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February 25, 2023 – Largely tracking arguments made by the Debtors' Official Committee of Unsecured Creditors for Tort Claimants – Related to Use of Combat Arms Version 2 Earplugs (the “CAE Committee”) in their February 2nd motion to dismiss [Docket No. 1066], the U.S. Trustee assigned to the Debtor’s case has filed its own motion to dismiss citing the recent dismissal of the LTL Management cases* and arguing that, “the Aearo Debtors were not in financial distress when they filed their petitions….There [ie in LTL], as here, the existence of an intercompany ‘funding agreement’—sufficient to pay the debtor’s liabilities in the ordinary course— justified dismissal.” [Docket No. 1198]. At a status conference held on February 13th, the U.S. Trustee had stated its intent to file a dismissal motion in the near that would largely mirror the motion filed by the CAE Committee.
*The CAE Committee 's dismissal motion came on the heels of a January 30th U.S. Court of Appeals for the Third Circuit ruling [the Debtors' cases are in the Seventh Circuit] ruling dismissing the Chapter 11 cases of Johnson & Johnson subsidiary LTL Management, with the CAE Committee citing (as does the U.S. Trustee) similarities in the funding arrangements between (i) Aearo parent 3M Company and the Debtors and (ii) that of LTL Management and J&J.
The Debtors' Official Committee of Unsecured Creditors for Tort Claimants – Related to Use of Respirators (the “Respirator Committee”) has, however, taken a very different approach, filing a motion requesting the appointment of a Chapter 11 Trustee with dismissal serving as their second, and less-preferred choice [Docket No. 1197]. Although specifically citing the dismissal motions of the CAE Committee and the U.S. Trustee, and like each of those dismissal motions' argument that the Debtors' filing was not in good faith, the Respirator Committee makes no mention of the Seventh Circuit's LTL decision.
In arguing that the appointment of a Chapter 11 Trustee is preferrable to dismissal, the Respirator Committee notes that a Chapter 11 Trustee "will aid in getting the most amount of money to creditors in the shortest period of time for their claims against the Debtors."
On July 26, 2022, Aearo Technologies LLC and six affiliated debtors (together “Aereo Technologies” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn. At filing, the Debtors’ parent 3M (NYSE: MMM), noted that: “…it is taking action to resolve litigation related to Combat Arms Earplugs Version 2 (‘Combat Arms Earplugs’). Aearo Technologies and related entities (‘Aearo Technologies’), all of which are wholly-owned 3M subsidiaries, have voluntarily initiated chapter 11 proceedings seeking court supervision to help establish a trust – funded by 3M – to efficiently and equitably resolve all claims determined to be entitled to compensation.”
On October 12th, the U.S. Court of Appeals for the Seventh Circuit issued an order stating that it will hear a direct appeal of a Bankruptcy Court order denying parent company 3M relief from the automatic stay in its subsidiary’s Chapter 11 case, with the Debtors/3M looking for that stay in order to halt prosecution of more than 200k lawsuits filed in respect of the sale of allegedly defective earplugs to the U.S. military. In taking on the direct appeal, the Seventh Circuit saves all parties the time and expense of passing first through a district court.
In denying the request for a stay, bankruptcy court Judge Jeffrey J. Graham held that the Debtors’ bankruptcy cases could proceed in parallel with the lawsuits. While the “sheer size” of the consolidated litigation may have spurred 3M and Aearo to seek “additional leverage” through the bankruptcy proceedings, Judge Graham ruled, that did not create a legal need to protect 3M.
On December 22nd, the U.S. District Judge hearing the earplug injury lawsuits filed against 3M, ruled that 3M may not transfer its earplug litigation liability to the Debtor.
U.S. Trustee’s Dismissal Motion
The U.S. Trustee's dismissal motion [Docket No. 1184] states, “On January 30, 2023, the United States Court of Appeals for the Third Circuit issued a precedential decision that dismissed the bankruptcy filing of LTL Management, LLC as lacking good faith (‘LTL Opinion’). In re LTL Mgmt., LLC, 58 F.4th 738 (3d Cir. 2023)…The LTL Opinion states that ‘Chapter 11 is appropriate only for entities facing financial distress’ and that debtors who are not in, or in immediate danger of, financial distress do not possess the requisite good faith to proceed in bankruptcy.
Although LTL is not binding in this circuit, the Third Circuit’s application of 11 U.S.C. § 1112(b) tracks the Seventh Circuit’s. Cases are dismissed routinely in this circuit for bad faith, and this case should be too. LTL underscores why. There, as here, the existence of an intercompany ‘funding agreement’—sufficient to pay the debtor’s liabilities in the ordinary course— justified dismissal.”
The Respirator Committee's Motion to Appoint a Chapter 11 Trustee
The Respirator Committee's motion [Docket No. 1197] states, “At filing, the Debtors announced their intention to move swiftly to resolve the large claims against them and their owner. To date, the Debtors have taken no substantial steps toward that goal. Instead, they have spent their time and treasure trying to protect their parent company, dragged their feet on critical information requests from both Committees, shown little interest in plan formulation or negotiation, and done their best to impede pursuit of jointly liable non-debtors in state court. Hundreds of thousands of people await responsible action by the Debtors.
It has become clear that the Debtors either will not or cannot take the actions needed to solve their problems. As a result, the CAE Committee has sought to dismiss these cases pursuant to 11 U.S.C. § 1112(b) and the United States Trustee has done the same.
While dismissal under § 1112(b) is a possible remedy, the Respirator Committee submits that appointing a chapter 11 trustee will better serve the interests of creditors, the estates, and the bankruptcy process.
Should the Court decline to appoint a trustee, the Respirator Committee supports dismissal of the cases, as sought by the CAE Committee.”
As to their preference for a Chapter 11 Trustee, the Respirator Committee continues: "While dismissal is an option, it is an incomplete remedy and not in the best interests of creditors. A dismissal of these cases cannot redress the harm caused the Respirator Claimants by the Debtors’ improper filings. The nine-month delay will likely have a multiplying effect on resetting the trial dates. Thus, in addition to those who have died since the Petition Date with no resolution to their claims, many more may die of their illness prior to getting their trials reset, let alone concluded.
Conversely, appointment of a trustee would provide a more complete remedy of the harm caused by the Debtors’ lack of good faith in filing their bankruptcy petitions. The appointment of a trustee has several advantages over dismissal:
- Both creditor bodies can continue pursuing claims against 3M in non-bankruptcy actions, and under the Funding Agreement, 3M will simply become an unsecured creditor of the Debtors’ estates.
- A trustee can pursue the $964 million receivable, plus interest, due from 3M. This debt appears on the Debtors’ schedules and has been outstanding since 3M acquired the Debtors; it seems unlikely that the Debtors in possession would even consider trying to recover the money.
- Appointment of a trustee will terminate the exclusivity period and allow the creditor bodies to propose their own plans, making use of the uncapped funding agreement. A creditor plan would not necessarily need to provide a channeling injunction for 3M’s benefit, unless 3M forthrightly begins to negotiate with the parties and they are able to come to terms.
- Appointment of a trustee will aid in getting the most amount of money to creditors in the shortest period of time for their claims against the Debtors. Claims against 3M and other joint defendants would simply remain pending in non-bankruptcy actions."
About the Debtors
According to the Debtors: “For more than 40 years, Aearo Technologies LLC has led the way in energy-control technology. We’ve pioneered new treatment techniques and developed proprietary, high performance materials that control unwanted energy – noise, vibration, shock, ergonomic and thermal control.
Our customers benefit from real-world applications experience we’ve gained over the past four decades in the aerospace, commercial vehicle, heavy equipment and electronics.”
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