Seventh Circuit Judges Grill 3M Lawyer Over Bankruptcy Maneuver

Appellate judges let a lawyer for 3M Co. and its bankrupt subsidiary get about a minute into his opening argument before inundating him with questions about why a bankruptcy liability shield should be extended to 3M.

Former US Solicitor General Paul Clement argued on Tuesday that a bankruptcy court’s refusal to extend liability protection to 3M against ongoing litigation over faulty earplugs was based on a misunderstanding of bankruptcy law and a funding agreement between 3M and its unit Aearo Technologies LLC.

The case before the US Court of Appeals for the Seventh Circuit weighs the core question of a controversial bankruptcy practice in which companies shift liability into a bankrupt subsidiary while protecting assets from creditors by keeping them in the parent company.

A three-judge panel for the Seventh Circuit, which is generally considered a business-friendly court, seemed skeptical Tuesday of 3M’s position that it should be protected by the automatic stay that shields Aearo in bankruptcy.

“I just don’t see how, unless you’re going to say the automatic stay applies to everybody with joint and several liability, how your position can hold,” Judge Diane Wood said.

3M established Aearo to face more than 230,000 lawsuits from former service members alleging it made faulty earplugs responsible for their hearing loss. US Bankruptcy Judge Jeffrey J. Graham in August refused to extend a bankruptcy liability shield to 3M.

The Seventh Circuit agreed to hear the case on direct appeal from the bankruptcy court.

3M’s situation is “a truly unique case,” Clement argued Tuesday. But Judge David Hamilton noted that there are concerns from parties who filed amicus briefs that other large corporations would make a similar move as 3M if they start losing in multi-district litigation.

“One of the points that some of the amicus make, they suggest that if this maneuver works, why won’t it automatically happen any time a defendant in an MDL starts to get uncomfortable with the MDL courts’ rulings?” the judge asked.

The case is Aearo Technologies LLC, et al v. Those Parties Listed on Appendix A to the Complaint, et al, 7th Cir., No. 22-02606, 4/4/23.