Court weighs dismissal of controversial bankruptcy of 3M earplug subsidiary

A federal judge in Indiana began hearings Wednesday on whether 3M's use of bankruptcy court is an appropriate remedy to an avalanche of lawsuits over allegedly defective earplugs.

Aearo Technologies, a 3M wholly owned subsidiary, in July filed Chapter 11 bankruptcy in Indianapolis. The move came after years of litigation in a Florida federal court failed to produce an outcome 3M desired.

In one of the largest U.S. mass torts ever, the Maplewood-based company faces more than 200,000 claims from veterans and military members that its earplugs caused hearing damage.

Aearo, where 3M's earplug business originated, is also named as a defendant in the suits. Plaintiffs' attorneys claim that Aearo — a relatively small subsidiary — wasn't in financial distress and that its bankruptcy wasn't made in good faith.

In February, plaintiffs asked Jeffrey Graham, a U.S. Bankruptcy Court judge for southern Indiana, to dismiss Aearo's bankruptcy.

"Filing bankruptcy is sort of like pulling a fire alarm," Adam Silverstein, an attorney for the plaintiffs, said Wednesday in the first of three days of hearings before Graham. "The consequences of a false alarm are extensive. It burdens the system and puts human beings through unnecessary chaos," Silverstein said.

"The fire that pulls the alarm is financial distress ... There was no fire at Aearo."

Aearo's lawyer, Chad Husnick, told the court that Aearo's purported lack of financial distress "is a red herring."

Congress long ago decided that insolvency isn't required to file bankruptcy and the U.S. Supreme Court has repeatedly agreed, Husnick said. "We are not in a land anymore where the house has to be burning down to fix a problem."

Chapter 11 bankruptcy allows a debtor to reorganize its finances while being shielded from its creditors claims. It also freezes litigation against a bankrupt company, which in Aearo's case includes the mountain of earplug suits.

3M had sought to extend that litigation freeze to 3M itself, but in December Graham denied that request — a significant blow to the company's legal strategy. 3M has asked the 7th U.S. Circuit Court of Appeals to reverse Graham's ruling.

In February, 3M argued its case before a three-judge panel of the 7th Circuit in Chicago. Reuters reported the judges appeared "skeptical" that Aearo's bankruptcy litigation freeze should be extended to 3M itself. The appeals court has yet to make a ruling.

3M bought Indianapolis-based Aearo in 2008, folding the earplug business into the parent company two years later. Aearo's earplug, the Combat Arms CAEv2, 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 in U.S. District Court for northern Florida.

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. 3M's ultimate liabilities could be in the tens of billions of dollars.

A settlement has proved elusive. Court-ordered mediation between 3M and the plaintiffs failed in the Florida MDL case. Plaintiffs say court-ordered mediation has failed, too, in bankruptcy proceedings.

Silverstein, the plaintiffs' lawyer, said Wednesday that Aearo's bankruptcy filing is simply "an alternative dispute resolution forum" for 3M after it soured on the MDL proceedings.

He called it a "tactic" that was "designed by 3M and paid for by 3M to resolve 3M's Combat Arms liabilities."

Husnick said the plaintiffs' motion to dismiss Aearo's bankruptcy was itself simply a "tactic" to gain leverage in any settlement agreement.

"Dismissal is an extraordinary remedy that is simply not warranted here," Husnick told the court.