The Indianapolis bankruptcy court is not the typical venue for large corporate Chapter 11 cases, but its pro-business legal findings have made it the logical choice for 3M Co.’s Aearo Technologies LLC to attempt to resolve widespread litigation over allegedly defective combat earbuds .
Big bankruptcies have gravitated to some places in the US – Delaware, New York and Houston – where judges have a reputation for efficiently solving complex problems involving large amounts of money. But in the Seventh Circuit, which includes the Indianapolis court where the Aearo bankruptcy is pending, 3M – which itself has not filed for bankruptcy – has found a jurisdiction known for allowing unbankrupt companies to avoid litigation , without applying for Chapter 11 yourself.
Despite comments Wednesday from the judge overseeing the Aearo case, US Judge Jeffrey Graham, suggesting the company faces an “uphill battle” to secure a litigation shield for its non-bankrupt mother, 3M has one Precedent in the Seventh Circuit in his favor.
“The Seventh Circuit has the most favorable law in the country for non-consensual releases of non-debtors,” said Adam Levitin, Georgetown University law professor.
Since Aearo is headquartered in Indianapolis, the choice of venue may also have helped avoid potential forum shopping disputes.
3M filed its Aearo subsidiary for bankruptcy in the US Bankruptcy Court for the Southern District of Indiana on Tuesday. The filing comes after three years and $350 million in legal fees spent in multi-county litigation over allegedly faulty U.S. military earplugs that caused hearing damage in more than 230,000 plaintiffs, mostly military personnel, according to the company .
Aearo seeks to reach a settlement that would end all lawsuits and related tort claims against the entity and 3M.
3M has announced it will fund a $1 billion settlement fund to compensate people who are suing over the earbuds – a bulk of the tort claims. The strategy is similar to that of other companies facing large personal injury liabilities, such as
Other major Seventh Circuit cases have also been debtor-friendly. In 2016, the Seventh Circuit issued a decision finding that the bankruptcy court erred in Chapter 11 of the
3M may also find encouragement in a 2008 Seventh Federal Court ruling that a bankruptcy court had “residual authority” to authorize the release of third-party litigation in Airadigm Communications Inc.’s Chapter 11 case.
“Maybe the thought was Airadigm provides clear support moving forward,” said Philip J. Gross, attorney for Lowenstein Sandler LLP.
More recently, USA Gymnastics successfully reorganized itself through a Chapter 11 trial in Indiana and reached a major settlement with hundreds of former gymnasts who had filed sexual abuse claims at the hands of former team doctor Larry Nassar. As part of the deal, the US Olympic & Paralympic Committee contributed $34 million to a settlement fund and also received an exemption from the gymnasts’ litigation, although it did not file for bankruptcy itself.
In their first appearance in the case Wednesday, attorneys for Aearo of Kirkland & Ellis LLP cited at least six 1987 Seventh Circuit decisions to support their argument that the court was extending an injunction to 3M or potentially jeopardizing its solvency should plaintiff.
In a consolidated lawsuit in Florida’s Northern District, plaintiffs say in approximately 230,000 cases that Aearo Combat Arms Version 2 earplugs were ineffective and caused hearing loss and tinnitus. 3M and Aearo have engaged in litigation related to the development and approval of the earbuds in an 11th court hearing.
While filing for bankruptcy in Indiana results in no apparent disadvantage for Aearo, a bigger question, Levitin said, is whether the court will grant 3M an automatic stay of bankruptcy, which generally halts litigation outside of the bankruptcy proceedings.
“If this is the case, Aearo will remain in bankruptcy indefinitely until plaintiffs’ attorneys are willing to strike a deal,” Levitin said. “It’s a stunning competition that 3M will win by gaining protection from its subsidiary’s bankruptcy.”
Insolvency hurdles for mass crimes
Aearo’s bankruptcy comes less than a year after New Brunswick, NJ-based healthcare giant Johnson & Johnson formed and filed for spin-off LTL Management LLC using pro-corporate Texas law, which is now in New Jersey im is in progress. 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 the plaintiffs’ push to vacate the bankruptcy, which they say was filed in bad faith over the two-stage maneuver. The U.S. Court of Appeals for the Third Circuit plans to hear the appeal in September.
The Second Circuit, which includes the Bankruptcy Court for the Southern District of New York, is also considering the appropriateness of non-debtors and non-consensual releases in Purdue Pharma’s bankruptcy.
Although Aearo’s case doesn’t involve the same two-pronged strategy as LTL, it takes inspiration from the LTL court’s support for using the bankruptcy system to resolve mass tort cases, according to Negisa Balluku, bankruptcy analyst at Bloomberg Intelligence.
The Third Circuit’s final decision on the LTL complaint could 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 if the LTL case were overturned,” Balluku said.
The bankruptcy is Aearo Technologies LLC, 22-02890, United States Bankruptcy Court for the Southern District of Indiana (Indianapolis).