Annmarie Gruick
St. John's University School of Law
American Bankrupcty Institute Law Review Staff
In In re Aearo Techs, LLC, a bankruptcy court in Indiana held that the automatic stay provision under Title 11 of the United States Code (the “Bankruptcy Code”) was not applicable to 3M and its affiliates as non-debtors and was only applicable to debtor Aearo Technologies LLC (“Aero”) and its six debtor affiliates (collectively with Aero, the “Aearo Debtors”).[1] Through a stock purchase, 3M Occupational Safety LLC (non-debtor 3M) acquired Aearo, a manufacturer of personal protective equipment, including earplugs.[2] Such earplugs became the subject of over 2,000 lawsuits as they were alleged to be defective, resulting in hearing loss.[3] Due to the volume of cases, some lawsuits were consolidated into a multidistrict litigation (the “MDL”), with approximately 2,000 pending lawsuits in the state courts of Minnesota (collectively referred to as the “Pending Actions”).[4] In an effort to escape liability and large verdicts in the MDL, Aearo and 3M came to an agreement (the “Funding Agreement”) whereby 3M would fund Aearo’s chapter 11 bankruptcy, obligating 3M to pay all of Aearo’s “administration expenses and indemnification obligations only after Aearo has exhausted its own assets, including cash reserves and available insurance[5]”—an obligation not conditioned on Aearo seeking or obtaining a stay of the Pending Actions from the bankruptcy court on behalf of 3M and other non-debtor affiliates.[6] In the background of this agreement remained the Pending Actions.[7] In July 2022, Aearo commenced a voluntary chapter 11 bankruptcy case with the Aero Debtors.[8]
In the present case, Aearo, relying on Sections 362(a) and 105(a) of the Bankruptcy Code, moved the bankruptcy court for an order: (1) extending that the automatic stay applies to certain actions against a non-debtor, including 3M; (2) preliminarily enjoining the Pending Actions against 3M, a non-debtor (the “Preliminary Injunction Motion”); and (3) granting a temporary restraining order pending an order on the Preliminary Injunction Motion.[9] Such order was denied by the bankruptcy court.[10]
The automatic stay afforded to debtors under Bankruptcy Code section 362 does not generally apply to non-debtor parties. One purpose of the automatic stay is to avoid a creditor scramble for the debtor’s assets, protecting property of the estate for equitable distribution.[11] Aearo, in its reliance on Section 362(a)(1), contended that the Pending Actions are or should be stayed as they relate to non-debtor 3M and its affiliates because the joint and several liability claims asserted against debtor Aearo and non-debtor 3M in the Pending Actions blurs the distinction between the two entities creating the potential that a judgment against non-debtor 3M will negatively affect debtor Aearo’s property of estate, reducing the amount available for creditors.[12]
The bankruptcy court, in holding against Aearo, recognized two exceptions to the general rule that Section 362(a)(1) does not apply to non-debtors: “(1) where there is such identity between the debtor and third-party defendant where a judgment against the third-party defendant will in effect be a judgment against the debtor, and (2) where the pending litigation, though not brought against the debtor, would cause the debtor irreparable harm.”[13] The bankruptcy court refused to adopt and apply the exceptions here.[14]
In its effort to convince the bankruptcy court to extend the automatic stay to its non-debtor affiliates, Aearo relied upon Section 362(a)(3)[15], which protects property of the estate and requires a two-step analysis to see if it is triggered: “[f]irst, a court must determine whether property of the estate is at issue; second, a court must determine whether the action in question constitutes an action to obtain possession of, or exercise control over, the property in question.”[16]Aearo argued that the two insurance policies, as property of the estate, satisfy subsection three, resulting in an automatic stay.[17] The bankruptcy court, under that guideline, rejected Aearo’s argument that it satisfied Section 362(a)(3).[18] The Court reasoned that even assuming that the insurance policies are property of the Aero estate, there was no attempt by the claimants in the Pending Actions to exercise control over the insurance policies as no defendants were proceeding directly against those policies.[19] Further, pursuant to the Funding Agreement between Aearo and 3M, which acted as a “complete, uncapped backstop to the insurance policies,” there was no threat or concern of inequitable distribution to creditors.[20]
Aearo relied on Bankruptcy Code section 105 together with Bankruptcy Code section 362 in seeking an extension of the automatic stay to its non-debtor affiliates. Under Section 105(a), “bankruptcy courts have the express authority ‘to issue any order, process or judgment that is necessary or appropriate to carry out the provisions of [the] title’” which includes the ability to stay actions in other courts where “the debtor [is not a] party but [where the suit might] affect the amount of property in the bankruptcy estate.”[21] In determining whether the Court had the authority to issue such an order, it turned to the question of jurisdiction.[22] In focusing on “related to” jurisdiction, the Court construed it narrowly, holding that “‘[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.”[23] In looking at the economic realities of the Funding Agreement, the Court determined that the Pending Actions would not affect the amount of property for distribution or the allocation of property among creditors.[24] Because the Pending Actions would not affect the amount of property available for distribution to Aero’s creditors, the court lacked “related to” jurisdiction.”[25]
In refusing to enjoin the Pending Actions and grant the extension of the stay to non-debtor 3M and its affiliates, the Court held that that the Bankruptcy Code’s automatic stay provision does not necessarily extend to non-debtors. The Court recognized that although extending the stay to non-debtors in Aero’s case might facilitate a global settlement and “provide certain tools that Aearo and 3M [as non-debtor] will lack outside of bankruptcy,” such considerations were improper in resolving the issues at bar.[26] On August 29, 2022, Aearo and 3M filed a direct appeal to the Circuit Court from the order denying the Premilitary Injunction Motion which is currently pending.[27]
[1] In re Aearo Techs, LLC, 642 B.R. 891 (Bankr. S.D. Ind. 2022).
[2] Id. at 896.
[3] Id. at 896–97.
[4] Id. at 897.
[5] Id. at 900 (“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 . . . . The Aearo Legacy provides $550 million in coverage.”).
[6] Id. at 898–99.
[7] Id. at 901 (“Aearo essentially makes three arguments: (1) that the Stay Defendants have asserted claims of joint and several liability against 3M and Aearo, essentially treating them as a single entity, such that a judgment against 3M is effectively a judgment against Aearo; (2) 3M and Aearo are co-insured under shared insurance policies, the proceeds of which may be depleted if the Pending Actions are not stayed as to 3M; and (3) Aearo is obligated to indemnify 3M and its non-debtor affiliates for any losses related to the CAEv2 claims.”).
[8] Id. at 896.
[9] Id.
[10] Id. at 912.
[11] See id. at 903 (“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.”’”) (internal citations omitted).
[12] Id. at 903–04.
[13] Id. at 904 (citing A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986)).
[14] Id.
[15] Id. (“[Subsection three] provides a stay immediately upon the filing of a bankruptcy petition as to: (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.”).
[16] Id. at 906.
[17] Id.
[18] Id. at 906–07.
[19] Id. at 906.
[20] Id. at 907.
[21] Id.
[22] Id. at 908. (“Section 1334(b) of Title 28 provides that “the district courts shall have original but not exclusive jurisdiction of all civil proceedings as arising under title 11, or arising in or related to cases under title 11.”).
[23] Id. at 909.
[24] Id. at 909–10. (“It is true that 3Ms commitment under the Funding Agreement is not without addition, but Aearo’s obligation to exhaust its own assets (namely, its cash reserves and 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).”).
[25] Id. at 910.
[26] Id. at 912.
[27] Notice of Appeal, In re Aearo Techs, LLC, No. 1:22-ap-50059 (Bankr. S.D. Ind. Aug. 29, 2022), EFC No. 145.