Are Confidentiality Agreements Enforceable in Bankruptcy?

Are State Court Settlement Confidentiality Agreements Enforceable in Bankruptcy?

The recent case of Meghji v. Casla Realty LLC (In re Celsius Network LLC) in the SDNY Bankruptcy Court addresses whether confidentiality agreements in state court settlements remain enforceable in subsequent bankruptcy proceedings.

Case Background

The Litigation Administrator in the Celsius Network LLC bankruptcy case filed a complaint to avoid transfers of the debtor's property to the defendant. In response, the defendant filed a motion to transfer venue to Puerto Rico state court, citing a prior settlement agreement. This motion included details of a settlement agreement containing a $68,375 wire transfer, mutual release, and confidentiality provisions.

The Confidentiality Dispute

Minutes after filing the transfer motion, the defendant filed an emergency motion to seal, arguing the settlement agreement contained confidential information. The bankruptcy court denied this motion, citing the "strong presumption and public policy in favor of public access to court records." This access can only be limited under § 107(b) of the Bankruptcy Code, which protects trade secrets and confidential commercial information.

Court's Analysis

The court rejected the defendant's subsequent motion for reconsideration for two key reasons:

1. Wrong Starting Point: The defendant incorrectly focused on whether the settlement was a "judicial record." The court clarified that by attaching the settlement agreement to their motion, the defendant had already made it a public record under § 107.

2. Faulty Arguments: The court emphasized that private settlement agreements cannot shield potentially avoidable transfers in bankruptcy. When fraudulent transfer claims are involved, the public has a clear interest in disclosure.

Key Takeaways

• Filing documents in bankruptcy court makes them public records under § 107, regardless of prior confidentiality agreements.

• The burden lies with the party seeking to seal records to prove they fall under § 107(b)'s narrow exceptions.

• Private confidentiality agreements cannot override bankruptcy law's provisions for avoiding fraudulent transfers.

• Public policy strongly favors transparency in bankruptcy proceeding.s

This case highlights the tension between private settlement confidentiality and bankruptcy's public nature, ultimately favoring transparency in the bankruptcy process.