3M recently raised the ire of a federal judge when it announced its plan to shift the 230,000 injury lawsuits tied to its defective military earplugs to bankruptcy court. Judge M. Casey Rodgers of the U.S. District Court in Pensacola, Florida, pointed out that the company’s Aearo Technologies LLC subsidiary volunteered to assume the liability as a co-defendant of the most extensive multidistrict litigation in U.S. history before filing Chapter 11.
The company went into financial distress as a strategy for getting out of federal court, with 3M providing $240 million in reorganization and at least $1 billion to settle the litigation. In return, 3M resolves the lawsuits and shields itself from pending and future claims involving the earplugs.
“The only reason Aearo needs to reorganize is this newly created indemnity agreement. Outside of that, there’s no reason in my view for 3M to agree to pay $1.24 billion,” Judge Rodgers said.
Others who have used it
While 3M and Aearo are the latest high-profile bankruptcy to try this strategy, it has been used before to avoid paying billions in injury lawsuits. The brainchild of Jones Day Partner Greg Gordon, he calls this approach the Texas Two Step. It is based on an obscure Texas law allowing the companies to create new companies, which are then moved to North Carolina, where bankruptcy laws favor businesses. This two-step is loved by corporations and loathed by the plaintiffs – in this case, the 3M plaintiffs want Judge Rodgers to keep the case.
While these gambits have not been wholly successful, some legal scholars forecast that Texas Two-Step will completely reshape corporate liability law. Perhaps it already has; Gordon has already used the two-step before to save billions:
- Georgia-Pacific: The Koch brothers-owned company had a subsidiary with a $2.9 billion asbestos-related mesothelioma lawsuit involving 400,000 claims due to a joint compound it used. Restructuring Georgia-Pacific and subsidiary Bestwall LLC in 2017 likely saved billions more.
- Saint-Gobain: The French-American company has its asbestos lawsuit tied to its building materials lawsuit involving thousands. It launched CertainTeed and DBMP LLC in 2020, but there it has not made a settlement offer.
- Trane Technologies: The U.S. branches of the Irish company have moved its $540 million asbestos case involving 80,000 claims from North Carolina to New Jersey, but it has not made a settlement offer.
- Johnson & Johnson: J&J’s flagship baby powder caused ovarian cancer and mesothelioma with 38,000 lawsuits since 2016. In 2018, a jury awarded 22 women $4.69 billion (later reduced to $2.25 billion). Claimants seek a dismissal of the company’s attempt to restructure because it is improper tactics, and the restructured company is a shell company. Still, the case’s judge has been open to J&J’s strategy, calling it “nothing inherently unlawful.”
None of the four were wholly successful, but the ploys gave the companies additional leverage in negotiating settlements.
Impact still to be determined
The cases discussed here are pretty significant, with some brand names. Nonetheless, there may be precedents that trickle-down to a broader array of companies contemplating filing Chapter 11. In the meantime, companies with questions involving whether they should file Chapter 11 can discuss the details with attorneys who can provide guidance based on the details involved.