Federal judge challenges 3M bankruptcy court ruling in earplugs case

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A federal judge in Florida had harsh words for 3M on Thursday over the company’s decision to file for bankruptcy protection for its earplug subsidiary Aearo.

Aearo’s line of military earplugs is at the heart of one of the biggest mass crimes in US history, potentially dragging 3M into tens of billions of dollars in debt.

“It’s troubling to me,” U.S. District Judge Casey Rodgers said of 3M’s decision last month to seek Chapter 11 bankruptcy protection for its subsidiary Aearo Technologies.

Rodgers said 3M appears to be trying to pass judgment on about 230,000 earplug lawsuits from federal court juries to a U.S. bankruptcy court judge in southern Indiana.

In its more than three years handling multidistrict litigation involving 3M earplugs, she said, 3M has never sought to part with Aeroro. Instead, he had told her that the two entities were 100% identical.

So far.

The bankruptcy filing named all of Aearo’s subsidiaries, but not 3M Co. In the bankruptcy filing, 3M said it invested $1 billion in a fund for Aero to settle Aearo’s claims .

The Indiana bankruptcy court is scheduled to begin hearing arguments next week on whether the litigation against 3M deserves a stay in that court, 3M defense attorney Jessica Lauria said. Chapter 11 allows a debtor to reorganize, automatically freezing creditor claims and lawsuits against a bankrupt business.

In Aearo’s bankruptcy, 3M effectively wants this stay extended to itself for earplug cases.

During Thursday’s two-hour hearing, Rodgers questioned 3M’s indemnification agreement with Aearo in which Aearo agreed to take full responsibility for the earplugs and in which 3M agreed to pay Aearo $1.24 billion to cover liabilities and reorganize.

By taking Aearo to bankruptcy court, 3M “in a very creative and shrewd way” sought to get the case out of U.S. District Court, said Rodgers, who oversaw 3M’s multidistrict litigation and 16 landmark cases for several years from Pensacola, Florida.

Two military veterans, who previously sued 3M, sought emergency court orders to stop 3M and Aearo from using bankruptcy court to handle the massive number of earplug lawsuits.

Rodgers took the request under advisement on Thursday.

It is unclear which court will have the final say on the dispute.

Ashley Keller, a plaintiff’s attorney, argued that 3M’s bankruptcy filing was a move to undermine Rodgers’ authority and shred 3½ years of district court rulings in the cases, as well to limit 3M’s growing legal costs.

“This is not the story of an unlucky debtor who seeks a brief break to put his affairs in order before returning to the fray. This is the story of a solvent and profitable company which has decided she’d rather be done with the tort system and jury trials, and is trying to use this [bankruptcy] the jurisdiction of the court to requisition the federal docket,” Keller and other attorneys for the plaintiffs said in a bankruptcy filing this week.

Lauria, insisted that the “proper venue” going forward was bankruptcy court, not the U.S. District Court.

The Indiana bankruptcy court will hear arguments about whether 3M’s debts deserve a stay by that court, Lauria said.

But Rodgers said “the only reason Aearo has to reorganize is simply because of this newly created indemnification agreement,” which financially underscored Aearo.

“It appears to me that the financing and the indemnification agreement were structured for the sole purpose of resolving 3M’s liability in the event of bankruptcy, as opposed to the jurisdiction of this court,” she said. “It seems that Aero has no responsibility [apart from 3M] until this agreement is concluded.”

At one point, Rodgers berated an attorney, saying, “You can’t use this court to perpetuate fraud in bankruptcy court.”

3M defense attorney Charles Beall insisted that 3M did not commit any fraud. Instead, the company had the right to choose the legal strategy used in each earplug case, since each lawsuit was different.

In a statement, 3M said, “We are ready to move forward and believe applicable law supports our position.”

To date, juries have sided with 3M on six occasions, agreeing that Aearo earplugs are safe and not defective. But juries have also awarded nearly $300 million to plaintiffs in 10 other landmark trials.

Rodgers took issue with Aearo’s statement in bankruptcy court that the “multidistrict litigation,” also known as MDL, for the earplug cases was “broken beyond repair.”

She said 3M can feel what it wants about the case and the jury’s decisions, but it’s up to the courts not to allow the defendants to simply move from district court to bankruptcy court, because he disliked past decisions and sought to undo them.

MDLs are used in the federal court system for complex product liability cases with many separate claims. They usually feature landmark lawsuits that are meant to set the tone for settling all claims.

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