Michael K. Lam and Jennifer J. Lam

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
ELIZABETH CITY DIVISION
IN RE:
BLUE WATER LAND DEVELOPMENT, LLC,
Debtor. 	Case No. 08-00842-8-JRL
Chapter 11
IN RE:
MICHAEL K. AND JENNIFER J. LAM
Debtors. 	Case No. 08-00856-8-JRL
Chapter 11
O R D E R
This action is before the court on the motion of creditors John W. Dixon (Dixon) and
Glenn E. Futrell (Futrell) for a protective order relieving them of the obligation of producing a
settlement agreement with the Bank of America pursuant to a subpoena issued by counsel for
debtors. The confidential agreement resolved claims among Futrell, Dixon and Bank of America
in litigation that predated the filing of these cases and also involved the debtors. At the
conclusion of a telephonic hearing on the motion on September 2, 2008, counsel for the Bank of
SO ORDERED.
SIGNED this 04 day of September, 2008.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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America submitted the agreement for in camera review. Although not a respondent to the
subpoena, counsel for Bank of America strenuously asserts that the bank is entitled to rely on the
confidentiality provisions in the agreement to prevent its disclosure.
The Rules of Evidence render settlement negotiations inadmissible if offered to prove
liability, invalidity, or amount of a claim. Fed. R. Evid. 408. Inherent in this Rule is the strong
public policy in favor of promoting settlements. However, relevant information that is
inadmissible at trial is discoverable if the discovery appears reasonably calculated to lead to the
discovery of other evidence that would be admissible at trial. Fed. R. Civ. P. 26(b)(1). Courts
have construed Rule 26(b) to permit very broad discovery, encompassing “any matter that bears
on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in
the case.” Young v. State Farm Mut. Auto Ins. Co., 169 F.R.D. 72 (S.D.W. Va. 1996) (quoting
Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351, 98 S. Ct. 2380, 2389 (1978)). It follows
that settlement documents are subject to discovery if they are relevant and likely to lead to the
discovery of admissible evidence.
Although Rule 408 does not bar the discovery of information related to settlement
negotiations, the majority of courts require the moving party to satisfy a heightened standard of
proof before granting the discovery of confidential settlement material. See Equal Rights Ctr. v.
Archstone-Smith Trust, 2008 WL 2717762 (D. Md. 2008) (court was unwilling to “open the gate
to expansive and costly discovery in the absence of a specifically articulated bases for
disclosure.”); Fidelity Fed. Sav. and Loan Ass’n v. Felicetti, 148 F.R.D. 532, 534 (E.D. Pa.
1993) (court switched the burden of proof from the party opposing discovery to the party seeking
the information and found that moving party met its burden as to some settlement material);
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Bottaro v. Hatton Assocs., 96 F.R.D. 158 (E.D.N.Y. 1982) (no disclosure where “particularized
showing of a likelihood that admissible evidence will be generated by the dissemination of the
terms of the settlement agreement”). Other courts have rejected the heightened standard and
place the burden on the opposing party to prove that the information sought is unlikely to lead to
admissible evidence. See Bennett v. La Pere, 112 F.R.D. 136 (D.R.I. 1986) (reasoning that the
policies favoring broad discovery mandate placing the burden of proof on the party opposing
discovery). The court finds that the parties’ confidential settlement agreement is discoverable
under either standard.
First, in these cases, Bank of America has asserted a secured claim of $14,000,000.00.
Futrell has asserted a secured claim of $5,517,775.36, and he and Dixon have asserted unsecured
claims of $300,000.00 and $1,360,841.36, respectively, in the Blue Water case. The debtors
have categorized all of these claims as disputed, unliquidated, and contingent in their schedules,
and have asserted from the outset of these cases that they will attempt to avoid Bank of
America’s secured status or equitably subordinate its recovery to that of other creditors. The
settlement agreement has provisions that would be highly relevant to the distribution scheme in
these cases, and perhaps to the classification of claims into classes, should the debtors succeed.
Without disclosure of the terms of the settlement agreement, any understanding of the potential
positions of the parties in these cases is incomplete.
Second, a close examination of the actual confidentiality provision agreement relied on
by Bank of America suggests that disclosure here is appropriate. Paragraph 9 reads as follows,
in pertinent part: “Notwithstanding the foregoing, Defendants may disclose to third-parties that
BOA returned to them funds in the amount of their respective deposits with six (6) months
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interest, and BOA and Defendants may disclose the terms of this Agreement to the other parties
to the Lawsuit and their counsel in the course of negotiating settlement or in furtherance of their
claims therein.” The Defendants referred to in this paragraph are Futrell and Dixon, and they
have indicated their willingness to disclose the agreement and provided written waivers. The
parties seeking the disclosure are counsel for other parties to the lawsuit to whom disclosure is
permitted. With a court-mandated mediation in the near future, it is not difficult to conclude that
disclosure is in the course of negotiating settlement. A fair reading of this term is that the Bank
cannot prevent disclosure when the Defendants are willing to make it in compliance with the
terms of the settlement agreement.
Accordingly, the motion for a protective order is denied, and Futrell and Dixon are
ordered to disclosure the settlement agreement forthwith. As anticipated by the agreement, its
use and disclosure shall be strictly limited to counsel in these cases, with the proviso that it may
be shared with the mediator if any party deems it necessary.
END OF DOCUMENT
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