💥3M Puts Legacy Liabilities in Chapter💥
The Voyager case just gets better and better.
Here’s a series of things we imagine happening all across America in the wake of Johnson & Johnson’s JNJ 0.00%↑ filing of LTL Management in October 2021:
BigLaw Restructuring Partner tells BigLaw Restructuring Associate to research each and every major company with massive mass tort litigation exposure.
BigLaw Restructuring Associate comes back with a list of companies running the gamut from those that’ve done environmental damage to those with opioid exposure to those who allegedly deafened military service members. You name it: nothing is off limits here.
BigLaw Restructuring Partner scours firm client lists and cross-references it against the Associate’s work to see whether there are any pre-existing relationships with any of the aforementioned deadbeat companies.
BigLaw Restructuring Partner identifies one! Homie starts getting super excited. There’s nothing a BigLaw Restructuring Partner likes more than an identifying a potential new and lucrative revenue stream.
BigLaw Restructuring Partner reaches out to BigLaw Corporate or BigLaw Litigation Partner identifying the issue and suggesting a Texas-Two-Step or whatever the hell you call what 3M Co. MMM 0.00%↑ is doing via an entity called Aearo Technologies LLC (along with six affiliates, the “debtors”) in the Southern District of Indiana (Judge Graham)(more on this in a sec). A Pacer Ploy? A Hoosier Humping? The Hoosier Hop?
Assuming the BigLaw Corporate or BigLaw Litigation Partner doesn’t tell the BigLaw Restructuring Partner to go f*ck him/herself (which, given BigLaw dynamics, may be a big assumption), BigLaw Corporate or BigLaw Litigation Partners initiate an introduction with said client.
Board meetings ensue wherein BigLaw Restructuring Partner pontificates about the benefits of bankruptcy in mass tort cases and makes a compelling case that chapter 11 may be the absolute best way to shed that pesky and expensive litigation exposure in an orderly fashion.
Retainer funded!
On July 26, 2022, 3M dropped a whole lot of news on the markets. It reported sh*te quarterly results (net income ⬇️, EPS ⬇️, sales ⬇️, cut forecast); it announced a planned spinoff of its healthcare business; and it filed the aforementioned debtors for chapter 11 bankruptcy. We have to hand it to Kirkland & Ellis LLP, Ice Miller LLP and AlixPartners LLP: this is a rare instance where a potential filing wasn’t broadcast widely in advance. 👏🏼
The debtors’ bankruptcy papers are simultaneously a harsh criticism of the US litigation system and a continuation of the recent theme of big corporates leveraging the federal bankruptcy system to address long-standing and seemingly endless mass tort liabilities. Much like LTL Management, the debtors hope to use the bankruptcy process to put an end to rampant litigation and streamline processes towards an eventual distribution. Here, the litigation stems not from allegedly cancer-inducing talc like in JNJ’s situation but, rather, litigation from several HUNDRED THOUSAND servicemembers alleging hearing issues due to purported failure of the debtors’ earplugs to safely protect servicemembers’ hearing.
The statistics cited in the debtors’ bankruptcy papers are eye-popping:
📍280,000 claims at the peak and currently 230,000 claims brought. 😬
📍Exposure risk of potentially over $1 trillion. 🤯
📍Largest multi-district litigation (MDL) in history (per a cited MDL Statistics Report).
📍The MDL “now accounts for more than 30 percent of the total number of all cases pending in federal courts.” WOWZERS.
📍Verdicts returned compensatory damages awards in the tens of millions.
The debtors spend a number of pages describing the state of MDL in this country and its failure to resolve mass tort claims. It’s an interesting read for those of you interested in necessary legal reforms. For our purposes, suffice it to say that, at least according to 3M, the MDL system has been a complete clusterf*ck riddled with inefficiency.
In short, the tort system is no longer a viable forum to resolve this litigation, which is instead now a cautionary tale of an MDL that is broken beyond repair. Lawyers, scholars, and judges have long raised questions about the utility of large MDLs to resolve mass tort claims, as aggregations of untested claims have become a magnet for frivolous lawsuits that otherwise may never have been filed and inevitably result in the compensation of claims with little or no merit. The Combat Arms MDL exemplifies these problems, but the extraordinarily high volume of claims and breakdown of traditional case management procedures created a perfect storm that no reasonable settlement could solve.
The debtors, therefore, saw bankruptcy as the only avenue to resolve the claims.
Bankruptcy provides unique jurisdictional and procedural vehicles for consolidating claims, negotiating and voting on global resolution, and ensuring that the scientific and legal merits of claims remain the principal metric for their value. In contrast to the MDL, which (at best) could resolve only a limited number of valid claims, the chapter 11 solution provides a process to establish full and fair compensation for all such claims.
The proposed restructuring path rests on decades of fundamental principles derived from countless other mass tort cases. This Court can ensure the litigation of the core issues through a combination of the automatic stay—which provides a reprieve from the litigation that precipitated this filing—and the Bankruptcy Code’s comprehensive process for administering and equitably resolving claims using well-tested tools, including claim objection, litigation, and resolution procedures that focus on the key scientific and factual issues gauged by federal evidentiary rules.
Aware of potential heat they may take, the debtors confronted potential backlash head-on:
Make no mistake, the chapter 11 cases are not about walking away from responsibilities, and it will not be used to deprive claimants of a fair recovery or deny them their day in court. In this respect, 3M’s uncapped financial commitment to Aearo’s reorganization—conditioned on Aearo indemnifying 3M against any losses related to Combat Arms claims—is essential.
Georgetown University Professor Adam Levitin touches upon both the structure of this filing and the indemnity in a blog post published Tuesday on Credit Slips. He writes:
Aearo has long been a separate subsidiary from 3M; there was no Texas divisional merger monkey business before the filing. Moreover, Aearo filed for bankruptcy in the Southern District of Indiana, where it is headquartered, rather than in Delaware where all the entities are incorporated. No forum shopping! K&E must have seen the light? Oh wait, why bother forum shopping? The 7th Circuit has some of the laxest law in the country on third-party releases and been scared that they might run into a bad decision in the LTL appeal.
He continues — in reference to the debtors filing, on day one, an adversary proceeding against tort plaintiffs seeking to prevent them from continuing their suits against 3M:
Aearo and 3M also planned much better than J&J did--they set up a situation where Aearo's DIP financing is from 3M, but that financing is contingent upon Aearo indemnifying 3M, and that indemnification is the key hook (bolstered by shared insurance coverage) for Aearo's argument why a suit against 3M is really a suit against Aearo.
He concluded:
The big point here is that thanks to LTL, the flood gates are open. The Hoosier Hop dispenses with the tawdry divisional merger nonsense and instead makes an unapologetic case that bankruptcy is the appropriate solution to the dysfunctional mass tort system. If a court buys that story, then all of the moves--the injunction and the funding agreement and the ultimate non-debtor release--are sort of necessary pieces that have to be accepted. Will this work? I don't know. There's certainly a lot of legal risk involved for Aearo and 3M, but it's hard to see what they lose by trying beyond a bunch of attorneys' fees.
On Wednesday, July 27, 2022, the debtors held their first day hearing and the injunction and the funding agreement stole the show. Why? It turns out that the debtors and 3M consummated the funding agreement within the same timeframe as an MDL-ordered mediation which, as you might imagine, generally requires parties to act in good faith. Whoopsies! Were the debtors and 3M acting in good faith at that mediation when, contemporaneously, they were entering into a funding agreement to permit a chapter 11 filing? 🤷♀️ What kind of harm might 3M suffer if a ruling comes down indicating that it didn’t, in fact, operate in good faith? Inquiring minds want to know but the possibility of major embarrassment along those lines helped spurn a deal: a brief break from the MDL for all parties but not the full-on stop of the MDL against 3M that the debtors and 3M wanted.
Maybe 3M didn’t plan much better after all. Time will tell.
The debtors are represented by Kirkland & Ellis LLP (Edward Sassower, Chad Husnick, Emily Geier, Spencer Winters, Mark McKane, David Bernick, Brenton Rogers, Renee Smith, David Horowitz) and Ice Miller LLP (Jeffrey Hokanson, John Cannizzaro, Connor Skelly) as counsel and AlixPartners LLP as financial advisor and CRO (John Castellano). 3M is represented by White & Case LLP (Jessica Lauria, Michael Andolina, Matthew Linder, Laura Baccash) — which seems to be everywhere these days — and Faegre Drinker Biddler & Reath LLP (Jay Jaffe, Kayla Britton, Harmony Mappes, Elizabeth Little).
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⚡️Update: Voyager Digital Ltd. (A Song of Ice and Fire)⚡️
Ah, Voyager Digital Ltd. Taking us all on a voyage to a land chock full of dumb-a$$ sh*t.
We’ve previously covered the chapter 11 bankruptcy cases of Voyager and its affiliates (the “debtors”) here, here, here and, most recently in “💥Sam Bankman-Fried Brings the Heat in Voyager's Bankruptcy💥,” wherein we acknowledged how (i) the debtors were plowing forward with their recently filed bid procedures motion and (ii) Sam Bankman-Fried lobbed in an unsolicited “bid” — outside of said procedures — for many but not all of the debtors’ assets (delivered via counsel, Sullivan & Cromwell LLP).
To the extent SBF brought the heat, well, the debtors swiftly and decisively subjected SBF