Section 107’s Primacy Over the Common-Law Right of Access in Bankruptcy Proceedings

Introduction

In In re: ESML Holdings Inc., DBA Mesabi Metallics Co. LLC (Nos. 23-2954 & 24-2265), the Third Circuit clarified the standard for sealing documents in bankruptcy cases. This consolidated appeal arose from the Bankruptcy Court’s decision to unseal certain papers that Cleveland-Cliffs, Inc. had designated “confidential” under a court-approved protective order during discovery in an adversary proceeding. Mesabi Metallics Company LLC—as debtor—originally filed the adversary suit against Cleveland-Cliffs alleging antitrust violations and tortious interference. To support a petition for mandamus in Minnesota state court, Mesabi moved to unseal documents that had been previously filed under seal. The Bankruptcy Court applied the common-law right of public access (as articulated in In re Avandia) and ordered disclosure. Cleveland-Cliffs obtained direct review in this Court and challenged several issues:

Whether Mesabi was judicially estopped from seeking unsealing given its stipulation to the protective order;
Whether the common-law right of access (Miller/Avandia) or Section 107 of the Bankruptcy Code governs sealing in bankruptcy cases;
Whether the Bankruptcy Court had jurisdiction to grant a non-party’s intervention and unsealing motion while the appeal was pending.

The Third Circuit held that (1) judicial estoppel did not apply, (2) Section 107 displaces the common-law standard in bankruptcy proceedings, and (3) the Bankruptcy Court lacked jurisdiction to decide the intervenor’s motion once the appeal was filed. It vacated the unsealing orders and remanded for the Bankruptcy Court to apply Section 107 in the first instance.

Summary of the Judgment

The Third Circuit’s opinion, authored by Judge Krause, resolves three principal questions:

Judicial Estoppel: Mesabi’s agreement to the protective order did not bind it to keep all produced documents sealed in perpetuity. Because the order merely provided a mechanism for initial confidentiality designations—subject to challenge—the Bankruptcy Court correctly declined to apply judicial estoppel.
Governing Standard for Sealing: Although the common-law right of access (and its heightened First Amendment variant) applies generally to judicial records, Section 107(a)–(b) of the Bankruptcy Code “speaks directly” to the sealing of papers filed in bankruptcy proceedings. Section 107(b) imposes a more tailored rule: a bankruptcy court shall protect “trade secrets” or “confidential … commercial information” (subsection (b)(1)) and “scandalous or defamatory matter” (subsection (b)(2)). This statutory scheme displaces the common-law balancing test of Avandia and Miller.
Jurisdiction Over Intervention Motion: Once Cleveland-Cliffs filed its direct appeal, the Bankruptcy Court was divested of jurisdiction over the very issues on appeal. By granting the intervenor’s motion to unseal the same documents, the court risked mooting the pending appeal. The Third Circuit therefore vacated the orders approving intervention and unsealing.

The case is remanded so that the Bankruptcy Court may apply Section 107’s mandatory provisions to Cleveland-Cliffs’ request to seal the contested documents, evaluating whether disclosure would pose a real risk of competitive injury or reveal a bona fide trade secret.

Analysis

4.1 Precedents Cited

Miller v. Indiana Hospital, 16 F.3d 549 (3d Cir. 1994): Established the common-law presumption of access to judicial records and required a showing that disclosure would cause “a clearly defined and serious injury.”
In re Avandia Marketing, Sales Practices & Products Liability Litigation, 924 F.3d 662 (3d Cir. 2019): Applied the Miller standard to motions to unseal under protective orders, affirming that confidentiality stipulations do not eliminate public-access rights.
Republic of Philippines v. Westinghouse Electric Corp., 949 F.2d 653 (3d Cir. 1991): Recognized the common-law right of access to “judicial records” filed or integrated into court adjudications.
Nixon v. Warner Communications, Inc., 435 U.S. 589 (1978): Held the common-law presumption of public access to court documents.
In re Orion Pictures Corp., 21 F.3d 24 (2d Cir. 1994): Concluded that Section 107 “eliminates” the common-law balancing test for bankruptcy filings and imposes its own protective scheme.
In re Roman Catholic Archbishop, 661 F.3d 417 (9th Cir. 2011): Interpreted Section 107(b)(2)’s “scandalous matter” clause objectively and noted Section 107’s mandatory “shall” language.

4.2 Legal Reasoning

The Third Circuit’s statutory analysis rests on these principles:

Statutory Displacement of Common Law: When Congress enacts a statute that directly addresses a subject matter, the common law adapts or yields. Section 107(a) codifies the general presumption of public access in bankruptcy, while (b) delineates specific, nondiscretionary categories for sealing. This “speaks directly” to sealing procedures in bankruptcy courts and displaces the common-law test of Miller/Avandia.
Mandatory “Shall Protect” Language: Section 107(b) uses mandatory terms. A bankruptcy court “shall” grant protection if the movant shows that the papers contain a qualifying category of information—confidential commercial data, trade secrets, or scandalous or defamatory content. There is no judicial balancing of public vs. private interests under Section 107.
Objective Competitive Injury Requirement: Although Section 107(b)(1) relaxes the Miller requirement of a “clearly defined and serious injury,” it does not permit sealing of innocuous materials. To fall within (b)(1), the moving party must demonstrate an actual risk of competitive harm or reveal a genuine trade secret or confidential research/development data. Otherwise, the statute’s plain text would be hollow.
No Judicial Estoppel: Protective orders merely facilitate discovery confidentiality—they do not bind parties to indefinite secrecy. Because Mesabi’s motion to unseal challenged Cliffs’ designation under the order’s own terms, there was no “irreconcilable inconsistency” with a previously adopted court position.
Appellate Divestiture: Once direct appeal was granted, the Bankruptcy Court lost jurisdiction over the contested sealing issues. The only matters it could address were those that would “assist” this Court. Granting the intervenor’s unsealing request would have mooted pending appellate review.

4.3 Impact

This decision has immediate and far-reaching implications:

Uniformity in Bankruptcy Practice: Bankruptcy courts in the Third Circuit must apply Section 107(b)’s categories and mandatory language whenever a party seeks to seal docketed records, rather than the common-law balancing test. Protective-order stipulations cannot override or supplant the congressional scheme.
Tighter Sealing Standards: Parties will need to submit concrete evidence of genuine trade-secret status or a real risk of competitive harm—rather than general assertions of confidentiality—to satisfy Section 107(b)(1).
Clarified Role of Protective Orders: Confidentiality designations under discovery orders remain provisional. Public-access challenges may be brought under Section 107 even after document exchange, ensuring transparency.
Guidance for Appellate Jurisdiction: The opinion underscores the limits on bankruptcy courts once an appeal is docketed, avoiding piecemeal litigation and preserving appellate review.
Potential Legislative Response: Stakeholders unhappy with Section 107’s contours may lobby Congress for different access rules in bankruptcy, though this decision cements Section 107’s primacy.

Complex Concepts Simplified

Common-Law Right of Access

Under centuries of precedent, documents filed with a court are presumptively open to public inspection. A party seeking secrecy had to show that disclosure would cause a serious, clearly defined injury—often called the Miller test in this Circuit.

Section 107 of the Bankruptcy Code

Section 107(a) reaffirms the public’s access to bankruptcy court filings. Section 107(b) then enumerates two nondiscretionary grounds for sealing:

(b)(1) Trade secrets or confidential research, development, or commercial information. The movant need only show that the material truly qualifies and that disclosure poses a realistic competitive risk.
(b)(2) Scandalous or defamatory material.

If one of these grounds is met, the court must protect the document—no public-private balancing is permitted.

Judicial Estoppel

A doctrine that prevents a party from taking two directly inconsistent positions in litigation when the court previously adopted the first position. It demands bad faith and a true inconsistency, neither of which was present here.

Appellate Divestiture

Once an appeal is filed, the lower court loses control over issues on appeal, except to the extent that further action will aid the appellate court.

Conclusion

In re ESML Holdings Inc. provides crucial clarity for practitioners and courts in the Third Circuit—and likely beyond—regarding public access to bankruptcy court records. By holding that Section 107(b) displaces the common-law right of access and imposes a non-discretionary, category-driven rule for sealing, the Third Circuit aligns its approach with other circuits and reinforces transparency in bankruptcy proceedings. Parties must now satisfy Section 107’s specific criteria—demonstrating real competitive harm or the existence of genuine trade secrets—to keep documents under seal. This decision safeguards the centuries-old principle of open judicial records, while respecting Congress’s carefully calibrated statutory framework.