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(Reuters) – By the end of 2023, we should have a much better idea of whether companies facing vast exposure to mass crime can use the bankruptcy system to avoid multidistrict litigation before a federal court.
On Wednesday, the 7th United States Circuit Court of Appeals granted a motion by 3M Co subsidiary Aearo Technologies LLC to review a bankruptcy court‘s decision refusing to block the MDL litigation against the company. mother despite Aearo’s Chapter 11 bankruptcy.
The 7th Circuit’s order means Aearo won’t have to first challenge U.S. Bankruptcy Judge Jeffrey Graham of Indianapolis’ decision in federal district court, which is usually the first stop for bankruptcy appeals. Instead, Aearo can tell the 7th Circuit directly why he believes more than 200,000 veterans should not be allowed to pursue their claims against 3M for selling allegedly defective earplugs at an MDL in Pensacola, Pennsylvania. Florida.
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The 3rd circuit, as you probably remember, weighs a parallel case. This court heard arguments last month on whether the bankruptcy of a Johnson & Johnson subsidiary could end nearly 40,000 allegations that J&J’s talc products contained carcinogenic asbestos. .
The two appellate cases present essentially the same issues, albeit in opposite positions. The bankruptcy judge overseeing Chapter 11 of the J&J subsidiary stayed litigation against the parent company, while Graham allowed plaintiffs MDL to continue the lawsuit against 3M.
But with the two circuit courts likely to rule in the coming months, we can expect answers to important statutory questions about whether parent companies mired in mass tort litigation can benefit from the bankruptcies of their subsidiaries. . And if the 7th and 3rd Circuits come to different conclusions, it’s a safe bet those questions will head to the United States Supreme Court.
MDL earplug plaintiffs, in which combat veterans won 10 of 16 jury trials and won a total of $25 million in damages, opposed Aearo’s surrender request straight to the 7th Circuit without stopping at the trial court. Aearo’s creditors’ committee of creditors did the same, which argued that there was no pressing reason to disrupt ordinary bankruptcy proceedings.
In an emailed statement, senior MDL earplug attorney Bryan Aylstock of Aylstock Witkin Kreis & Overholtz and Christopher Seeger of Seeger Weiss said Aearo’s appeal was without merit. “The 7th Circuit is expected to uphold Judge Graham’s thorough ruling dismissing non-debtor 3M’s attempt to shield itself from the bankruptcy system,” the statement read.
But on the preliminary question of whether to hear the case directly, the 7th Circuit clearly agreed with Aearo’s attorneys at Kirkland & Ellis, who framed the case as a matter of serious public interest. – and wide. Kirkland said it’s not just because the appeal review will expedite the resolution of more than 200,000 cases in the MDL earplug, but also because this appeal will clarify whether 3M, J&J and other companies can use subsidiaries’ Chapter 11 filings as an escape hatch for mass tort litigation.
I have to say here that 3M denies that there was anything wrong with their earplugs. J&J also maintains that its talc products are safe. Both companies argued that the bankruptcy process is a faster and fairer way than complex litigation in federal courts to resolve plaintiffs’ claims.
Aearo’s motion for direct review by the 7th Circuit set out the two basic avenues by which a parent company can take advantage of the bankruptcy of a subsidiary to receive a stay in pending litigation. The first is to invoke exceptions to the general rule that the automatic stay of proceedings for Chapter 11 debtors does not apply to non-debtors, including parent companies. The second, generally speaking, is to seek an injunction on the grounds that a dispute involving a parent company is related to the bankruptcy of the subsidiary and could affect the debtor’s restructuring.
In the ruling rejecting Aearo’s offer to end litigation against 3M, Graham said 7th Circuit case law reflected a “constrained” view of the two options. According to Graham, the 7th Circuit never adopted the reasoning of other federal circuits that the automatic stay of litigation can be extended to non-debtors – including parent companies – if a judgment against them would in fact be a judgment against. the bankrupt subsidiary.
Graham also argued that the 7th Circuit limits the power of the bankruptcy court to issue injunctions restraining claims against non-debtors to cases that will have a real impact on the debtor’s estate, not just bankruptcy-related litigation. Graham said litigation against 3M would not actually hamper Aearo’s estate because the financing agreement the two companies entered into on the eve of Aearo’s Chapter 11 filing made 3M ultimately responsible for Aearo’s liability in the earplug litigation. (I’m summarizing a nuanced position that combines legal and factual analysis, but that’s the gist.)
Aearo’s petition to the 7th Circuit provided insight into the central argument he will make during the appeal statement: the 7th Circuit should clarify its interpretation of the relevant bankruptcy laws in order to align its precedent with that of other appellate courts which gave bankruptcy courts broad power to block claims that might affect the debtor.
Nine other circuits, according to Aearo, have already adopted a comprehensive view of the authority of bankruptcy judges to prohibit related litigation. And at least three appellate courts have ruled that parent companies are covered by the automatic stay of litigation when claims against the parent company would diminish the wealth of the bankrupt subsidiary.
You can tell from my summary that Aearo’s legal arguments will likely be dauntingly technical. The MDL earplug plaintiffs, meanwhile, will likely tell the 7th Circuit that Graham faithfully applied long-standing and well-reasoned circuit precedent.
But there is no doubt that the consequences of these numbing questions on the relationship between parent companies and bankrupt subsidiaries have never been greater than they are now, in the era of so-called Texas in two steps to using bankruptcy to end mass tort claims. . The very future of mass tort litigation may hinge on the decision of the 7th and 3rd Circuits.
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Is the 3M earplug bankruptcy the beginning of the end for mass tort MDLs?
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