3M unit gets debtor-friendly bankruptcy location in Indianapolis

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Indianapolis Bankruptcy Court is not the typical venue for big business Chapter 11 cases, but its business-friendly legal findings made it the logical choice for 3M Co.’s Aearo Technologies LLC to try to resolve a widespread dispute over allegedly defective combat earplugs. .

Major bankruptcies have occurred in a few places in the United States – those of Delaware, New York and Houston – where judges have a reputation for effectively resolving complex issues with high financial stakes. But in the Seventh Circuit, which encompasses the Indianapolis court where Aearo’s bankruptcy is pending, 3M – which is not itself bankrupt – has found jurisdiction known to allow non-bankrupt entities to dodge litigation without filing Chapter 11 themselves.

Despite comments on Wednesday from the judge handling Aearo’s case, U.S. Judge Jeffrey Graham, suggesting the company faces an “uphill battle” to obtain legal shield for its non-bankrupt parent company, 3M has a precedent of seventh circuit in his favor.

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

Since Aearo is headquartered in Indianapolis, his choice of location may have also helped to avoid possible forum disputes.

3M filed its subsidiary Aearo in bankruptcy on Tuesday in the US Bankruptcy Court for the Southern District of Indiana. The filing came after what the company said was 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 to more of 230,000 plaintiffs, mainly soldiers.

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

3M said it would fund a $1 billion settlement trust to compensate people suing earplugs — the majority of tort claims. The strategy is similar to those used by other companies facing significant personal injury liabilities, such as Johnson & Johnson and Purdue Pharma LPalthough these companies address their liabilities in the courts of New York and New Jersey.

Friendly tour

Other prominent Seventh Circuit cases have also been debtor-friendly. In 2016, the Seventh Circuit issued a decision finding that the Chapter 11 bankruptcy court of Caesars Entertainment Operating Company Inc. had the power to stay prosecutions 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 power” to approve third-party litigation releases in the Chapter 11 case for Airadigm Communications Inc.

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

Most recently, USA Gymnastics successfully reorganized in a Chapter 11 proceeding in Indiana, reaching a significant settlement with hundreds of former gymnasts who filed sexual abuse claims by the former team physician Larry Nassar. As part of the settlement, the U.S. Olympic and Paralympic Committee paid $34 million to a settlement trust and also received a release from the gymnasts’ litigation, although it did not itself file for bankruptcy. .

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

In consolidated litigation in the Northern District of Florida, plaintiffs in approximately 230,000 cases claim that Aearo Combat Arms version 2 earplugs were ineffective and caused them to develop hearing loss and tinnitus. 3M and Aearo pleaded issues with the development and approval of earplugs in an eleventh circuit.

While filing for bankruptcy in Indiana does not result in any obvious downside for Aearo, a larger question, Levitin said, is whether the court will grant 3M an automatic stay of bankruptcy, which typically ends disputes. disputes outside the bankruptcy case.

“If so, then Aearo will remain bankrupt indefinitely until plaintiffs’ attorneys agree to reach an agreement,” Levitin said. “It’s a jaw-dropping contest that 3M stands to win if it can obtain protection in the bankruptcy of its subsidiary.”

Obstacles to mass bankruptcy

Aearo’s bankruptcy comes less than a year after New Brunswick, New Jersey-based healthcare giant Johnson & Johnson created spin-off company LTL Management LLC, using pro-business Texas law, and placed that company into bankruptcy, which is now pending 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 pressure from plaintiffs to dismiss the bankruptcy, which they said was filed in bad faith due to the two-step maneuver. The United States Court of Appeals for the Third Circuit expects to hear the appeal in September.

The Second Circuit, which encompasses the bankruptcy court for the Southern District of New York, is also considering the merits of non-consensual releases of nondebtors in the Purdue Pharma bankruptcy.

Although Aearo’s case does not involve the same two-step strategy used by LTL, it draws on the LTL court’s support for the use of the bankruptcy system to resolve third party liability cases. mass, according to Negisa Balluku, bankruptcy litigation analyst at Bloomberg Intelligence.

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

For Aearo, “a filing in Delaware could have been risky if the LTL deal was overturned,” Balluku said.

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

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