Trial News

An Indiana bankruptcy court denied 3M’s request for a stay in a massive MDL claiming that its military earplugs left over 200,000 servicemembers and civilians with hearing loss and tinnitus due to a product defect. 3M initiated Chapter 11 proceedings for its subsidiary Aearo Technologies and related entities in July, but the court found 3M was not shielded by its subsidiary’s bankruptcy filing. (In re Aearo Tech., No. 22-02890-JJG-11 (Bankr. S.D. Ind. Aug. 26, 2022).)

The MDL plaintiffs allege that 3M and Aearo knew their Combat Arms Earplugs version 2 (CAEv2) were defective but continued to supply them to the U.S. military. A 2018 settlement between 3M and the Department of Justice resolved a False Claims Act suit alleging that the earplugs were “too short for proper insertion into users’ ears,” that they could “loosen imperceptibly,” and that they “therefore did not perform well for certain individuals.” 3M discontinued the earplugs in 2015. The servicemembers’ and civilians’ cases were centralized in the Northern District of Florida in 2019 before U.S. District Judge M. Casey Rodgers. (In re 3M Combat Arms Earplug Prods. Liab. Litig., No. 3:19-md-2885 (N.D. Fla. Apr. 3, 2019).)

Sixteen bellwethers involving 19 plaintiffs have concluded, with verdicts for 13 of the plaintiffs. The most recent trial, Beal v. 3M Co., resulted in the largest plaintiff verdict to date—jurors awarded Army veteran James Beal $5 million in compensatory damages for his hearing loss and tinnitus and $72.5 million in punitive damages. (Click here and here for Trial News coverage of previous verdicts.) With the bellwethers concluded, waves of 500 cases will next proceed to plaintiff-specific discovery and trial work-up.

But on July 26, 3M subsidiary Aearo Technologies filed a voluntary petition for bankruptcy under Chapter 11 with the U.S. Bankruptcy Court in Indiana. Through a funding agreement with Aearo, 3M established a $1 billion trust to resolve claims related to the CAEv2 earplugs, as well as Aearo mask and respirator products. 3M also committed $240 million for projected case expenses and announced that Aearo had indemnified it for obligations related to the earplug plaintiffs’ claims.

3M sought to stay the MDL proceedings, arguing that provisions under the Bankruptcy Code §362(a)(1) and (3) prohibited further prosecution of pending actions in the MDL against it because the claims are inextricably linked with the claims against Aearo. However, the Indiana bankruptcy court disagreed in an August 26 order.

The court cited multiple decisions finding that §362(a)(1) “does not protect separate legal entities, corporations, partnerships or non-debtor co-defendants in pending litigation.” (In re Lengacher, 485 B.R. 380 (Bankr. N.D. Ind. 2012); In re White, 415 B.R. 696 (Bankr. N.D. Ill. 2009).) It recognized that the Fourth Circuit has made exceptions to the general rule “where there is such identity between the debtor and third-party defendant where a judgment against the third-party defendant will in effect be a judgment against the debtor” and “where the pending litigation, though not brought against the debtor, would cause the debtor irreparable harm.” (A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994 (4th Cir. 1986); In re A.H. Robins Co., Inc., v. Aetna Cas. & Sur. Co., 828 F.2d 1023) (4th Cir. 1988).) However, the court said, these exceptions are “reserved for ‘unusual circumstances’” and, in fact, the Seventh Circuit has not yet “expansively discussed or formally adopted” them or extended a stay to a third party under their reasoning.

The court then found that §362(a)(3), which extends protections to “property of the estate,” is broader but still provides insufficient grounds to stay proceedings against 3M. The court applied a two-step test and looked at “whether property of the estate is at issue” and “whether the action in question constitutes an action to obtain possession of, or exercise control over” that property. Assuming, as Aearo contends, that Aearo Legacy and 3M Tower insurance policies are the property at issue, the court noted there is no evidence the MDL claimants are proceeding against the insurance policies. Rather, it said, 3M itself has agreed to fully fund liability incurred pursuant to its funding agreement with Aearo. Although 3M will seek recovery from the insurance policies, the funding agreement “operates as a complete, uncapped backstop” and “there is no threat of inequitable distribution of insurance proceeds,” the court said.

The court also declined to extend the stay to 3M via its general authority under §105(a) of the Bankruptcy Code, finding that section “does not give the bankruptcy court carte blanche.” The burden is on Aearo to show by a preponderance of the evidence that there is a necessity for relief under that section, which it has not shown.

3M has appealed the bankruptcy court’s decision. Meanwhile the MDL judge has ordered the parties to mediation.

“This is the second time this year that a highly profitable company has misused the bankruptcy system to avoid responsibility for harms they have caused,” said AAJ’s Linda Lipsen, noting that Johnson & Johnson had just tried the same tactic to evade claims in the talc litigation. Lipsen said that “this disgraceful abuse of bankruptcy laws represents the new face of tort reform and an existential threat to an average American’s right to pursue justice. Unless stopped, it will become ubiquitous among corporations looking to avoid accountability. AAJ is leading efforts to oppose it and will use every tool in our toolbox to end this shameful practice and keep the courthouse doors open for everyone.”

According to New York City attorney EricaRae Garcia, who represents servicemembers harmed by the earplugs, “This is a significant decision and is going to have far-reaching implications for many other cases. At this point, Aearo will continue in the Chapter 11 proceedings, and cases pending against 3M will continue in the MDL. For the claims against Aearo, it will be up to the appointed creditor’s committee to protect the plaintiffs’ interests at every turn. Overall, this will be a lengthy process, and we have a long road ahead in the 3M litigation.”

Pensacola, Fla., attorney Bryan Aylstock, who is one of the lead counsels for the MDL plaintiffs, said the decision is “a complete rejection of 3M’s attempt to evade accountability and hide in a fraudulent bankruptcy after multiple juries found it liable for knowingly causing hearing damage to those who served our nation. This sham bankruptcy was not only a direct attack on our justice system but also the U.S. servicemembers who were harmed. We plan to continue litigation against 3M in the MDL, with trials hopefully to take place later this year. We are prepared to try cases in courts across the country to obtain justice for the servicemembers and veterans we represent in the event 3M refuses to accept responsibility.”