Citing bankruptcy judge's 'errors,' 3M begs appeals court for stay in earplugs MDL 

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

(Reuters) - 3M Co told a federal appeals court this week that an Indiana federal bankruptcy judge could have — and should have — followed any one of at least three distinct lines of reasoning to conclude that mass tort litigation over allegedly defective 3M Co military earplugs must be paused during the Chapter 11 bankruptcy of 3M’s Aearo Technologies LLC subsidiary.

Instead, argued 3M counsel Paul Clement of Clement & Murphy, U.S. Bankruptcy Judge Jeffrey Graham of Indianapolis repeatedly veered off track last August, when he ruled that tens of thousands of military veterans whose claims have been consolidated in multidistrict litigation in Pensacola, Florida, can continue litigating against 3M, despite Aearo’s bankruptcy.

3M’s opening brief at the 7th U.S. Circuit Court of Appeals asserted that Graham misread precedent, disregarded relevant facts and applied an overly cramped interpretation of his own inherent authority to enjoin litigation against 3M. It's now up to the appeals court, 3M said, to correct Graham’s mistakes, pause ongoing MDL litigation against 3M, and allow 3M and Aearo to use the bankruptcy process to reach a fair resolution of the military veterans’ claims.

After all, 3M reminded the 7th Circuit, that is the process that many other federal appellate courts have endorsed in mass tort cases that were paused when a subsidiary defendant went into bankruptcy. Among the examples 3M cited: W.R. Grace & Co, Pfizer-owned Quigley Corp, Georgia-Pacific LLC and its bankruptcy subsidiary Bestwall LLC, USA Gymnastics, Purdue Pharma LP and, of course, Johnson & Johnson’s LTL Management LLC. (As you probably recall, the 3rd Circuit is reviewing a New Jersey bankruptcy court’s decision to stay tort claims against J&J because of LTL’s bankruptcy, in a mirror-image of the 3M scenario.)

You don’t have to be much of a fortune teller to predict that if the 7th Circuit ends up siding with 3M, aligning with other courts that have allowed viable parent companies to escape from crushing mass tort litigation via a subsidiary’s bankruptcy, the Chapter 11 strategy will become an increasingly attractive play for MDL defendants.

That would not be good for plaintiffs lawyers. So, as you would expect, the plaintiffs steering committee in the earplugs MDL said in an email statement that 3M's appeal is meritless. “The 7th Circuit should uphold Judge Graham’s thorough decision rejecting non-debtor 3M’s attempt to shield itself through the bankruptcy system,” the statement said. “We look forward to holding 3M accountable for causing irreversible hearing damage to hundreds of thousands of men and women who served our nation.”

3M tamped down its previous criticism of the MDL process in its new 7th Circuit brief, which seems to be Clement’s first appearance in this wing of the earplug litigation. (Clement's name has turned up in previous appeals at the 11th Circuit of rulings by the Pensacola MDL judge, but he's new to the bankruptcy litigation. Briefing and arguments on 3M’s bid to halt the MDL previously had been handled by Clement’s former firm, Kirkland & Ellis, which is also on the new 7th Circuit brief.)

3M's brief argued that the bankruptcy judge made at least two key mistakes in ruling that the automatic stay on litigation against Aearo, its bankrupt subsidiary, should not extend to 3M. First, the brief argued, Graham erred when he said that the 7th Circuit has not recognized that an automatic stay for a corporate subsidiary can extend to the parent company under certain circumstances.

Many of the appellate courts that have approved an extension of the automatic stay, as the 3M brief explains, have reasoned that litigation against the parent company will have immediate, adverse effects on the bankrupt subsidiary. The 7th Circuit has not specifically joined that consensus, but 3M said that the appeals court has not foreclosed the possibility of extending the stay to shield a parent company – and that this case is a paradigm of how litigation against the parent will impair the overlapping and entwined interests of the bankrupt subsidiary.

Graham also failed, in 3M’s view, to give sufficient weight to insurance policies shared by Aearo and 3M. That pool of money, 3M told the 7th Circuit, will dry up if 3M is forced to continue litigating cases in the MDL. Aearo’s bankrupt estate, 3M said, will therefore be diminished by the loss of the insurance money. For that reason alone, 3M said, the bankruptcy judge should have extended the automatic litigation stay to cover 3M.

Graham, in case you’ve forgotten, relied heavily on 3M’s commitment to provide an uncapped backstop for any Aearo liability from the earplug litigation. Under that agreement, Graham essentially concluded, ongoing litigation against 3M would not affect Aearo’s ability to cover its debts and reorganize.

Even if Graham correctly declined to extend the automatic stay, 3M said, he erred in refusing to exercise his inherent authority to enjoin MDL litigation against 3M. Graham ruled that he did not have jurisdiction to bar ongoing litigation against 3M because those cases were not related to Aearo’s bankruptcy. 3M argued that he applied the wrong 7th Circuit precedent by focusing on the actual effect on Aearo of ongoing litigation against 3M rather than the potential impact. That error, according to 3M, so thoroughly permeated Graham’s decision that his ruling must be overturned.

The public’s interest would be best served, 3M said, by courts allowing the company to stop litigating in the MDL and negotiate a global settlement through the bankruptcy process.

The MDL, meanwhile, is plodding along even as the 7th Circuit appeal heats up. A trial date is scheduled in February for the next bellwether case in the MDL, although it may be stayed. Both sides have briefed summary judgment motions on 3M’s independent liability. 3M has briefed appellate challenges to some of the MDL judge’s evidentiary rulings. According to 3M, thousands of new plaintiffs filed earplug suits just in October, joining more than 200,000 military veterans who have already staked claims.

Will the 7th Circuit shut that all down in the name of Aearo’s bankruptcy? 3M sure hopes so.

Read more:

3M’s Aearo scores quick appeal of bankruptcy court's ruling on earplug MDL

Bankruptcy as MDL escape hatch? Not so fast, judge tells 3M in ‘surprise’ decision

Is 3M earplug bankruptcy the beginning of the end of mass tort MDLs?

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.