7th U.S. Circuit Court Approves 3M Aero's Earplugs Appeal

7th U.S. Circuit Court Approves 3M Aero's Earplugs Appeal

Introduction

The 7th U.S. Circuit Court of Appeals approved 3M’s Aearo Technologies LLC's petition to reconsider a bankruptcy court's judgement, refusing to prevent MDL action against the parent firm notwithstanding Aearo's Chapter 11 bankruptcy.

The 7th Circuit decision implies that Aearo will not have to first contest the judgement of the United States Bankruptcy Judge for the Southern District of Indiana in federal district court, which is generally the initial destination for bankruptcy appeals. Instead, Aearo can inform the 7th Circuit why it feels over 200,000 war veterans should not be allowed to pursue their claims against 3M for selling allegedly faulty earplugs in an MDL in Pensacola, Florida.

As you may recall, the Third Circuit is considering a comparable case. Last month, the court heard oral arguments on whether the bankruptcy of a Johnson & Johnson subsidiary can put an end to over 40,000 claims that J&J's talc products contained hazardous asbestos.

The two appellate decisions raise substantially the same issues, but from opposing perspectives. The bankruptcy court supervising the J&J subsidiary's Chapter 11 case delayed action against the parent business, but permitted MDL plaintiffs to continue their case against 3M.

However, with both circuit courts expected to decide in the coming months, we may expect answers to critical statutory concerns such as whether parent firms embroiled in mass tort lawsuits can benefit from the bankruptcy of their subsidiaries. If the 7th and 3rd Circuits reach different decisions, it's a safe chance that these cases will end up before the United States Supreme Court.

Plaintiffs in the earplug MDL, in which war veterans have won 10 of 16 bellwether jury trials and a total of $25 million in damages, challenged Aearo's attempt to bypass the trial court and move straight to the 7th Circuit. The Aearo tort claimants' creditors committee agreed, arguing that there is no compelling need to disturb normal bankruptcy proceedings.

The earplug MDL's lead counsel stated in an email statement that Aearo's appeal is without merit. The statement even stated that the 7th Circuit should affirm the judge's detailed conclusion denying non-debtor 3M's request to avoid bankruptcy.

However, on the first question of whether the case should be heard directly, the 7th Circuit obviously agreed with Aearo's lawyers, who framed the case as a matter of grave and widespread public interest. Lawyers say this is important not only because appellate review will expedite the resolution of the more than 200,000 cases in the earplug MDL, but also because it will clarify whether 3M, J&J, and other corporations can use subsidiaries' Chapter 11 filings as an escape hatch from mass tort litigation.

Both firms have claimed that the bankruptcy procedure is a speedier and more equitable approach to resolving plaintiffs' claims than complicated federal-court litigation. Aearo's petition for direct review by the 7th Circuit outlined the two fundamental paths through which a parent firm might use a subsidiary's bankruptcy to avoid ongoing litigation. The first is to invoke exceptions to the general rule that the automatic stay of action for Chapter 11 debtors does not extend to non-debtors, such as parent businesses. The second approach is to seek an injunction on the grounds that litigation involving a parent business is connected to the bankruptcy of a subsidiary and may impede the debtor's reorganisation.

The central argument in Aearo's petition to the 7th Circuit foreshadowed the central argument it will make in the appellate briefing: the 7th Circuit should clarify its interpretation of the relevant bankruptcy statutes in order to align its precedent with that of other appellate courts that have given bankruptcy courts broad power to block claims that could affect the debtor.

According to Aearo, nine other circuits have previously embraced a broad interpretation of bankruptcy courts' ability to enjoin related litigation. In addition, at least three appellate courts have found that parent firms are subject to the automatic stay where claims against the parent will reduce the estate of the bankrupt subsidiary.

But there's no denying that the ramifications of these numbing concerns about the connection between parent corporations and bankrupt subsidiaries have never been more severe than they are now, in the era of the so-called Texas two-step, which uses bankruptcy to shut off large tort lawsuits. The fate of mass tort lawsuits may be decided by the 7th and 3rd Circuits.