INDIANAPOLIS (Legal Newsline) - A bankruptcy judge shot down 3M’s attempt to halt litigation over its Combat Arms military earplugs, saying a generous funding agreement between 3M and its bankrupt Aearo unit eliminated any risk creditors – including some 290,000 earplug claimants – would suffer from an unfair distribution of assets if the lawsuits proceed.
The decision by U.S. Bankruptcy Judge Jeffrey J. Graham in Indiana represents a severe setback for 3M, which placed Aearo in bankruptcy in July to try to force a global settlement of the earplug claims. The strategy has been successful for other mass-tort defendants, including Johnson & Johnson, which put its talc business in Chapter 11 to resolve asbestos claims; and the Sackler family, which won a halt to opioid lawsuits against them personally in exchange for providing billions of dollars to fund the reorganization of Purdue Pharma.
No such luck for 3M, however. Judge Graham took a close look at the funding agreement between the Minnesota company and its Aearo unit and decided 3M’s open-ended financial commitment to Aearo meant there was no reason to stay the earplug lawsuits in order to preserve Aearo’s assets.
“The Court cannot conclude that continuation of the pending actions will affect the amount of property for distribution or the allocation of property among creditors,” he wrote in a 31-page order issued Aug. 26.
3M shares plunged more than 13% on the news, shaving $10 billion off the company’s market value. The company said it disagreed with the ruling and will appeal. “3M also will continue to vigorously defend its position in the multi-district litigation and in its appeals in that litigation,” the company said.
3M acquired Aearo for $1.2 billion in 2008. The lawsuits began after 3M settled a whistleblower complaint without admitting fault for $9.1 million in 2016. Lawyers began advertising for clients and by 2019, 700 cases were consolidated into multidistrict litigation under Judge M. Casey Rodgers in Pensacola, Fla. The claims swelled to more than 300,000 and currently stand at about 290,000, although 3M complains that tens of thousands of claims have little or no documentation.
“To say that the MDL is large is an understatement of epic proportions,” Judge Graham noted in his order.” It is the largest MDL in history by an order of magnitude and represents a staggering 30% of cases currently pending in the federal district courts.”
Some of the blame for 3M’s failure may lay with its attempt to do everything by the book. The parent company appointed two independent directors to Aearo and in negotiations they arrived at a commitment of $1.2 billion in cash and 3M agreed to indemnify all claims after Aearo exhausted all of its assets, primarily $1.6 billion in insurance. Critically, the agreement didn’t require Aearo to obtain a stay of the earplug litigation, which the independent directors said might leave it “marooned” in bankruptcy without money to pay claims.
Judge Graham said his ruling wasn’t about whether the MDL was being run properly, or whether bankruptcy was a more appropriate way to resolve the earplug litigation. “Both are merely tools, created by Congress, for the adjudication and resolution of claims,” he wrote.
“There has been some suggestion that the bankruptcy process is the only avenue by which the claimants may globally settle the claims,” he went on. “But this is not so.”
On the other hand, the judge disagreed with complaints by trial lawyers that bankruptcy would deny their clients their day in court. While most claims in bankruptcy are resolved through a negotiated settlement, he said, it’s also unlikely the 290,000 tort claimants would have a jury trial regardless of how he ruled.
The federal Bankruptcy Code provides an automatic stay to halt all litigation so some creditors can’t seize assets that should be distributed more fairly. But the Code only protects bankrupt debtors, not solvent entities like 3M. Courts have extended protection to non-debtors when pending litigation would cause “irreparable harm” to the bankrupt company, including in the Purdue and J&J talc cases. The Seventh Circuit, however, hasn’t fully adopted this idea, he wrote.
The stay only applies to the property of the bankrupt entity, the judge went on, which in Aearo’s case appears to be its insurance policies. But since 3M has agreed to fund all of Aearo’s liabilities, it doesn’t matter if the litigation threatens to clean them out; 3M will continue to cover the cost of earplug claims regardless.
The judge rejected a second argument that another section of the Bankruptcy Code, 105(a), gave him authority to issue any orders “necessary or appropriate” including a halt to litigation “related to” the underlying bankruptcy. On first glance the earplug litigation would seem “related to” the bankruptcy, the judge went on, but since 3M has an uncapped, non-recourse commitment to finance Aearo, he said, the lawsuits have no practical impact on its finances.
The judge concluded by acknowledging the litigation could cripple 3M. If the litigation ends up costing $100 billion, as some have speculated, it would wipe out 3M’s cash reserves and consume 17 years’ worth of earnings to repay.
“3M’s ability to honor its commitment under the funding agreement is very much the elephant in the room,” he said.