CAN A PUBLIC BENEFIT CORPORATION INSIST ON CONFIDENTIALITY AS PART OF A SETTLEMENT AGREEMENT?

Counsel for public benefit corporations often insist on the inclusion of a confidentiality provision in their settlement agreements.  Often claimants refuse to agree.  But many claimants are anxious to finally wind up their litigation and recover their award.  The issue is can a public benefit hide the payment of just compensation?  Isn’t the settlement something of great concern to the public, the press, legislative overseers and the bar in general?  An often overlooked consequence is that a claimant agreeing confidentiality may find unanticipated tax consequences.  See, for example, Amos v Comm., T.C. Memo. Docket No. 13391-01 (Dec. 1, 2003).

A review of New York Law will indicate that even if parties settle a case with a confidentiality provision – it still may be discoverable.  Furthermore, the Civil Practice Law and Rules require that there be a stipulation of settlement “with the terms of such stipulation” filed by the defendant (condemnor) with the County Clerk.  CPLR 2104.

There is a well settled body of law that holds the public interest is better served by promoting open access to the court, its proceedings and records.  See Mosallem v Berenson, 76 AD3d 345 (1st Dept 2010).

As was stated by the First Department in Osowski v AMEC Constr. Mgt. Inc., 69 AD3d 99, at 106, according to CPLR 3101 (a), “full disclosure of all matter material and necessary in the prosecution or defense of an action” is required.  In Allen v Crowell-Collier Publ. Co. (21 NY2d 403 [1968]), the Court of Appeals interpreted the CPLR phrase “material and necessary” to mean nothing more or less than “relevant.”  (Id. at 407)  The Court stated that the phrase must be “interpreted liberally to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity.”  (Id. at 406)  The Court concluded that the “test is one of usefulness and reason.”  (Id.)  Thus, disclosure of the terms of a settlement agreement by a settling party to a nonsettling party may be appropriate, despite the presence of a confidentiality clause in the agreement, where the terms of the agreement are “material and necessary” to the nonsettling party’s case.  Masterwear Corp. v Bernard, 298 AD2d 249, 250, 750 NYS2d 5, 6 [1st Dept 2002]; see Connors, Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, CPLR 3101:18A [“(t)he central inquiry in resolving…disclosure requests (regarding settlement agreements) should focus on relevance”]).)

Indeed, a New York court is generally proscribed from sealing a court record.  22 NYCRR Sec. 216.1 (a), provides: “Except where otherwise provided by statute or rule, a court shall not enter an order in any action or proceeding sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof.  In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties.”

A confidentiality agreement which seeks to restrain counsel’s ability to discuss the settlement would be unethical as a prior restraint on counsel’s right to free speech and would interfere with the attorney’s advice to current/or future clients.  The bar in general is entitled to know of any just compensation settlement so that counsel can place a fair and reasonable value on a similar case.

The legislature should hold hearings to investigate this improper demand.  Litigants should refuse to agree to confidentiality.

Posted in Confidentiality, Settlement Agreements
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