Bankruptcy as an MDL loophole? Not so fast, judge tells 3M in ‘surprise’ ruling

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The 3M logo is seen at its global headquarters in Maplewood, Minnesota, U.S., March 4, 2020. Picture taken March 4, 2020. REUTERS/Nicholas Pfosi/File Photo

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(Reuters) – A federal bankruptcy judge in Indianapolis rocked 3M Co on Friday, decision that tens of thousands of military veterans who claim hearing loss from 3M earplugs can continue to sue 3M, despite the July 26 bankruptcy of several 3M subsidiaries. Shares of the company, as reported by my colleague Dietrich Knauth, fell 12% on Friday and continued to fall Monday morning.

But the implications of the ruling extend beyond 3M and the multidistrict earplug litigation. Indianapolis US Bankruptcy Judge Jeffrey Graham’s ruling should also be a warning to other MDL defendants that a subsidiary’s bankruptcy may not be the way out you hope.

Graham’s decision took even seasoned bankruptcy watchers such as University of Georgia Law School law professor by surprise, as courts frequently agree to extend litigation stays to parents of bankruptcy subsidiaries. Reuters, for example, has extensively reported on the so-called Texas Two-Step, in which solvent companies lay mass tort liability in a newly created subsidiary that then declares bankruptcy. This maneuver hinges on stopping the litigation against the parent company in order to use the bankruptcy process to reach a global settlement.

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Certainly, Graham’s decision does not prevent 3M and its subsidiaries from continuing to push for a global settlement through the bankruptcy process. 3M, which has lost 10 of 16 landmark MDL earplug lawsuits before U.S. District Judge Casey Rodgers of Pensacola but vehemently denies its products were defective, has repeatedly said it believes bankruptcy was the fairest and most effective way to solve his problem. responsibility. 3M can still try to assert that ground with plaintiffs in the MDL — but as Graham noted in his notice, the company and its bankrupt subsidiaries have much less leverage without a stay in the MDL litigation against 3M.

3M filed a notice of appeal of Graham’s decision on Monday. I suspect the company will ask to bypass the federal district court and take its appeal directly to the 7th US Circuit Court of Appeals. 3M and his alternative co-defendants also have appeals pending before the 11th Circuit from Judge MDL’s key rulings. The 11th Circuit suspended those appeals in light of the subsidiaries’ bankruptcy, but if the MDL goes ahead with claims against 3M, I wouldn’t be surprised if the company asks the 11th Circuit to proceed. In other words, a lot of uncertainties remain in the case of earplugs.

And before drawing a sweeping conclusion from Graham’s decision on Friday, said Georgian law professor Simon and Melissa Jacoby of the University of North Carolina Law School, it’s important to remember that the decision is rooted not only in the particular facts of 3M’s financing agreement with its bankrupt subsidiaries, but also in the precedent of the 7th US Circuit Court of Appeals. The 7th Circuit, as Graham repeatedly noted, takes a narrower view than other federal circuits of the provision of the bankruptcy code that allows bankruptcy judges to exercise jurisdiction to prohibit related proceedings.

Nonetheless, Graham’s decision is at the very least “an important red flag,” Jacoby said via email. “Lawyers must be prepared to prove their case under applicable law. They have to show the asset impact of the particular bankruptcy, and they can’t make a distracting argument without more details.

Graham was careful, Simon noted, to place his decision within the framework of bankruptcy law. As you may recall, 3M used the bankruptcy filing of its Aearo subsidiaries as an opportunity to oppose an MDL process it described as hopelessly broken. Lawyers for veterans who litigated MDL against 3M for more than three years have in turn accused the company of abusing the bankruptcy process in a naked attempt to wrest control from a judge it dislikes not decisions. MDL Judge Rodgers made no secret of her view of 3M’s bankruptcy strategy, but left it to Graham in bankruptcy court to decide whether MDL’s lawsuit against 3M could proceed.

The bankruptcy judge explicitly stated that he was not rendering judgment on Rodgers’ handling of the MDL earplug — or on the relative merits of the bankruptcy court as an alternative to the MDL process for the purposes of global settlements of mass in tort. “Both are merely tools, designed by Congress, for arbitration and claims resolution,” Graham wrote, with remarkable diplomacy. “None is perfect and each presents both risk and reward for all the different constituencies.” (Graham also did not offer an opinion on whether Aearo’s subsidiaries acted in bad faith when they filed for bankruptcy, as that issue was not squarely before him. .)

For Graham, the critical fact in the case was 3M’s uncapped commitment to cover the Aearo entities’ liability for earplug claims. 3M initially sought to condition funding for Aearo on the suspension of MDL litigation against the parent company. But the independent directors who joined Aearo’s board, both longtime bankruptcy professionals, negotiated the removal of this provision from the final financing agreement with 3M.

Effectively, Graham concluded, this deal left 3M – the profitable parent company – fully liable for liability for Aearo’s earplugs. So, to make a long decision short, the judge said the pending litigation against 3M would not impact Aearo’s ability to reorganize and pay its creditors. (Technically, Graham decided both that he would not extend the automatic stay of litigation to 3M because Aearo would not be irreparably harmed and that an injunction was not warranted because the claims against 3M are not not related, under 7th Circuit precedent, to the bankruptcy of Aearo.)

The takeaway for would-be MDL defendants hoping to use a subsidiary’s bankruptcy to get out of consolidated litigation, said Georgia professor Simon, might be to condition funding for failed subsidiaries on an injunction to put end to litigation against the parent company. Such a condition would inextricably tie the fate of subsidiary bankruptcy to cessation of litigation against the parent company, even under the 7th Circuit’s narrow view of kinship.

But such a condition, Simon said, could raise concerns in bankruptcy court about whether a financing deal was negotiated in good faith. Independent board members, she said, might also balk at a term that appears to favor the parent company when their fiduciary duty is to the subsidiaries.

As I said, we haven’t heard the final word on 3M’s injunction. But Friday’s ruling undoubtedly adds further steps to what had been a predictable dance for the mass defendants.

Read more:

3M earplug lawsuits fight, judge rules, despite bankruptcy case

3M earplug MDL judge adds to bankruptcy tangles with injunctive order

How a bankruptcy ‘innovation’ halted thousands of lawsuits from sick plaintiffs

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