A bankruptcy judge yesterday refused to open court records identifying about 100 savings institutions that lent money to Equity Programs Investment Co. (EPIC) after he heard testimony arguing that disclosing the names could start bank runs around the country.
Not only could disclosure cause a run on the thrifts named, but "there is a high probability that lenders that have no connection to EPIC will be in a position to have a run," Judge Martin V. B. Bostetter said, explaining his decision to maintain a seal on some of the financial information submitted by more than 350 bankrupt real estate partnerships established by EPIC, the real estate subsidiary of troubled Community Savings & Loan of Bethesda.
"I find no other way of protecting the public other than by this order," he said.
Bostetter originally had sealed the information in response to a request by two banks serving as trustees for thrifts holding about $1 billion in mortgage debt upon which EPIC has defaulted. The Washington Post and The New York Times asked Bostetter to reconsider his order on the grounds that it contravened portions of the bankruptcy code permitting public access to court documents except in special circumstances. Norman Oliver, a lawyer for the U.S. bankruptcy trustee in Alexandria, also opposed keeping the records sealed.
After the judge reaffirmed the decision yesterday, a Post staff lawyer said the newspapers were considering an appeal.
Bostetter's ruling came after a three-hour hearing in Alexandria in which lawyers for The Post and the banks argued over the relevance of testimony by two banking experts that public disclosure of thrifts' names in similar situations had triggered a loss of depositor confidence in the institutions.
Thomas L. Batties, the deputy chief superintendent of the Ohio Division of Savings and Loans, which regulates the state's thrifts, testified that media dissemination of bankruptcy court documents had helped trigger the Ohio savings and loan crisis last March.
Bankruptcy filings by ESM Government Securities of Florida indicated that the Home State Savings Bank in Ohio faced about $150 million in losses as a result of transactions it entered with the securities firm, Batties said. However, he said, Ohio newspapers and other media reported that the bank's liabilities resulting from ESM totaled nearly $650 million, triggering a run on deposits at Home State and other thrifts insured by the state.
Batties testified that without this public disclosure, "We would not have the collapse of the Ohio insurance network."
Drawing an analogy with the Ohio circumstances, another banking specialist, Arthur M. Weimer, said disclosure of the names of EPIC's creditors "could be very damaging.
"In a period of calm, there's no problem, but in a period of concern and nervousness, it's a different matter," added Weimer, a former dean at the University of Indiana business school. "Its a volatile situation, and that's what concerns me."
Robert Plotkin, a lawyer for the National Bank of Washington, one of the trustees, contended that the testimony showed that the creditors' fears about disclosure of their names "are not remote and speculative fears, but they are founded in real life." In urging Bostetter to maintain his sealing order, he said public disclosure of their names would place the institutions that lent EPIC money at a competitive disadvantage with other thrifts.
But the lawyer arguing the newspapers' position in court yesterday said the testimony about Ohio and the general banking crisis was of little relevance to the issue at hand. The trustees failed to produce a "shred of information or evidence" that secrecy is necessary to prevent harm to EPIC's creditors in this particular case, Patrick Carome, a Post staff attorney, told the judge.
"We have no evidence, only mere speculation," Carome added.
Carome said the banks' lawyers had not demonstrated that the information under seal represents confidential trade information that the bankruptcy code allows to be kept secret under special circumstances. If any creditor were allowed to assert generalized harm from disclosure of their name, "it would mean that virtually all bankruptcy proceedings could be subject to a wide-ranging sealing order," he said.