A federal judge in Florida on Thursday had harsh words for 3M over the company’s decision to file for bankruptcy protection for its earbud subsidiary Aearo.
Aearo’s line of military earbuds is at the heart of one of the largest mass torts in US history, potentially leaving 3M with tens of billions of dollars in liabilities.
“This worries me,” US District Judge Casey Rodgers said of 3M’s move last month to file for Chapter 11 bankruptcy protection for its subsidiary Aearo Technologies.
Rodgers said 3M appears to be attempting to shift judgment on approximately 230,000 earplug claims from federal court juries to a US bankruptcy judge in southern Indiana.
In her more than three years of conducting multi-district litigation related to the 3M earbuds, 3M has never attempted to part ways with Aearo, she said. Instead, it had claimed to her that the two entities were 100% the same.
The bankruptcy filing named all of Aearo’s subsidiaries, but not 3M Co. In the bankruptcy filing, 3M said it had invested $1 billion in a fund for Aero to pay Aearo’s claims.
The Indiana bankruptcy court is scheduled to begin hearing arguments next week about whether a lawsuit against 3M merits a stay in that court, 3M defense attorney Jessica Lauria said. Chapter 11 allows a debtor to reorganize and automatically freeze creditor claims and lawsuits against a bankrupt company.
In Aearo’s bankruptcy, 3M effectively wants that stay extended to itself for the earbud cases.
During Thursday’s two-hour hearing, Rodgers challenged the indemnity agreement 3M had with Aearo, in which Aearo agreed to assume all liability for the earbuds and in which 3M agreed to pay Aearo $1.24 billion to cover of liabilities and to pay for the reorganization.
By taking Aearo to bankruptcy court, 3M tried “very creatively and skillfully” to move the case out of US District Court, said Rodgers, who for several years oversaw 3M’s multi-district litigation and 16 lead cases from Pensacola, Fla.
Two military veterans who previously sued 3M are seeking summary judgments to prevent 3M and Aearo from turning to bankruptcy court to handle the massive number of lawsuits against earbuds.
Rodgers accepted the application Thursday under deliberation.
It is unclear which court will have the final say in the lawsuit.
Ashley Keller, the plaintiff’s attorney, argued that 3M’s bankruptcy filing was a move to undermine Rodgers’ authority and nullify 3½ years worth of district court judgments in the cases, as well as contain 3M’s rising legal costs.
“This is not the story of an unlucky debtor looking for a brief respite to put his affairs in order before returning to the fray. It’s the story of a solvent, profitable company that has decided it’d rather be done with the tort system and jury trials altogether, and is trying to take advantage of that [bankruptcy] jurisdiction of the court to seize the federal files,” Keller and other attorneys for the plaintiffs said in a bankruptcy filing this week.
Lauria insisted that the “proper venue” going forward is the bankruptcy court, not the US District Court.
The Indiana bankruptcy court will hear arguments about whether 3M’s debts merit a stay by that court, Lauria said.
But Rodgers said “the only reason Aearo needs to reorganize is just this newly created compensation arrangement,” which put a financial strain on Aearo.
“It appears to me that the funding and indemnification agreement were structured for the sole purpose of resolving 3M’s bankruptcy liability and are not within the jurisdiction of this court,” she said. “It seems that Aero had no liability [apart from 3M] until this agreement is concluded.”
Rodgers once rebuked an attorney, saying, “You cannot use this court to continue a bankruptcy court fraud.”
3M’s defense attorney, Charles Beall, insisted that 3M did not commit fraud. Instead, the company had the right to choose the legal strategy used in each earbud case because each of the lawsuits was different.
In a statement, 3M said, “We stand ready to move forward and believe the applicable law supports our position.”
To date, the jury has sided with 3M six times and agreed that Aearo earbuds are safe and not defective. But juries have also awarded nearly $300 million to plaintiffs in 10 other lead cases.
Rodgers challenged Aearo’s statement in bankruptcy court that the multidistrict litigation, aka MDL, was “broken beyond repair” over the earbud housings.
She said 3M can feel as it pleases about the case and the jury decisions, but it is incumbent on the courts not to allow defendants to simply move from district court to bankruptcy court because it disliked previous decisions and was trying to overturn them.
MDLs are used in the federal court system for complex product liability matters involving many separate claims. They often include governance processes designed to set the tone to settle any claims.