits
(the "2019 Exhibits") referred to in, but not annexed to,
Rule 2019 statements filed in these bankruptcy cases by various
attorneys representing multiple asbestos claimants. Under the
version of Rule 2019 in effect at the time, any entity representing
more than one creditor in a chapter 11 bankruptcy case, other than
an official committee, was obligated to file a verified statement
with the court disclosing, among other things: (i) the name and
address of each creditor; (ii) the nature and amount of each
represented creditor's claim; (iii) the circumstances and terms
under which the representative entity was employed; and (iv) the
acquisition date of each claim owned by the representative and the
amount paid for each such claim.
Beginning in 2004, the bankruptcy courts entered orders in the 12
asbestos-chapter 11 cases—all of which were presided over by
the same bankruptcy judge sitting in different
districts—requiring all law firms that represented multiple
asbestos personal-injury claimants to comply with Rule 2019 by
filing verified statements and submitting to the clerk of the court
compact discs containing the 2019 Exhibits, i.e., the individual
claimant information required by the rule. The Rule 2019 statements
were publicly available, but the 2019 Exhibits were not. Instead,
although the 2019 Exhibits were not formally sealed, the bankruptcy
judge ordered that they be made available to third parties only
upon court order. That "procedural framework" was upheld
on appeal by two district courts and the Third Circuit Court of
Appeals. See In re Kaiser Aluminum Corp., 327 B.R. 554 (D. Del.
2005); In re Pittsburgh Corning Corp., 2005 WL 6128987 (W.D. Pa.
Sept. 27, 2005), aff'd, 260 F. App'x 463 (3d Cir. Jan. 10,
2008).
In addition to seeking discovery of information included in the
2019 Exhibits in connection with litigation in its own chapter 11
case, Garlock filed motions in January 2011 seeking access to the
2019 Exhibits filed in these other asbestos-bankruptcy cases.
According to Garlock, by comparing the 2019 Exhibits filed in other
asbestos-bankruptcy cases with the discovery that Garlock obtained
in connection with its own tort litigation, it could verify whether
lawyers and claimants are being untruthful about exposure to
Garlock's products and the injuries sustained through such
exposure—in other words, as evidence of "fraud in the
tort system."
The bankruptcy judge denied Garlock's requests in October
2011. Among other things, the judge concluded that: (i) Garlock had
neither standing to intervene, Article III standing, nor
"prudential" standing to seek access to the 2019 Exhibits
in the other asbestos cases; and (ii) Garlock's expressed
desire to use the 2019 Exhibits in pending and potential litigation
"improperly" attempted to use Rule 2019 for purposes for
which it was not intended. According to the judge, "Rule 2019
is not a discovery tool but is to ensure that plans are negotiated
and voted on by those authorized to act on behalf of real parties
in interest in a case." Addressing the right of public access
to judicial records, the bankruptcy judge wrote that restriction of
access to an individual claimant's personal details "is
not inconsistent with the public's right of access."
Garlock appealed to the district court, which consolidated all of
the matters in a single proceeding.
The District Court's Ruling
The district court reversed. At the outset, the court concluded
that Garlock had standing both to seek access to the 2019 Exhibits,
as a member of the public confronting an obstacle preventing access
to a judicial record, and to appeal the bankruptcy judge's
October 2011 order, because Garlock was "aggrieved" by
the denial of access. The district court also determined that
Garlock was not precluded from pursuing the appeal under the
doctrines of collateral estoppel or res judicata because, among
other things, no previous order or final judgment decided the issue
of Garlock's right as a member of the public to access the 2019
Exhibits.
Addressing the merits of the appeal, the district court first
concluded that the 2019 Exhibits were "judicial records"
because they had been filed with the clerk of the court, even if
not publicly available without a court order.
Next, the court explained that, because the 2019 Exhibits are
public records, there is a presumptive right of public access to
them in accordance with the Third Circuit's ruling in Goldstein
v. Forbes (In re Cedant Corp.), 260 F.3d 183 (3d Cir. 2001), as
well as section 107 of the Bankruptcy Code.
Finally, the district court in Garlock Sealing ruled that the
presumption of public access had not been rebutted. It acknowledged
the appellees' concerns about possible misuse of asbestos
claimants' personal information but concluded that "they
fail to show any clearly defined and serious injury,"
particularly given the restrictions which the court intended to
place on Garlock's use of the 2019 Exhibits.
The court similarly rejected the argument that Rule 2019 was not
intended as a vehicle for obtaining discovery. "[J]ust because
Garlock might have another mechanism for obtaining the information
it seeks here," the court wrote, "does not, in the
circumstances presented here, diminish Garlock's right to
pursue access through the process it is pursuing in this
court." Emphasizing that balancing the factors for and against
access is an exercise committed to the discretion of the court, the
district court ruled that Garlock should have access to the 2019
Exhibits.
Alternatively, the court ruled, even if the 2019 Exhibits were not
judicial records, it would still grant Garlock access to them. The
court explained that the Rule 2019 orders operated to a certain
extent as confidentiality orders. Applying the balancing test
articulated by the Third Circuit Court of Appeals in Pansy v.
Borough of Stroudsburg, 23 F.3d 772 (3d Cir. 1994), the court ruled
that Garlock had demonstrated good cause to modify the orders to
give it access to the 2019 Exhibits, subject to certain
restrictions. The court wrote that "Garlock's purpose in
seeking access to the 2019 Exhibits—to permit its expert in
its own bankruptcy to develop or rebut an opinion as to an estimate
of Garlock's aggregate liability for asbestos claims . . .
— is a proper purpose for seeking access."
However, the court determined that Garlock's access to the
2019 Exhibits should be subject to certain restrictions to prevent
identity theft and other potential damage which the bankruptcy
judge envisioned might ensue from unfettered access. Specifically,
the court directed that: (i) access is to be provided solely for
the purpose of using the 2019 Exhibits in connection with
Garlock's asbestos claims-estimation hearings; (ii) Garlock may
not publicly disclose information in the exhibits except in an
aggregate format that does not identify individuals; (iii) Garlock
is obligated to propose a form of protective order to the
bankruptcy court presiding over its chapter 11 case before
disclosing any information obtained from the 2019 Exhibits; and
(iv) Garlock shall not be granted access to any attorney-retention
agreements.
Outlook
Part of Garlock Sealing's import is explained by its
context—large asbestos-bankruptcy cases—where companies
seek a permanent resolution of thousands of existing and future
claims. In such cases, the debtor's legitimate efforts, through
discovery and other means, to develop an accurate estimate of its
aggregate liability for current and future asbestos claims, as well
as to rebut competing estimates, for the purpose of funding a
section 524(g) trust must be balanced against the privacy interests
of asbestos claimants (and their counsel).
The ruling reaffirms the importance of the right, albeit
qualified, of public access to documents filed in a bankruptcy
case. According to Garlock Sealing, statements and accompanying
exhibits filed under Rule 2019 do not enjoy any special immunity
from disclosure.
Garlock Sealing is emblematic of a growing movement promoting
transparency regarding the assertion of claims in asbestos-related
bankruptcy cases, including the submission to, and treatment by,
asbestos trusts established at the conclusion of such cases. In
granting Garlock's motion for access to the 2019 Exhibits, the
court took judicial notice of recently proposed legislation at the
state and federal levels designed to address a perceived lack of
transparency in the asbestos-bankruptcy claim and trust system
created by chapter 11 plans, plan confirmation orders, sealing
orders, and other orders limiting public access to information.
This lack of transparency has fueled widespread concerns of
potential fraud in asbestos litigation.
For example, a pending federal bill, the Furthering Asbestos Claim
Transparency Act of 2013 (the "FACT Act"), proposes
amending the Bankruptcy Code to require all section 524(g) trusts
to file publicly available reports on a quarterly basis, disclosing
the details of payment demands and disbursements, including the
names and exposure histories of claimants, except as provided in a
protective order or as necessary to prevent disclosure of
confidential medical records or protect against identity theft. As
proposed, the FACT Act would apply retroactively to bankruptcy
cases commenced and bankruptcy trusts established before its
passage.
The Garlock Sealing court agreed to take judicial notice of the
proposed legislation, noting that "these legislative proposals
have arguable relevance to issues in this appeal, including at
least whether there is public interest in transparency in asbestos
litigation," a factor (in accordance with Pansy) the court
deemed relevant in assessing whether a third party should have
standing to challenge protective and confidentiality orders in an
effort to obtain access to information or judicial proceedings. By
providing Garlock with access—albeit restricted—to
information that has been closely guarded by attorneys for asbestos
claimants, the court appears to agree that transparency is the
better course of action.
Jones Day represented Kaiser Aluminum Corp. and USG Corp., two of
the reorganized debtors as to which Garlock is seeking access to
the 2019 Exhibits.
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