On August 26, Indiana Bankruptcy Court Judge Jeffrey J. Graham issued an order in the bankruptcy cases of Aearo Technologies (“Aearo” and, together with its affiliated debtors, the “Debtors”) , dismissing the Debtors’ motion for a preliminary injunction protecting non-debtor parent 3M Company (“3M”) from a series of lawsuits related to allegedly defective hearing protection devices that resulted in hearing loss and related injuries. The ruling highlights the risks inherent in the “Texas two-step” or “split-merger” approach that has become a hot topic in recent years, playing out in many scenarios involving corporate liability cases. mass, often in the context of asbestos. The most notable prior case to date has been the Chapter 11 filing of LTL Management (Johnson & Johnson), but there have been several others, including Aldrich Pump (Trane Technologies and Ingersoll-Rand), Bestwall (Georgia- Pacific), DBMP (CertainTeed and Saint Gobain), HONX (Hess) and Paddock Enterprises (OI Glass).
Aearo and 3M face more than 200,000 claims based on defective hearing protection products (the “combat arms claims”), with judgments in some “indicator” lawsuits against 3M and Aearo ranging from 1, $7 million to $77.5 million. There are two insurance programs, both operated by 3M, that could cover tort claims: the 3M Tower program offering $1.05 billion in coverage and the Aearo Legacy program offering $550 million in coverage. Prior to Aearo’s bankruptcy filing, 3M and the Debtors entered into a financing agreement, which was executed on July 25, 2022 (the “Funding Agreement”). Aearo’s Chapter 11 petitions were filed the following day.
Under the financing agreement, 3M agreed to provide $1.24 billion to fund Aearo’s Chapter 11 cases and a claims trust, among other things, and the debtors, in turn, would indemnify 3M. The purpose of the financing agreement was to transfer initial responsibility for combat arms claims to Aearo, while leaving ultimate financial responsibility for claims with 3M. Notably, notwithstanding the indemnity in favor of 3M, under the financing agreement, 3M has agreed to fund all amounts necessary to fund any claim by 3M. It should also be noted that 3M’s obligations under the financing agreement were not dependent on an injunction issued by the bankruptcy court.
In the Aearo Chapter 11 cases, the debtors sought an injunction protecting 3M from Combat Arms Multi-District Litigation (“MDL”) in order to preserve the debtors’ assets and ultimately implement a reorganization plan that would include the creation of a claims trust. The court rejected the injunction. Subsequently, on August 29, Aearo filed a motion asking the Seventh Circuit for a direct review of their appeal of Judge Graham’s denial, and the next day Judge M. Casey Rodgers issued an order securing mediation at the MDL.
Some key takeaways from the bankruptcy court decision:
- Although the focus was on the inefficiencies of the MDL process, the bankruptcy court however declined to take a position on the relative merits of the MDL litigation and bankruptcy processes, with the court making it clear that the bankruptcy process is not not “the only way” to resolve large amounts of claims, as both the MDL and the Bankruptcy Code were federally approved approaches.
- Matters of venue – lack of explicit direction from the 7th Circuit to extend the automatic stay to non-debtors under Bankruptcy Code Section 362(a)(1) led the court to decline to do so for 3M . In contrast, the New Jersey bankruptcy court overseeing LTL Management’s Chapter 11 extended that protection to Johnson & Johnson.
- The court concluded that section 362(a)(3) of the Bankruptcy Code – applying the stay of obtaining estate assets – did not apply here because of the lack of “effect pecuniary on the estate” owed to 3M, not Aearo, being ultimately responsible for funding Aearo’s liabilities related to MDL and state lawsuits. The Court emphasized that there was no threat of inequitable distribution of the insurance proceeds and that this would not affect the amount of money Aearo could pay to creditors.
- The bankruptcy court having come to the conclusion that the automatic stay did not apply directly, attention then turned to the question of whether an injunction could be issued under Article 105 of the Bankruptcy Code to protect 3M. At the outset of this analysis, the court focused on the jurisdictional basis of determining whether the issuance of the injunction was “related to” or “arose out of” Aearo’s bankruptcy.
- The parties agreed that the analysis of the Section 105 injunction should focus on jurisdiction “connected to”, which the court accepted, while noting, citing Caesars, that an argument could be made for seek to “arrange from” the skill, although he said he was reluctant to do so. Although the law on “tied to” jurisdiction varies, the bankruptcy court focused on the “constrained approach” employed in the Seventh Circuit, which primarily examines whether there is an economic impact on the debtor’s estate. .
- The bankruptcy court analyzed the actual economic effect that continued litigation would have on Aearo’s bankruptcy estate and found no extraordinary circumstances to issue an injunction under Section 105(a) for the non-debtor 3M. In doing so, the court noted that the financing agreement provides for an uncapped and non-recourse commitment from 3M, and that the agreement is a circular arrangement, such that when Aearo makes a payment, there is no financial impact for creditors. This produced contrary results in the bankruptcy courts overseeing LTL Management, Aldrich Pump and Bestwall.
- The court also reasoned the financing agreement and Aearo’s reorganization did not depend on the Court’s barring of litigation, noting that Aearo must have believed that the reorganization was possible without the promise of a stay in favor of 3M, as Aearo negotiated the removal of such a condition from the financing agreement.
- Aearo is seeking an appeal because, without the injunction, 3M could face $100 billion in claims, an amount that far exceeds 3M’s cash reserves and would disastrously affect 3M’s ability to honor the settlement agreement. funding. The ruling notes that this “really is the elephant in the room.”
Special thanks to Josh Friedman who co-wrote this post.