Appeal from the United States Bankruptcy Court for the Southern District of New York.

Powers of the Court — Reorganizations — Exclusivity Period — Seals — Commercial Information. — A bankruptcy court was authorized by Section 107 to enter an order sealing its court records in a response to a reorganization plan that was provided subject to conditions of confidentiality and nondisclosure to third parties. The concern was that the creditors' committee could use the information to affect the market and disclose information about negotiations which would ultimately affect the viability of the debtors. However, because the order was overbroad, it was modified to seal only the designated sentences which contained the confidential commercial information. The non-censored portions of the response would be available to the public.

STANTON, District Judge

See Sec. 107 at ¶ 7047 and cf. Sec. 1121(b) at ¶ 12,102.

The Official Committee of Unsecured Creditors (the "Creditors' Committee") of Lomas Financial Corporation and certain of its subsidiaries (collectively, "Debtors") appeal from an order of the United States Bankruptcy Court for the Southern District of New York (Burton R. Lifland, Chief Bankruptcy Judge) sealing various documents.

BACKGROUND

Debtors filed a Chapter 11 petition in bankruptcy on September 24, 1989. On October 1, 1990, they filed a request for a fourth extension of their exclusive right to file a plan of reorganization. See 11 U.S.C. § 1121(b), (d) (1988).

That application was based in part on Debtors' claimed success in producing an outline of a plan of organization (the "POR"), which they submitted to interested parties on October 10. The POR bore on its cover a prominent legend stating that it was confidential, and that it was provided on condition that it not be disclosed to third parties.

The Creditors' Committee opposed the extension. Its "Response of the Official Committee of Unsecured Creditors to Debtors' Fourth Application for an Order Extending the Exclusive Right of the Debtors to File a Plan or Plans of Reorganization and to Obtain Acceptances Thereto" (the "Response") quoted overall figures and disclosed percentage allocations among classes to whom certain distributions were proposed in the POR, to show why the Creditors' Committee considered the POR unreasonable and unworkable, and to support its argument that Debtors' period of exclusivity should not be extended.

Debtors sought an order sealing the Response, asserting that disclosing the confidential information from the POR would affect trading in Debtors' listed securities and trading in claims against Debtors. The Creditors' Committee opposed sealing, and it urges that the bankruptcy court lacked authority to seal the Response.

After oral argument, the bankruptcy court ordered the Response and other related documents sealed. (Transcript of October 23, 1990 ("Tr.") at 27-27). The court characterized the POR as an "invitation to negotiate," and stated, "I do find for all of the reasons that I have stated that there is the potential for much disruption, possible mischief, disruption of markets, both with regard to the trading in securities, the trading in claims, which has become quite active in this case." ( Id. at 26).

The court also granted Debtors' application for an extension of exclusivity, a ruling which is not at issue here.

DISCUSSION

The public has a general right of access to judicial records. Nixon v. Warner Communications, Inc., 435 U.S. 589, 597-98 (1978); In re Analytical Systems, Inc., 83 B.R. 833, 834-35 (Bankr. N.D. Ga. 1987). While sealing is the exception rather than the rule, id. at 835; In re Nunn, 49 B.R. 963, 964 (Bankr. E.D. Va. 1985), the decision whether to seal bankruptcy court records lies within the discretion of the bankruptcy court. In re Sherman-Noyes Prairie Apts. Real Estate Investment Partnership, 59 B.R. 905, 909 (Bankr. N.D. Ill. 1986); Hope ex rel. Clark v. Pearson, 38 B.R. 423, 424 (Bankr. M.D. Ga. 1984).

That discretion is limited by section 107 of the Bankruptcy Code, which states that while papers filed in the bankruptcy court are open to inspection, bankruptcy courts are authorized to "protect an entity with respect to a trade secret or confidential research, development, or commercial information." 11 U.S.C. § 107(b)(1).

The Creditors' Committee argues that the term "commercial information" in section 107(b)(1) protects only information that may give a debtor's competitors an unfair advantage. See In re Intel Corp., 17 B.R. 942, 944 (Bankr. 9th Cir. 1982). See also In re EPIC Assocs. V, 54 B.R. 445, 450 (Bankr. E.D. Va. 1985).

That interpretation is too narrow. The same words "commercial information" appear in Fed.R.Civ.P. 26(c)(7) and as used there include information related "to the buying and selling of securities on the open market". See Federal Open Market Committee of the Federal Reserve Sys. v. Merrill, 443 U.S. 340, 361-63 (1979).

This case is unlike Delatour v. Meredith, 144 F.2d 594 (2d Cir. 1944), relied on by the Creditors' Committee. There, the Second Circuit found it "a bit extreme" to deny access to a list of the debtor's creditors and stockholders. Id. at 597.

Here the bankruptcy court faced a situation in which it could reasonably determine that allowing disclosure in the Response would put into the hands of members of the Creditors' Committee the ability to affect the market in which they might sell their claims, by what they disclose about the negotiations (Tr. at 14), and have a chilling effect on negotiations, ultimately affecting the viability of Debtors. ( Id. at 24).

However, the sealing appears overbroad. Only four sentences contain the offending material (the second and third sentences in paragraph lc on page 3, and the first two sentences in paragraph 10 on page 8), and the balance of the Response should be available to the public.

CONCLUSION

For the reasons set forth above, the order of the bankruptcy court is modified so as to seal only the four designated sentences and, as so modified, is affirmed.

So ordered.