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3M Unit Gets Debtor-Friendly Bankruptcy Venue in Indianapolis

July 28, 2022, 9:01 AM

The Indianapolis bankruptcy court isn’t the typical venue for large corporate Chapter 11 cases, but its business-friendly legal findings have made it the logical choice for 3M Co.'s Aearo Technologies LLC to try to resolve widespread litigation over allegedly faulty combat earplugs.

Large bankruptcies have gravitated to a few venues in the US—those in Delaware, New York, and Houston—where judges have a reputation for efficiently resolving complex issues with high financial stakes. But in the Seventh Circuit, which encompasses the Indianapolis court where the Aearo bankruptcy is pending, 3M—which is not itself in bankruptcy—has found a jurisdiction known for allowing non-bankrupt entities to dodge litigation without filing for Chapter 11 themselves.

Despite comments Wednesday from the judge overseeing the Aearo case, US Judge Jeffrey Graham, suggesting the company faces an “uphill battle” in securing a litigation shield for its non-bankrupt parent, 3M has Seventh Circuit precedent in its favor.

“The Seventh Circuit has the most favorable law in the country on non-consensual non-debtor releases,” Georgetown University law professor Adam Levitin said.

Given that Aearo is headquartered in Indianapolis, its venue choice may also have helped avoid potential forum-shopping disputes.

3M on Tuesday placed its Aearo subsidiary into bankruptcy in the US Bankruptcy Court for the Southern District of Indiana. The filing came after what the company said is three years and $350 million in legal fees spent in multidistrict litigation over allegedly faulty earplugs used by the US military that caused hearing damage in more than 230,000 mostly service member plaintiffs.

Aearo wants to reach a settlement that would end all of the lawsuits and related tort claims against the unit and 3M.

3M has said it would fund a $1 billion settlement trust to compensate people suing over the earplugs—a majority of the tort claims. The strategy is similar to those used by other companies facing extensive personal injury liabilities like Johnson & Johnson and Purdue Pharma LP, although those companies are handling their liabilities in New York and New Jersey courts.

Friendly Circuit

Other large Seventh Circuit cases have also been friendly to debtors. In 2016, the Seventh Circuit handed down a decision finding that the bankruptcy court in the Chapter 11 of Caesars Entertainment Operating Company Inc. had the power to stay lawsuits in New York and Delaware, where some $12 billion was at stake.

3M may also find encouragement in a 2008 Seventh Circuit ruling that a bankruptcy court had “residual authority” to approve third party litigation releases in the Chapter 11 case for Airadigm Communications Inc.

“Perhaps the thought was Airadigm provides clear support on the release path,” said Lowenstein Sandler LLP attorney Philip J. Gross.

More recently, USA Gymnastics successfully reorganized through Chapter 11 proceedings in Indiana, reaching a large settlement with hundreds of former gymnasts who filed claims stemming from sexual abuse committed by former team doctor Larry Nassar. Under the deal, the US Olympic & Paralympic Committee contributed $34 million to a settlement trust and also received a release from the gymnasts’ litigation, despite not filing for bankruptcy itself.

During their first appearance in the case on Wednesday, Aearo’s attorneys from Kirkland & Ellis LLP cited at least six Seventh Circuit decisions dating back to 1987 in support of their argument that the court should extend a temporary injunction to 3M or potentially jeopardize its ability to pay plaintiffs.

In consolidated litigation in the Northern District of Florida, plaintiffs in about 230,000 cases say the Aearo Combat Arms version 2 earplugs were ineffective and caused them to develop hearing loss and tinnitus. 3M and Aearo have been litigating issues related to the earplugs’ development and approval in an Eleventh Circuit.

While filing for bankruptcy in Indiana doesn’t lead to any obvious disadvantages for Aearo, a larger question, Levitin said, is whether the court will grant 3M a bankruptcy automatic stay, which generally halts litigation outside of the bankruptcy case.

“If it does, then Aearo will sit in bankruptcy indefinitely until the plaintiffs’ attorneys are willing to take a deal,” Levitin said. “It’s a breath-holding contest that 3M is poised to win if it can get protection in its subsidiary’s bankruptcy.”

Mass Tort Bankruptcy Hurdles

Aearo’s bankruptcy comes less than a year after New Brunswick, N.J.-based health care giant Johnson & Johnson created spinoff LTL Management LLC, using a corporate-friendly Texas law, and placed that spinoff into bankruptcy, which is now underway in New Jersey. The legal maneuver is commonly referred to in corporate bankruptcy circles as the “Texas two-step.”

The judge overseeing LTL’s bankruptcy earlier this year rejected claimants’ push to throw out the bankruptcy, which they said was filed in bad faith because of the two-step maneuver. The US Court of Appeals for the Third Circuit plans to hear the appeal in September.

The Second Circuit, which encompasses New York’s Southern District bankruptcy court, is also considering the propriety of non-debtor, non-consensual releases in the Purdue Pharma bankruptcy.

While Aearo’s case doesn’t involve the same two-step strategy that LTL used, it draws inspiration from the LTL court’s support for using the bankruptcy system to resolve mass tort cases, according to Negisa Balluku, a bankruptcy litigation analyst at Bloomberg Intelligence.

The Third Circuit’s ultimate ruling on the LTL appeal may raise uncertainty about filing for bankruptcy in that circuit, which includes both Delaware and New Jersey, Balluku said.

For Aearo, “A Delaware filing could have been risky in the event the LTL case gets overturned,” Balluku said.

The bankruptcy is Aearo Technologies LLC, 22-02890, United States Bankruptcy Court for the Southern District of Indiana (Indianapolis).

To contact the reporter on this story: James Nani in New York at jnani@bloombergindustry.com, Alex Wolf in New York at awolf@bloombergindustry.com

To contact the editor responsible for this story: Maria Chutchian at mchutchian@bloombergindustry.com, Melissa B. Robinson at mrobinson@bloomberglaw.com