Aearo Technologies LLC v. Parties Listed on Appendix A to the Complaint et aAearo Technologies LLC v. Parties Listed on Appendix A to the Complaint et a
ORDER DENYING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION
1The Debtors in these Chapter 11 cases, along with the last four digits of digits of each Debtor‘s federal tax identification number, are set forth
This matter comes before the Court on the Motion for Declaratory and Injunctive Relief (I) Confirming that the Automatic Stay applies to Certain Action Against a Non-Debtor; (II) Preliminarily Enjoining Certain Actions Against a Non-Debtor; and (III) Granting a Temporary Restraining Order Pending an Order on the Preliminary Injunction (the “PI Motion“) filed by Plaintiffs/Debtors Aearo Holding LLC, Aearo Intermediate LLC, Aearo LLC, and Aearo Technologies LLC (together “Aearo” or the “Aearo Plaintiffs“) and Objections thereto filed by the United States Trustee (the “UST“) and certain Interested Parties. Aearo filed the PI Motion to stay certain federal and stated
The Court conducted an evidentiary hearing on Aearo‘s request for a preliminary injunction on August 15-17, 2022 (the “PI Hearing“).2 Having fully considered the submissions by the parties and the arguments and evidence presented to the Court at the PI Hearing, and for the reasons stated below, the Court hereby DENIES Aearo‘s request for a preliminary injunction and declaratory relief.
Venue and Jurisdiction
Except as noted herein, the Court has jurisdiction over this proceeding pursuant to
Factual and Procedural Background
On July 26, 2022, Aearo Technologies LLC and six related entities3 (together, the “Aearo Entities” or “Aearo“) filed voluntary petitions for chapter 11 relief (the “Petition Date“). The cases are being jointly administered under Case No. 22-2890. The Aearo Entities are operating as debtors-in-possession pursuant to
Aearo and 3M
The Aearo Entities are headquartered in, and have operated out of, Indianapolis in one form or another for over forty years. They are, with one exception, limited liability companies and are each incorporated under the laws of Delaware. Aearo currently manufactures and sells custom noise, vibration, thermal, and shock protection, primarily serving the aerospace, commercial vehicle, heavy equipment, and electronics industries. Aearo had $108 million in direct sales in 2021. Approximately 330 employees work directly for the Aearo Entities.
In the late 1990s Aearo designed a product called the Combat Arms earplug. After noise reduction rating testing in 1999 and 2000, Aearo began selling Combat Arms earplugs in 2000. Aearo eventually designed and manufactured an earplug sold to the United States military under the name Combat Arms Earplug Version 2 (the “CAEv2“) and to civilian consumers under the name Arc Plug (the CAEv2 and Arc Plug, collectively, the “CAEv2“).
3M is a multinational technology and manufacturing company that develops products across a wide range of markets including pharmaceuticals, chemicals, digital imaging and sound technology, office supply and consumer goods. 3M is incorporated under the laws of Delaware and headquartered in St. Paul, Minnesota. 3M is a large, profitable company, boasting $35 billion in net sales in 2021.
3M acquired the Aearo Entities in April of 2008 through a stock purchase for approximately $1.2 billion. For the first two years following the acquisition, Aearo‘s business remained separate from 3M. This changed in 2010, as Aearo transferred its Head, Eye, Ear, Hearing and Face Safety business, including the CAEv2 business, to
Aearo became much more integrated into 3M after the Upstream, relinquishing many functions to 3M. Pursuant to a Shared Services Agreement (the “SSA“), 3M agreed to provide, among other things, legal, accounting and insurance services to Aearo in exchange for a fee. 3M has not charged Aearo for services under the SSA since 2016.
In 2016, relators filed a qui tam action styled as United States ex rel. Moldex-Metric, Inc. v. 3M Company, Case No. 1601533. The action was dismissed by stipulation in July of 2018, following execution of a settlement agreement and 3M‘s payment of $9,100,000 to the United States thereunder. Shortly thereafter, servicemembers began to file lawsuits against 3M and/or Aearo alleging defects and injuries related to their use of the CAEv2.
The MDL
On April 3, 2019, approximately 700 CAEv2 lawsuits were consolidated into multidistrict litigation (the “MDL“) before the Honorable M. Casey Rodgers in the United States District Court for the Northern District of Florida (the “MDL Court“). The Aearo Plaintiffs and 3M are co-defendants in the MDL and in approximately 2000 lawsuits pending in the state courts of Minnesota (the MDL and Minnesota actions, collectively, the “Pending Actions“). The Court notes that most, though not all, of the claims filed in the Pending Actions assert that 3M and Aearo are jointly and severally liable. Some of the claims, however, have been asserted against only 3M.
To say that the MDL is large is an understatement of epic proportions. According to a July 15, 2022 statistical report of the United States Judicial Panel on Multidistrict Litigation, the MDL had grown to include more than 290,000 claims, down from a high of over 308,000 claims. It is the largest MDL in history by an order of magnitude and represents a staggering 30% of cases currently pending in the federal district courts.
The Pending Actions allege that the CAEv2 hearing protection devices manufactured, distributed and sold by the Aearo Entities and/or 3M were defective, resulting in hearing loss and related hearing defects. The purported design flaws at issue in the Pending Actions allegedly date to a period prior to 3M‘s acquisition of Aearo.
As part of the MDL process, 27 claimants were designated as “bellwethers.” Of that group, eight plaintiffs’ claims were dismissed prior to trial. As to the remaining plaintiffs, the parties have participated in 16 trials. Ten of the bellwether trials resulted in verdicts for 12 claimants, and the remaining six resulted in verdicts in favor of 3M and Aearo. The verdicts, each of which imposed joint and several liability against 3M and Aearo, ranged from $1.7 million to $77.5 million. Appeals are pending in five of the bellwether cases, and to date, no payment has been made to any of the plaintiffs who have obtained a verdict in their favor. Attempts to negotiate a settlement in the MDL have, to date, failed.
The Funding Agreement
Beginning in March 2022, 3M began exploring strategic alternatives to the MDL. Among those alternatives was a chapter 11 bankruptcy for the Aearo Entities. 3M appointed two disinterested directors to Aearo‘s Board of Directors: Jeffrey Stein and Roger Meltzer (the “Independent Directors“). The Independent Directors were tasked with negotiating the terms under which 3M would fund a chapter 11 bankruptcy as well as a claims trust for the CAEv2 claims and certain “respirator claims” (the “Respirator Claims“) that are also the subject of litigation involving both 3M and Aearo but which are not the subject of the instant proceeding. A draft funding agreement—circulated by Kirkland & Ellis, proposed bankruptcy counsel for the Aearo Entities—became the framework for negotiations between 3M and the Independent Directors.
Stein testified that the negotiations among 3M and the Independent Directors were “vigorous.” Hyperbole aside, Aearo did obtain several significant concessions from 3M. Pertinent to our discussion here, early versions of a funding agreement contained the following provisions:
- No funded trust for CAEv2 claims or Respirator Claims outside of a chapter 11 plan;
- Aearo Entities indemnification of 3M with no funding obligation from 3M;
- Any funding requests to be conditioned on an extension of the stay of the Pending Actions to 3M;
- Each funding request required to include an officer certification, detailed narrative, documentation, and assurances regarding use;
- Inclusion of several events of default, including conversion or dismissal of the bankruptcy case as well as if the bankruptcy court declined to extend the stay or grant a restraining order in favor of 3M; and
- Termination as a remedy for an event of default.
Aearo, through the Independent Directors, pushed back on these points, as well as asking 3M to collateralize its funding commitment and maintain its credit ratings.
Negotiations continued, and 3M‘s initial ask on the terms highlighted above were modified as set forth below:
- 3M made a commitment of $1.24 billion, including $240 million for funding a chapter 11 case and a trust of $1 billion for CAEv2 claims and Respirator Claims, the commitment being uncapped and funded inside or outside of bankruptcy;
- Aearo would indemnify 3M but not assume liabilities, paragraph added to funding agreement where a “Permitted Funding Use” would be for 3M to pay any liability of the Aearo Entities to 3M, including indemnification obligations;
- Funding not conditioned on extension of the stay or any other requests;
Aearo must only abide by a budget; - Events of default no longer include extension of the automatic stay, conversion or dismissal; 3M does not have right to terminate agreement; and
- No financial conditions on 3M other than 3M to use commercially reasonable efforts to maintain credit rating.
These changes were presented to the Aearo Board on July 23, 2022, at which the time the Board resolved to execute the funding agreement. The Independent Directors advised that Aearo “[s]hould not take the risk Bankruptcy Court declines to extend the automatic stay, or other bankruptcy [events of default], leaving the Aearo Entities marooned in chapter 11 proceeding without funding.”
3M and the Aearo Entities executed a final funding agreement on July 25, 2022 (the “Funding Agreement“). Per the Funding Agreement‘s Recitals, 3M has committed to “satisfy all of the respective Aearo Entities’ Liabilities specified herein on the terms set forth herein, such that each of the respective Aearo Entities will have assets with a value greater than its Liabilities and will have the financial capacity to satisfy its obligations as they become due in the ordinary course of its business....” An initial $1 billion was committed to fund a trust to compensate allowed CAEv2 claims and Respirator Claims, as well as $240 million to fund the chapter 11 cases.
In exchange for this commitment, Aearo has agreed to indemnify 3M and its non-debtor affiliates for liabilities related to the CAE2v and Respirator Claims. 3M‘s commitment under the Funding Agreement, both as to the chapter 11 case expenses and the trust, is on an uncapped basis. The Funding Agreement is not a loan, as it does not impose any real repayment obligations on Aearo.
The Court needs to pause a moment and explain why it used the phrase “real repayment obligations.” Section 2(d) of the Funding Agreement States:
No Requirement of Repayment. For the avoidance of doubt, the Aearo Entities shall not be required to return or repay any Payment, in whole or in part, except to the extent any Payment is used to satisfy the Aearo Entities’ obligations under Section 3.
Section 3 of the Funding Agreement contains the Aearo Entities’ indemnification of any 3M liability relating to the CAEv2 claims and the Respirator Claims. This language initially gave the Court pause, as it seems to say there is a repayment obligation as to the indemnity. But § 2(c) of the Funding Agreement—the section referenced in the recap of the Funding Agreement negotiations—provides that a Permitted Funding Use includes a request “to pay Liabilities of an Aearo Entity owed by [3M], including any indemnification or obligation of any Aearo Entity under Section 3.”
A plain reading of the Funding Agreement is that Aearo must repay any indemnity obligation to 3M, but may do so by asking 3M for the money to do so. The net effect to Aearo is zero.5 But if we assume, for the purposes of this opinion, that the language of the Funding Agreement is ambiguous, the Court resolves that ambiguity in favor of Aearo. Aearo‘s Board approved the Funding Agreement after being told, via a Power Point slide deck presentation, of the negotiated change that Aearo could pay any indemnity obligation to 3M by making a funding request to 3M. Aearo provided no evidence or testimony that there was a repayment obligation under
This was something that we discussed in connection with the funding agreement and 3M‘s agreements to provide shared services during the cases. 3M Company will not be seeking any type of claim or any reimbursement from the debtors during the cases on account of any of the payments it makes pursuant to the funding agreement. So that applies across the various relief requested in all of the first day motions.
Transcript of Miscellaneous Motions by Plaintiffs/Debtors, July 27, 2022 P.M. Session, at 24, lines 6-12 (Docket No. 43).
Given the conduct and statements of Aearo and 3M before the Court and in negotiations of the Funding Agreement, the Court finds that if there is a repayment obligation “ado” under § 3 of the Funding Agreement, § 2(c) makes it much ado about nothing. We now return to the discussion of the Funding Agreement as a whole.
The Funding Agreement is not without condition, however. 3M is obligated to pay Aearo‘s Chapter 11 administrative expenses and indemnification obligations only after Aearo has exhausted its own assets, including cash reserves and all available insurance.6 Significantly, 3M‘s obligations under the Funding Agreement are not conditioned on Aearo seeking or obtaining a stay of the Pending Litigation at to 3M.
The Independent Directors reviewed 3M‘s finances and concluded that 3M will be able to fund the payments provided for under the Funding Agreement. 3M‘s
most recent SEC filings show it to be strong financially with no going concern warnings. Specifically, Stein testified that he was confident of 3M‘s financial wherewithal and believed that the Funding Agreement provided a “clear path” to restructuring the Aearo Entities even absent a stay of the Pending Actions.
Insurance
3M manages two insurance programs that might cover the CAEv2 claims: the “3M Tower” and the “Aearo Legacy” programs. The 3M Tower provides $1.05 billion in coverage for claims made during the applicable policy period of March 1, 2018, to March 1, 2019. 3M pays the premiums related to, and is the primary insured under, the 3M Tower; however, Aearo is named as an additional insured under the 3M Tower. On June 28, 2019, 3M provided notice to its insurers of the CAEv2 claims, and these are the only claims for which notice has been given. The 3M Tower coverage is otherwise fully available and free of any other demands.
The Aearo Legacy provides $550 million in coverage. The policies were paid for by Aearo and existed prior to 3M‘s purchase of Aearo in 2008. The coverage provided by the policies covers “occurrences” during the years 1997 to 2008. Aearo is the named insured. On June 28, 2019, 3M provided notice to the insurers in the Aearo Legacy program of the CAEv2 claims.
The only payments made, to date, by any insurer have come from an Aearo Legacy
Procedural Posture
On the Petition Date, Aearo filed its Complaint for Declaratory and Injunctive Relief (I) Confirming that the Automatic Stay Applies to Certain Actions against a Non-Debtor; (II) Preliminarily Enjoining Certain Actions Against a Non-Debtor; and (III) Granting a Temporary Restraining Order Pending an Order on the Preliminary Injunction Motion (the “Complaint“), along with the PI Motion, against “those Parties listed on Appendix to the Complaint,” i.e., the named plaintiffs in the Pending Actions, as well as any party who holds, or may seek to hold, Aearo and/or 3M liable for injury related to the CAEv2 (the “Stay Defendants“).
The Complaint, coupled with the PI Motion, seek to stay the Pending Actions as to 3M and its affiliates. More specifically, Aearo insists that the automatic stay imposed by
Various of the firms who represent the Stay Defendants in the Pending Actions (collectively, the “Objecting Parties“),7 have appeared in this proceeding—either on their own behalf or on behalf of their Stay Defendant clients. They, along with the UST, have objected to the PI Motion. While no committee of the firms or the Stay Defendants themselves has yet been formed8 in the bankruptcy case itself (and, as such, they do not formally speak with one voice), the Objecting Parties do, as a group, oppose Aearo‘s requested relief. And while the Objecting Parties concede that the Court generally has the power to enjoin non-debtor parties, at least pursuant to
Discussion and Decision
At the outset of its discussion, the Court wishes to make clear what this decision is not about. Much has been written and said
This is also not a debate as to the relative merits or demerits of the MDL and bankruptcy processes. Both are merely tools, engineered by Congress, for the adjudication and resolution of claims. Neither is perfect and each present both risk and reward for all of the various constituencies. There has been some suggestion that the bankruptcy process is the only avenue by which the claimants may globally settle the Claims. But this is not so. Multidistrict litigation, through the bellwether process, is itself designed to “enhance and accelerate both the [litigation process itself and the global resolutions that often emerge from that process.” ELDON E. FALLON ET. AL., Bellwether Trials in Multidistrict Litigation, 82 TUL. L. REV. 2323, 2337 (2008). See also, In re E. I. Du Pont De Nemours, 204 F. Supp. 3d 962 (S.D. Ohio 2016) (discussion bellwether process and its value in encouraging settlement). The fact that the bellwether trials conducted in the MDL have not yet yielded a global settlement does not mean that the MDL itself is broken.
That said, the Court also takes issue with the suggestions made by the Objecting Parties throughout this proceeding that the bankruptcy process necessarily deprives the Stay Defendants of their Constitutional right to a jury trial before an Article III judge. Even in bankruptcy that right is preserved. See
Finally, the Court emphasizes that this Order is not a decision as to whether the Aearo Entities’ bankruptcy petitions were filed in good faith. No party has, at least to date, moved for dismissal, and the Court expresses no opinion as to the various suggestions made by the Objecting Parties that Aearo sought bankruptcy protection for an improper purpose or with “unclean hands,” as those issues are not squarely before the Court. Nor does the Court express any opinion, more generally, as to the propriety of the various devices used here and in other jurisdictions—including the much-maligned “Texas Two-Step“—by entities facing mass tort liability. Again, those issues are not squarely before the Court.
In response to charges made within the MDL that 3M is acting in bad faith in seeking a stay,9 Judge Rodgers has indicated that she believes that Aearo is a defendant in the Pending Actions “in name only,” stating that Aearo has had no meaningful role or identity in the MDL. Certainly, the Court does not question Judge Rodgers’ prerogative to reach that conclusion within the context of the MDL. But this Court, at present, has a necessarily
are named as defendants in most, if not nearly all, of the Pending Actions for their role in designing, manufacturing and selling the CAEv2 both prior to and after their purchase by 3M. The Stay Defendants presumably have claims against Aearo as that term is defined by
With that out of the way, the Court moves onto what this matter is about—whether the Pending Actions are, or should be stayed, as to 3M under the relevant provisions of the United States Bankruptcy Code, Title 28 of the United States Code, and controlling decisional law in light of the facts and evidence properly before the Court.
11 U.S.C. § 362(a)
When a bankruptcy petition is filed, the stay provisions of
The purpose of the automatic stay is “to prevent certain creditors from gaining a preference for their claims against the debtor; to forestall the depletion of the debtor‘s assets due to legal costs in defending proceedings against it; and, in general, to avoid interference with the orderly liquidation or rehabilitation of the debtor.” In re Rexene Prod. Co., 141 B.R. 574, 576 (Bankr. D. Del. 1992) (quoting Borman v. Raymark Indus., Inc., 946 F.2d 1031, 1036 (3rd Cir. 1991)). The stay preserves what remains of the debtor‘s estate and “provide[s] a systematic equitable liquidation procedure for all creditors, secured as well as unsecured ... thereby preventing a ‘chaotic and uncontrolled scramble for the debtor‘s assets in a variety of uncoordinated proceedings in different courts.‘” Holtkamp v. Littlefield (In re Holtkamp), 669 F.2d 505, 508 (7th Cir. 1982) (quoting In re Frigitemp Corp., 8 B.R. 284, 289 (S.D.N.Y. 1981)).
Here, Aearo argues that the Pending Actions are, or should be, stayed under both
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other proceeding against the debtor that was or could have been commenced before
the commencement of the case under this title; * * * * *
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate . ...
11 U.S.C. § 362(a)(1)
Section 362(a)(1), while broad, generally protects only the debtor, not non-bankrupt co-debtors like 3M. Pitts v. Unarco Indus., Inc., 698 F.2d 313, 314 (7th Cir. 1983) (“The clear language of Section 362(a)(1) thus extends the automatic stay provision only to the debtor filing bankruptcy proceedings and not to non-bankrupt co-defendants.“); Lee v. RCN Corp., No. 03 C 5866, 2004 WL 2108577, at *1 (N.D. Ill. Sept. 20, 2004) (§ 362 is intended to protect the assets of the debtor for the benefit of creditors and is “not designed to afford collateral benefits to non-debtor parties involved in litigation with the debtor as party defendants or as co-defendants.“). This section “does not prevent actions against non-debtor obligors, debtor‘s sureties or guarantors. It does not protect separate legal entities, corporations, partnerships or non-debtor co-defendants in pending litigation.” In re Lengacher, 485 B.R. 380, 383 (Bankr. N.D. Ind. 2012); see also In re White, 415 B.R. 696, 698 (Bankr. N.D. Ill. 2009) (“Generally, the automatic stay protects the bankruptcy debtor and does not bar suits against third parties, such as non-debtor entities, even when wholly owned by the debtor, or the debtor‘s insurers, guarantors, and sureties.“).
Based on the foregoing authority and the plain language of the Bankruptcy Code, the Court is reluctant to conclude that
Admittedly, there is ample case law holding otherwise. Most significantly, the Fourth Circuit, in two opinions issued in the context of the A.H. Robins Co. bankruptcy case, held that a bankruptcy court has multiple statutory bases for extending the stay to a non-debtor party, including directly under
In particular, the Fourth Circuit identified two exceptions to the general rule that
But while the Seventh Circuit, and other courts within the Circuit, have cited A.H. Robins and the above exceptions to
The Seventh Circuit has not yet had the opportunity to consider the correct process for invoking an exception to the general rule regarding the applicability of section 362(a)(1). That is because in the handful of times the Seventh Circuit has considered A.H. Robins or other exceptions to section 362(a)(1), it has found that the non-debtor does not qualify for the exceptions. See Harley-Davidson Credit Corp. v. JHD Holdings Inc., No. 19-CV-155-JDP, 2020 WL 7078828, at *1 (W.D. Wis. Dec. 3, 2020); Fernstrom, 938 F.2d at 736 (deciding non-debtor did [not] fit within A.H. Robins’ exception; Fox Valley, 140 F.3d at 666 (rejecting attorney‘s argument that the automatic stay deprived the district court of jurisdiction to sanction him).
The bankruptcy court in In re LTL Mgmt. LLC, 638 B.R. 291, 299-301 (Bankr. N.J. 2022), recently grappled with this same issue under similar facts—having been asked to extend the stay to enjoin certain mass tort litigation as to non-debtor parties. While the LTL court ultimately applied A.H. Robins’ more expansive view of a bankruptcy Court‘s power to “extend the stay” to non-debtor parties directly under
Without more explicit guidance from the Seventh Circuit, the Court declines Aearo‘s invitation to extend
11 U.S.C. § 362(a)(3)
Whereas
The Fourth Circuit‘s A.H. Robins decision again looms large in this analysis, as that court held that
Whether
Aearo asserts the property at issue here are its insurance policies, both the Aearo Legacy and the 3M Tower. This assertion is in line with Seventh Circuitcaselaw, which has held that “[a]s a general matter, insurance contracts in which the debtor has an interest at the time the petition is filed constitute property of the estate for the purposes of
Having made this assumption, the Court turns to the second prong of the
But Havlik teaches that
Fortunately, the Court does not have to go down this parade of horribles. At the heart of the Seventh Circuit‘s analysis under
Distilled to that essence, the Court finds that the Pending Actions are not stayed by
11 U.S.C. § 105(a)
That leaves Aearo‘s argument that the Court should enjoin the Pending Actions pursuant to
The burden is on the movant—here the Aearo Plaintiffs—to clearly establish by a preponderance of the evidence the necessity for injunctive relief. See In re Gathering Rest., Inc., 79 B.R. 992, 1000 (Bankr. N.D. Ind. 1986) (citations omitted). “This will ordinarily require convincing evidence of an adverse impact on the debtor‘s estate which seriously threatens the debtor‘s ability to formulate and carry out a plan of reorganization.” Id. (quoting In re Arrow Huss, Inc., 51 B.R. 853, 859 (Bankr. D. Utah 1985)).
“Section 105, however, is merely a vehicle to carry out the otherwise provided powers of the bankruptcy court [and] [m]ay not be used to create new law.” In re Sybaris Clubs Inter., Inc., 189 B.R. 152, 155 (Bankr. N.D. Ill. 1995) (citing In re Lloyd, 37 F.3d 271, 275 (7th Cir. 1994)). To that end, then, a proper exercise of the Court‘s authority to issue an injunction under
Jurisdiction
The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute.
Here, the parties agree that the Court should focus its
Many courts recognize that an indirect effect upon the estate might be sufficient to confer jurisdiction under an interpretation of
The Seventh Circuit, however, has adopted a more constrained approach to “related to” jurisdiction and has repeatedly emphasized that the bankruptcy court should interpret its jurisdiction narrowly. Zerand-Bernal, 23 F.3d at 161; Home Ins. Co. v. Cooper & Cooper, Ltd., 889 F.2d 746, 749 (7th Cir. 1989). Under this more constrained approach, “[a] case is ‘related’ to a bankruptcy when the dispute ‘affects the amount of property for distribution [i.e., the debtor‘s estate] or the allocation of property among creditors.‘” Mem‘l. Estates, 950 F.2d at 1368 (quoting Xonics, 813 F.2d at 131).
“[C]ommon sense cautions against an open-ended interpretation of the ‘related to’ statutory language ‘in a universe where everything is related to everything else.‘” Matter of FedPak Sys., Inc., 80 F.3d 207, 214 (7th Cir. 1996). Thus, simply because a dispute may have some type of nexus to a bankruptcy proceeding is not enough to give the court “related to” jurisdiction over it. Home Ins. Co., 889 F.2d at 749. That jurisdiction requires a direct effect upon either the assets of the estate or their distribution to creditors. “Overlap between the bankrupt‘s affairs and another dispute is insufficient . . .” Home Ins. Co., 889 F.2d at 749.
At first blush, common sense would seem to readily support the conclusion that the Pending Actions, as they relate to 3M, fall within even the Seventh Circuit‘s limited view of the Court‘s “related to” jurisdiction. Aearo‘s obligation toindemnify 3M for any liability 3M incurs by virtue of the CAEv2 claims arguably amounts to liability against Aearo. But such a conclusion ignores the economic realities of the Funding Agreement. So additional scrutiny is required.
It is true that the Aearo Entities have agreed to indemnify all liabilities related to the CAEv2 and Respirator Claims. But the Funding Agreement also provides for an uncapped, non-recourse commitment from 3M to fund all of the Aearo Entities liabilities pre- and post-petition financing, including those arising from CAEv2 claims and Respirator Claims. This includes any indemnity obligations arising from an assessment of liability against 3M relating to the Pending Actions. In support of their objections, the Objecting Parties insist that the Funding Agreement amounts to nothing more than a “circular arrangement.”
To counter that charge, Aearo points to Aearo‘s requirement to first exhaust its own assets, namely cash and insurance coverage, before triggering 3M‘s funding obligation. However, the Funding Agreements makes clear that if Aearo‘s assets are “or are projected to be . . . insufficient to pay or satisfy the Liabilities or amounts or otherwise maintain the Minimum Balance,”13
Significantly, 3M commitment under the Funding Agreement does not depend on the Court enjoining the Pending Actions—a commitment that Aearo expressly negotiated under the belief that it might be “marooned” in bankruptcy with no funding source if such a condition was included and if the Court denied the PI Motion. It would seem, then, that whatever liability the Pending Actions generate—in bankruptcy, outside of bankruptcy, stay in place, or no stay—Aearo can satisfy such liability by making a payment request under the Funding Agreement. From this, the Court is unable to discern any financial impact to creditors, let alone a significant and adverse one, from the continuation of the Pending Actions. Stated differently, the Court cannot conclude that continuation of the Pending Actions will affect the amount of property for distribution or the allocation of property among creditors.
A number of other courts have extended the stay notwithstanding the existence of an uncapped funding agreement. See, e.g., LTL Mgmt, 638 B.R. at 291; In re Aldrich Pump LLC, No. 20-30608, 2021 WL 3729335 (Bankr. W.D.N.C. August 23, 2021); and In re Bestwall LLC, 606 B.R. 243 (Bankr. W.D.N.C. 2019). Respectively, this Court cannot follow suit. Given the Seventh Circuit‘s instruction in Xonics and its progeny, the Court must focus its analysis on the actual economic effect continuation of the Pending Actions will have on the Aearo‘s estate and creditors, a concern that was a not a limiting factor in the above-cited decisions.
It is true that 3M‘s commitment under the Funding Agreement is not without condition, but Aearo‘s obligation to exhaust its own assets (namely, its cash reservesand available insurance policies) do not functionally impair the Aearo Entities from operating or from offering a fully funded plan of reorganization (or a trust outside of bankruptcy, for that matter). Or, perhaps more to the point, Aearo failed to articulate what impairment, behind the merely theoretical, the conditions pose. Aearo itself must have believed that a reorganization was possible, with the financial assistance of 3M, without the promise of a stay in favor of 3M because Aearo itself negotiated for the removal of that condition from the Funding Agreement.
Of course, 3M‘s ability to honor its commitment under the Funding Agreement is very much the elephant in the room. To this point, Objecting Parties Keller Postman LLC and Charles Rataj (collectively, “Keller“), in support of its objection to the PI Motion,14 presented the expert testimony
However, Keller presented Dr. Heaton‘s testimony during the Objecting Parties’ case15 for the limited purpose of seeking a condition on the stay should the Court be inclined to grant the PI Motion. Presumably fearing the Court might rely on Dr. Heaton‘s testimony more broadly, the other Objecting Parties did not support or adopt Dr. Heaton‘s testimony. Aearo, for its part, objected to the Court hearing the testimony under Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993), arguing that Dr. Heaton‘s methodology was flawed.
While the Court overruled Aearo‘s objection, it is unwilling to consider Dr. Heaton‘s testimony for anything other than the limited purpose for which it was offered. The evidence that Aearo—the party that bears the burden of proof under
The Court also rejects Aearo‘s insistence that Court should invoke its
Based on the foregoing, the Court declines Aearo‘s request to enjoin the Pending Actions as to 3M pursuant
Of course, the Court recognizes that this conclusion may ultimately prove improvident if Dr. Heaton‘s estimation of 3M‘s liability and financial wherewithal ultimately proves accurate. But as the Seventh Circuit‘s decision in Bush instructs, this Court‘s analysis of “related to” jurisdiction is ex ante. Bush, 939 F.3d at 856. From the evidence currently before the Court, the Court is unable to conclude that 3M is unable or unwilling to honor its commitment under the Funding Agreement and, as such, an injunction of the Pending Actions is neither necessary nor appropriate.
Conclusion
Admittedly, it is tempting to be swayed by the sheer size of the MDL at issue in this case, but that alone provides insufficient reason for the Court to conclude that an injunction is necessary for Aearo‘s reorganization or that creditors will be negatively impacted in the absence of an injunction. Might a stay influence these proceedings or, more to the point, provide Aearo and/or 3M with additional leverage to negotiate a global settlement? And might the Bankruptcy Code provide certain tools that Aearo and 3M will lack outside of bankruptcy? The Court believes the answer to both these questions is a resounding yes. Alas, those questions are not things to be considered when reviewing the language of
For the reasons stated above, the Court hereby SUSTAINS the objections of the Objecting Parties—other than those relating to unclean hands—and DENIESthe PI Motion. Because of the denial of the PI Motion, the Court OVERRULES as moot the Keller Objection to the extent it sought conditions on an injunction.
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