In re ESML Holdings Inc.: Bankruptcy Code § 107 Governs Sealing of Judicial Records

Introduction

In this consolidated appeal—Nos. 23-2954 & 24-2265—the United States Court of Appeals for the Third Circuit clarified whether the common law right of public access or 11 U.S.C. § 107 of the Bankruptcy Code controls the sealing of records in bankruptcy proceedings. At issue were certain confidential documents produced under a protective order in an adversary proceeding brought by ESML Holdings, Inc. and Mesabi Metallics Company LLC (“Mesabi”) against Cleveland-Cliffs, Inc. (“Cliffs”). Mesabi and a third-party intervenor sought to unseal those filings after the bankruptcy court applied the common law standard from In re Avandia. Cliffs appealed, arguing that § 107 displaces the common law presumption and that the bankruptcy court lacked jurisdiction to grant the intervenor’s motions while the appeal was pending.

Summary of the Judgment

On April 16, 2025, the Third Circuit held:

Bankruptcy Code § 107(b)—not the common law right of access—governs motions to seal or unseal filings on a bankruptcy court docket.
Section 107(b) mandates protection for “trade secrets or confidential research, development, or commercial information” and for “scandalous or defamatory matter,” subject to an objective showing of competitive harm or defamation.
The common law standard from In re Avandia (requiring “clearly defined and serious injury”) is displaced in bankruptcy cases.
Mesabi was not judicially estopped by its stipulation to a protective order from later seeking unsealing.
The bankruptcy court lacked jurisdiction to grant the third‐party intervenor’s motions while the direct appeal remained pending and those orders are vacated.
The case is remanded for the bankruptcy court to apply § 107’s requirements in the first instance.

Analysis

1. Precedents Cited

In re Avandia (924 F.3d 662): Adopted the common law test for sealing—presumption of openness, rebuttable by serious harm.
Miller v. Indiana Hosp. (16 F.3d 549): Established the “clearly defined and serious injury” requirement under the common law right of access.
Nixon v. Warner Communications (435 U.S. 589): Recognized the common law right to inspect and copy judicial records.
Publicker Industries v. Cohen (733 F.2d 1059): Distinguished common law access from First Amendment access.
In re Cendant Corp. (260 F.3d 183): Defined “judicial records” and confirmed the public’s common law right to inspect them.
In re Orion Pictures (21 F.3d 24): Held that § 107 creates a statutory right of access in bankruptcy distinct from common law.
Foundational statutory‐interpretation cases such as City of Milwaukee v. Illinois (451 U.S. 304) and United States v. Texas (507 U.S. 529), emphasizing that statutes displacing common law must speak directly to the question.

2. Legal Reasoning

The Third Circuit undertook a straightforward textual and doctrinal analysis:

Statutory Text: Section 107(a) presumes access to “papers filed” and the docket. Section 107(b) then directs (“shall”) the bankruptcy court, upon a party in interest’s request, to protect:
- Trade secrets or confidential research, development, or commercial information.
- Scandalous or defamatory matter.
Displacement of Common Law: Where Congress “speaks directly” to a question long governed by common law, the statute displaces that doctrine. Section 107(b)’s mandatory language and its clearly defined categories override the balancing test of In re Avandia.
Scope of § 107(b):
- “Confidential commercial information” must be the kind “kept confidential” to preserve competitive advantage.
- The bankruptcy court has no discretion to decline protection for information that objectively falls within § 107(b). The old common-law weighing of public vs. private interests is replaced by Congress’s chosen standard.
Judicial Estoppel: Mesabi’s agreement to a protective order did not adopt any binding merits position that the confidentiality of all documents would be indefinite. The protective order itself provided a mechanism for later court review and therefore did not trigger judicial estoppel.
Appellate Divestiture: Once Cliffs’s direct appeal was accepted, the bankruptcy court lost jurisdiction over the aspects of the case involved in that appeal. Granting the intervenor’s motions would have mooted the very issue on appeal.

3. Impact on Future Cases

This decision will guide bankruptcy practitioners and courts by:

Requiring litigants to invoke § 107(b) when seeking to seal or unseal documents in bankruptcy dockets, rather than relying on common law.
Streamlining confidentiality disputes: categories of protected information are fixed by statute, and once objective criteria are met, courts must seal.
Clarifying that judicial estoppel is not triggered by protective orders that allow later court review.
Emphasizing strict adherence to appellate‐divestiture principles: trial courts may not reopen sealed‐records issues once a direct appeal is pending.
Potentially influencing district courts exercising bankruptcy jurisdiction to look to § 107, although that question awaits further resolution.

Complex Concepts Simplified

Common Law Right of Access: An old principle that most court filings are public unless a party shows significant harm from disclosure.
First Amendment Access: A constitutional guarantee of public attendance and reporting of trials, requiring an overriding interest and strict scrutiny for closure.
11 U.S.C. § 107:
- § 107(a): Everything on the bankruptcy docket is presumptively public.
- § 107(b): Congress said that if a document is a trade secret, confidential commercial data, or scandalous matter, the court “shall” seal it on request.
Judicial Estoppel: Courts may stop parties from taking two clearly inconsistent positions that undermine the judicial process.
Appellate Divestiture: Once an appeal is filed and accepted, the trial court generally cannot change any aspect of the case that is before the appellate court.
Protective Order: A pretrial agreement that lets parties mark sensitive discovery materials “confidential,” subject to later court challenge.

Conclusion

In re ESML Holdings Inc. establishes that in bankruptcy proceedings the sealing of judicial records is governed exclusively by § 107 of the Bankruptcy Code. The Court of Appeals for the Third Circuit held that:

The common law right of access, while important in district‐court litigation, does not apply once Congress has provided a comprehensive statutory scheme in § 107.
Section 107(b)’s mandatory, category-based standard requires objective proof of competitive harm or defamation, replacing the broader common-law balancing test.
Parties bound by protective orders may still challenge confidentiality under § 107.
Bankruptcy courts must respect appellate jurisdiction and refrain from altering sealed‐records disputes once a direct appeal is pending.

This ruling reinforces the strong presumption of public access to judicial records while giving effect to Congress’s carefully tailored statutory regime in the Bankruptcy Code.