3M earplug bankruptcy: Shrewd plan or sham?

Is the bankruptcy filing of a small 3M subsidiary — Aearo Technologies — a legitimate move to shield itself from crippling liabilities for allegedly defective military earplugs?

Or is it a sham that would allow 3M itself to greatly limit billions of dollars in liabilities without the messy business of declaring bankruptcy itself?

That's a key question before Jeffrey Graham, a U.S. Bankruptcy Court judge in Indianapolis. His decision will have huge ramifications on how 230,000 earplug lawsuits against 3M will play out — and how much the company will eventually pay out.

"I don't know where I am going right now," Graham said Wednesday at the conclusion of three days of hearings. "There are a lot of things to consider."

While Graham was listening to lawyers argue this week, the U.S. District Court judge presiding over the massive earplug litigation in Florida issued an order that could complicate 3M's bankruptcy court gambit.

Pensacola-based Judge Casey Rodgers ruled Tuesday that 3M could not relitigate in bankruptcy court issues that had been settled in her court. Rodgers has threatened 3M with contempt of court if the company violates her order.

3M moved to escape the jurisdiction of Rodgers' court, saying the process there was "broken" — when it put its Indianapolis-based Aearo subsidiary into Chapter 11 bankruptcy protection in late July.

Chapter 11 allows troubled companies to reorganize their finances while shielded from creditors' claims — and, most important in this case, from ongoing litigation. Aearo Technologies is named as a defendant in the avalanche of earplug cases along with 3M.

Aearo is trying to persuade Graham to extend the litigation freeze to 3M itself, thus allowing 3M to resolve the earplug cases through bankruptcy proceedings. Such a strategy would likely lower 3M's costs in settling the 230,000 cases while avoiding thousands of jury trials in federal court.

Graham will likely rule on the matter next week. If he says the litigation freeze can't be extended to 3M, the Maplewood-based company would still need to see through the Florida cases.

Attorneys for earplug plaintiffs in Florida have labeled Aearo's bankruptcy filing a sham.

3M "is trying set up something that is frankly an illusion: that Aearo is a legitimate bankruptcy," Melanie Cyganowski, a lawyer for plaintiffs and their attorneys, told the bankruptcy court Wednesday.

Aearo is solvent and has no accrued liabilities — and 3M has always told Rodgers' court in Florida that 3M the corporation, not Aearo the subsidiary, is solely responsible for earplug litigation liabilities, she said. The only reason for Aearo's bank filing is for 3M to get the litigation freeze extended to itself.

Aearo maintains that the earplug legal claims it's facing are inextricably linked with those against 3M.

"A judgment against 3M is effectively a judgment against the debtor," Chad Husnick, a lawyer for Aearo told the bankruptcy court. Husnick denied plaintiffs' attorneys characterization of the Aearo bankruptcy as a "sham" and a "contrivance" by 3M.

Aearo is an existing company — not a shell company formed just to hold litigation claims, Husnick said.

"Aearo is managed as part of a corporate conglomerate, which is common, but it is an independent entity," he said. "This is an organic business. It has employees. It has been saddled with liabilities for some time."

About 300 of 3M's 95,000 employees work directly for Aearo.

3M bought Aearo in 2008, and two years later folded the subsidiary's earplug business into 3M proper. Aearo had developed an earplug, the Combat Arms CAEv2, that was standard issue for the U.S. military for many years.

The wave of lawsuits against 3M came after the company in 2018 settled a government whistleblower suit regarding the earplugs. It claimed Aearo knew about "dangerous design defects" in its earplugs in 2000.

Military veterans' earplug claims against 3M were roped together in a "multi-district litigation" — or MDL — case presided over by Rodgers. MDLs are used in the federal court system for complex product liability matters with many separate claims.

The earplug litigation is the largest MDL ever.

MDLs commonly feature bellwether trials that are supposed to set a tone for settling all claims.

Plaintiffs won 10 of 16 bellwether cases against 3M; juries awarded them nearly $300 million. Stock analysts have estimated 3M's total liabilities from the lawsuits could be into the tens of billions of dollars.

J.B. Heaton, a financial and litigation consultant hired by one plaintiff's attorney, said in bankruptcy court Tuesday that 3M's liabilities for the earplug suits could be $100 billion.

However, an attorney representing another group of plaintiffs Wednesday called Heaton's estimate "preposterous."

When Aearo filed for bankruptcy, 3M set up a $1 billion fund to settle earplug claims, though that fund is not capped.