Court Opinion Review: 3M Settles CAE Claims, Questionable Aircraft Foreclosures, PPL Says Talen Independent Director Had ‘Too Much Integrity,’ and the Teamsters Take On Bankruptcy in Yellow

Reorg’s Court Opinion Review provides an update on recent noteworthy bankruptcy and creditors’ rights opinions, decisions and issues across courts. We use this space to comment on and discuss emerging trends in the bankruptcy world; our opinions are not necessarily those of Reorg as a whole. Today we consider 3M’s post-Aearo dismissal settlement of CAE claims, Ares’ allegedly unreasonable aircraft auctions, Talen independent directors fired for being too independent and the Teamsters’ opposition to the Yellow bankruptcy court considering a labor dispute.

3M Pays Retail

We remain mystified that the academic/commentator debate over the use of bankruptcy to resolve mass tort litigation has devolved into a clash of expert opinion over whether chapter 11 or multidistrict/class-action litigation more effectively promotes efficient and equitable resolution of thousands of claims. As an initial matter, which system works best is entirely beside the point: Congress created the MDL system to resolve mass tort litigation, and did not create the bankruptcy system to resolve mass tort litigation. We could settle mass torts extremely efficiently via a game of rock, paper, scissors, but no one is out there pushing that as a solution.

More importantly, though, mass tort defendants do not file bankruptcy to efficiently and equitably resolve mass tort litigation. Why would defendants care about efficiency? Every day of delay is another day of compounding interest on the money they aren’t paying claimants, and delay increases their negotiating leverage.

Nor do defendants care about equity among claimants: What difference does it make to them how the pie is sliced, as long as the size of the pie is fixed? This is why claimant trusts get set up in mass tort cases: The debtor no longer has any incentive to reconcile claims. That’s an issue for the claimants.

We humbly submit that mass tort defendants file chapter 11 for one reason: to reduce their exposure. To be clear, there is nothing wrong with that. The goal of the defendant is to pay the plaintiff as little as possible, either in litigation or in bankruptcy. That’s how the adversary system works. Do you seriously think prospective debtors’ counsel sells a company’s board on filing for bankruptcy by pushing an efficient and equitable resolution of claims? Companies file bankruptcy to pay their creditors less than they may be owed, either because they lack the wherewithal to pay what may be owed or because they would rather do other things with their money.

Mass tort cases get filed because defendants believe bankruptcy will help them pay less on claims. Filing bankruptcy is no different from filing a motion for summary judgment: The defendant is trying to take the claims out of the hands of an unpredictable, possibly clueless jury and put them in the hands of a sophisticated, settlement-obsessed judge. And no judge is so confident in her own sophistication and ability to cudgel a settlement as a bankruptcy judge.

We have repeatedly chided big-case bankruptcy judges for failing to call the debtors’ “parade of horribles” bluff and reject “extraordinary” relief for fear of - shudder - actual litigation - without carefully considering what would actually happen if the extraordinary relief was denied. In reality, we have pointed out, the sky almost never falls, and endless litigation is vanishingly rare. The latest example: the 3M Combat Arms earplugs MDL settlement announced on Aug. 29.

In virtually every case where a judge has pushed back against debtors’ warnings of endless litigation unless some extraordinary relief is approved, the parties demanding such relief either immediately dropped their demand (see for example the nondebtor releases in Ascena, the get-out-of-antitrust-free findings for CuraScript in the first Mallinckrodt case and the appellate mootness guarantee in National CineMedia) or agreed to pay a higher price for a settlement (see the nondebtor releases in Purdue), revealing that the offer rejected by the bankruptcy judge was not, in fact, their highest and best offer.

Fact is, bankruptcy judges have a reputation for being a soft touch, and this is a selling point for potential mass tort debtors. When a bankruptcy judge shows herself to be a bit more shrewd, the game is up, and the real deal gets done quick.

And lo, it came to pass with 3M. 3M pushed affiliate Aearo Technologies under the chapter 11 bus to secure nondebtor releases for 3M’s Combat Arms earplug, or CAE, liabilities in exchange for $1 billion - keep that figure in mind. Of course, Aearo pushed the “efficiently and equitably resolve” narrative, but of course 3M couldn’t care less about that - that’s fine, really, it’s fine, why do we have to keep saying that? The real reason 3M filed Aearo was to increase its negotiating leverage in settlement talks with the claimants.

The CAE claimants fought the bankruptcy tooth and nail because plaintiffs’ counsel knows what debtors’ counsel knows - that a bankruptcy judge may be perfectly willing to cram down a lowball settlement on claimants via estimation out of fear of endless litigation, yadda-yadda.

The false dichotomy between warm and fuzzy bankruptcy negotiations and scorched-earth, neverending MDL litigation pervaded the debtors’ arguments throughout the proceedings on their requested injunction halting nondebtor CAE litigation. The MDL was broken, and the bellwether trial process had failed, rendering settlement outside bankruptcy next to impossible, the debtors repeatedly insisted. So we have come to you, Judge Jeffrey Graham, to cut the Gordian knot.

Judge Graham obligingly granted the injunction, protecting 3M - sorry, force of habit. In fact, Judge Graham kicked the injunction request into a dumpster, concluding that the injunction was unnecessary because 3M agreed to fund Aearo’s CAE liability even if the injunction was denied.

The debtors also returned to this theme during trial on the claimants’ motions to dismiss the chapter 11 cases. On the second day of trial, one of Aearo’s independent directors testified that there was “no doubt” in his mind the MDL mediation would not result in a settlement and said he did not see “any other path” but chapter 11. On the third day, the other independent director echoed this view: The debtors filed because the MDL mediation parties “were very far apart.”

Then you got the experts fighting over whether bankruptcy or the MDL was the better venue to efficiently and equitably resolve, etc. After the CAE claimants’ expert testified that the MDL provides sufficient “tools” to resolve mass torts, the debtors’ expert responded that the “sheer numerosity” of CAE claims made a settlement outside of bankruptcy impractical. The expert also warned that dismissal could result in 235,000 federal trials: one for each CAE claim. “If you are plaintiff 235,000 in the queue, you may be waiting a very long time” for your trial, the expert said.

Did anyone really believe that dismissal of the Aearo bankruptcy would result in 235,000 individual CAE trials? Seriously? Maybe the Chamber of Commerce: In an amicus brief, the chamber said that “the eventual remand of tens of thousands” of CAE claims for trial “will severely burden every single district court docket around the country and take a staggering amount of judicial resources.” Sure, Jan.

Of course, anyone with even a passing familiarity with the MDL process - say, someone who has been following our coverage of the 3M PFAS or opioid litigation - knows this is nonsense. In practice, even massive, enterprise-threatening MDLs routinely settle without a bankruptcy filing and never end with mass remands of all of the claims for trial in the original courts. Don’t take our word for it - just listen to corporate giant Bayer. In a global settlement, defendants set a percentage threshold for claimant buy-in to address the opt-out issue, and those thresholds are routinely met because almost all the claimants are represented by the big plaintiffs’ firms that agreed to the deal.

Despite the debtors’ insistence that dismissal would result in the entire federal judiciary collapsing under the weight of 235,000 individual trials, on June 9 Judge Jeffrey Graham dismissed the Aearo cases, effectively calling 3M’s bluff. We were less than surprised when, less than three months later, that hopeless MDL mediation bore fruit, with a proposed $6 billion settlement. Pretty much the only thing that happened between the $1 billion first day bankruptcy offer and the $6 billion deal in the MDL was a bankruptcy judge rejecting the possibility of estimation proceedings.

Right now you are about to point out that the settlement isn’t final - because of potential opt-outs, 3M can walk away if less than 98% of claimants participate. Yes, that’s possible, but the Yankees also aren’t mathematically eliminated yet. We would be very surprised if the plaintiffs’ firms fail to cajole enough claimants into accepting the deal so they can get their contingency fee in time for yacht-buying season.

As we quipped back in June of last year, “A cynic - not us! - might suggest that defendants are actively resisting reasonable global settlements in MDL cases so they can run to bankruptcy court, call the MDL process a failure and ask a non-Article III judge to take the matter out of the hands of juries entirely.” The 3M CAE settlement, on the heels of repeated assertions from 3M’s side that MDL mediation was hopeless, certainly provides ammo for those cynics (not us, no siree).

So what? If bankruptcy is a legitimate adversarial tactic by defendants, why do we care when it works? Or that it is revealed as a litigation tactic when it doesn’t? Because it is corrosive for the bankruptcy system to become a litigation tactic. It’s fine for parties to try and use it that way, but it is not fine for bankruptcy judges to allow it to be used that way.

As always, we hope bankruptcy judges will become more skeptical of the “parade of horribles,” not because that would deter mass tort bankruptcy filings, but because that would deter mass tort filings whose real purpose is driving down settlement value using delay and the estimation process. Healthy judicial skepticism should not deter debtors from filing mass tort bankruptcies in good faith rather than to secure a credulous bankruptcy judge that may give them a $4 billion savings on their liability rather than risk “endless litigation.”

The Johnson & Johnson/LTL talc saga is far from over, but if that dismissal and 3M/Aearo stand as the rough line beyond which even usually accommodating bankruptcy judges dare to tread, there’s a decent argument that the system is working.

Compare LTL and Aearo with other mass tort bankruptcies: the opioid cases, the Boy Scouts, dozens of Catholic dioceses and the older vintage of asbestos or asbestos-adjacent cases, to name a few. Those cases featured some combination of a fairly well known quantum of liabilities, limited financial resources/funded debt creditor pressure or prepetition litigation processes that galvanized plaintiffs into being ready to at least begin good-faith settlement negotiations. LTL and Aearo arguably put the cart before the horse on all or most of those fronts.

Bankruptcy is, in fact, a good place to equitably and efficiently settle mass torts, if that is what the debtor is actually trying to accomplish. We tend to doubt that is really the purpose of many mass tort cases, but we are trying to be conciliatory here and, as always, separate the intended use of chapter 11 from foreseeable misuse and outright abuse. Bankruptcy judges need to be more careful in examining debtors’ intentions in mass tort cases, lest they become nothing more than a forum-shopping destination.

Hijacking the Process

A group of junior aircraft financing certificateholders filed a fascinating complaint in New York state court on Aug. 31, challenging the reasonableness of a nonbankruptcy auction of 17 LATAM aircraft by trustee Wilmington Trust. Fascinating, that is, for the plaintiffs’ allegation that what made the sale unreasonable was the trustee’s designation of a stalking horse bidder controlled by Ares, the senior certificate holder, with a massive breakup fee. Even more fascinating: the aircraft financing industry’s reaction to the situation.

According to the plaintiffs, Ares has now played this trick twice to snag aircraft for Vmo, its new aircraft leasing business, on the cheap and at the expense of junior creditors. The first time around involved 10 aircraft owned by Norwegian Air Shuttle, or NAS. The plaintiffs maintain that Ares bought out the Class A certificate holders after an event of default by NAS and directed Wilmington, as the Class A trustee, to initiate a short-notice foreclosure auction, designate Vmo as the stalking horse for $250 million ($20 million less than a “conservative” valuation of the aircraft, according to the plaintiffs) and impose a $25 million breakup fee should Vmo lose the auction.

The plaintiffs assert that Wilmington should have instead re-leased the aircraft to NAS or held a straight-up, no-stalking-horse auction, which they insist “would have realized enough proceeds to pay all of the outstanding certificates in full,” including the plaintiffs’ junior Series B certificates. Instead, Wilmington “blindly followed Ares’ instructions,” resulting in Class B certificateholders getting bupkis.

Our favorite part: After buying the planes, Vmo repossessed them from NAS and leased them back to the airline - exactly what the plaintiffs say should have been done in the first place. Seems like a violation of the repo code, if nothing else.

The new complaint alleges that the LATAM foreclosure sale followed the same pattern: Ares, as majority holder of the Class A notes, instructed Wilmington to set up a quickie foreclosure auction and designate Vmo as stalking horse bidder with a $575 million offer, again allegedly well below the market value of the aircraft. This time, Wilmington agreed to a $50 million breakup fee. “Not surprisingly,” the plaintiffs say, “no other bids were deemed qualified and Wilmington canceled the auction and sold the aircraft to Vmo Holdings at the price set by Vmo.”

So what? This is a bankruptcy column, right? Here’s what hooked us: In both complaints, the plaintiffs contend that the auctions were set up “to imitate - on the surface - a sale process often employed under the supervision of a bankruptcy court.” Our reaction: The terms of these auctions don’t just imitate a section 363 bankruptcy sale, they track the terms of many bankruptcy auctions exactly.

Is it unusual for a section 363 sale to feature artificially short timelines imposed by senior lenders, a big stalking horse credit bid from the same senior lenders and a massive breakup fee that threatens to chill bidding? If these auctions qualified as breaches of fiduciary duty by Wilmington as trustee, then so would many section 363 sales, but for - and this is a big “but” - judicial supervision and signoff of every step of the section 363 process.

In January 2022, New York Supreme Court Justice Barry Ostrager partially denied the defendants’ motions to dismiss the NAS suit, concluding that, well, the plaintiffs sufficiently pleaded breach of fiduciary duty and aiding and abetting claims against Ares and Wilmington.

The defendants asked for summary judgment on July 18, arguing that Wilmington approved the sale as trustee for Class A certificate holders - Ares - and not in its capacity as trustee for the Class B certificate holders. In a Sept. 6 response, the plaintiffs call this assertion “absurd” and suggest that Wilmington should have resigned rather than following Ares’ directions.

Maybe Ares and Wilmington have no legal liability to Class B certificateholders, but clearly others participating in the aircraft financing market felt the NAS violated the unwritten rules of the business. In June 2021, after the NAS sale, the Aviation Working Group, or AWG, published a statement of principles discouraging the use of stalking horse bids and breakup fees in aircraft foreclosure sales.

The principles encourage senior and junior certificate holders to include in their intercreditor agreement a provision that “[n]o fees should be payable to a party that merely provides a minimum bid in a foreclosure sale (breakup fee).” Breakup fees, the AWG maintains, are “prejudicial to a commercially reasonable sale (and a commercially reasonable bidding process)” and are “likely to result in lower bids for aircraft collateral thus harming junior creditors (and potentially the debtor).” You don’t say.

Such fees are particularly pernicious, the AWG continues, when offered to a “party controlling remedies” - that’s you, Ares. “The payment of any fees to, or other financial benefits in favor of, the party controlling remedies or its affiliates is prejudicial to a commercially reasonable foreclosure sale, and, consequently, is likely to result in lower bids for aircraft collateral, thus harming junior creditors,” the AWG says. “Junior creditors should not have to prove unjust enrichment in order to stop such a foreclosure sale.”

We are not suggesting that the benefits of stalking horse bids and breakup fees for senior creditors never outweigh the chilling effect on bidding in section 363 sales, or that every sale subject to such inducements is a stitch-up. Trying to be conciliatory here, people. We are suggesting that - as discussed above - bankruptcy judges should evaluate controlling creditors’ stalking horse bids and breakup fees rather than what sometimes feels like a rubber stamp weighed against “market” - who picked 3%, anyway?

Bankruptcy judges might want to consider whether the assets being sold are more like aircraft - where the market participants have categorically suggested breakup fees are unnecessary to generate competitive bidding - or the detritus left at a Westchester County yard sale at 3 p.m. All of us bankruptcy participants are probably too wedded to the idea that massive inducements are necessary to convince someone to open the bidding on debtors’ assets - perhaps this is “failure bias” at work - and are too fearful of proceeding without a stalking horse (or patently unnecessary backstops). Looking at you, Garrett Motion.

Independents Day

Counsel for PPL Energy made a very interesting accusation during the Aug. 24 oral argument on Riverstone’s motion for summary judgment in the nasty circular-firing-squad litigation over the two sponsors’ respective management of Talen Energy. Specifically, PPL counsel told Judge Marvin Isgur that in preparation for a Talen bankruptcy filing, Riverstone retained an independent director and advisor for Talen Montana to negotiate a resolution of intercompany claims but fired the director and sidelined the advisor prior to the filing because they were too independent.

This will come as a Captain Renault-level surprise to everyone but debtors’ counsel, their preferred “independent” fiduciaries and advisors and bankruptcy judges, but still, we have not seen this accusation surface in court before.

Prior to Talen’s bankruptcy, PPL sued Riverstone in Delaware for causing Talen Montana to bring two fraudulent transfer suits against PPL, which spun the Talen entities off in 2014. According to Talen Montana, PPL improperly pocketed more than $900 million from Talen Montana in the spin, including the proceeds of the sale of Talen Montana’s hydroelectric assets. According to PPL, those suits breached a covenant not to sue in the spinoff separation agreement, and Riverstone is liable for tortious interference with that agreement.

But PPL has a big problem here: It has to show that Riverstone, which took Talen private in 2016, pushed Talen Montana’s board to breach the covenant. Sure, Talen Montana’s board was composed entirely of Riverstone appointees, but as Judge Isgur creatively pointed out, “throughout the corporate world, people wear a yellow hat some days and a blue hat other days,” and PPL has to show that when the Talen Montana board voted to bring the suits, they were wearing their (blue?) Riverstone hats.

To survive summary judgment, Judge Isgur suggested, PPL must show that Talen Montana’s board acted obviously contrary to Talen Montana’s interests and therefore must have been wearing their Riverstone hats when they voted to authorize the suit. In other words: They need to dig up some fresh dirt.

PPL’s dirtiest accusations relate to the treatment of intercompany claims between Talen Montana and the other Talen entities. PPL contends Riverstone treated Talen Montana as the proverbial red-headed stepchild of the Talen family, depriving it of cash and refusing to allow the other Talen entities to pay Talen Montana’s claims against them. Riverstone also terminated a tax-sharing agreement that cost Talen Montana $260 million in tax attributes, according to PPL.

Recognizing the issues this treatment could create in a Talen chapter 11, PPL continues, Riverstone brought in an independent director and advisor for Talen Montana to negotiate a friendly settlement of intercompany receivables and tax sharing agreement claims that could be peddled in bankruptcy court to ward off any committee standing or trustee appointment motions. Standard operating procedure, so far.

However, PPL alleges that instead of whitewashing the intercompany claims as expected, the independent director and advisor sent a letter demanding the other Talen entities pay Talen Montana $15 million and reinstate the tax-sharing agreement. PPL says Talen, under the thrall of Riverstone, reacted by canceling a meeting with the independents, firing the independent director and shoving the independent advisor (AlixPartners) to the “periphery” of bankruptcy planning.

Riverstone then filed chapter 11 for the Talen entities without the fig leaf of independent fiduciary review, PPL says. The independent director and advisor simply had “too much integrity,” counsel remarked.

This understandably piqued Judge Isgur’s curiosity. The judge called PPL’s allegations “disturbing,” though he invited briefing on whether acts contrary to Talen Montana’s interest related to intercompany claims could create a sufficient inference that the entirely separate decision to bring suit was made at the behest of Riverstone. After all, as Riverstone pointed out, the fraudulent transfer claims seem viable and could very well benefit Talen Montana’s creditors (and not Riverstone).

Putting aside the merits, allegations of independent directors and advisors being excessively independent and getting fired for it never reached our ears before. Maybe another airing of grievances is due in the Bromford Industries case, where on Wednesday, Sept. 6, the debtors announced that they may abandon their prepackaged plan, despite having secured the required votes, because the debtors’ independent special board committee feels “compelled” to pursue alternatives, including a section 363 sale.

Is that the sound of an independent board committee exercising a fiduciary out? This must be how Marjorie Courtenay-Latimer felt when she spotted a coelacanth in a fishing net.

If you, or someone you know, has been involved in an excessive independence incident, please contact us at the email address above. You definitely will not be entitled to compensation, but you may have your story told with excessive emphasis italics in this column.

Not in Kansas Anymore?

Leave it to the Teamsters to say the quiet part very, very out loud. In a Tuesday, Sept. 5, response to Yellow Corp.’s motion to transfer its $1.5 billion “tortious interference with dubious efforts to avoid bankruptcy” suit against the union from a Kansas district court to the Delaware bankruptcy court, the Teamsters flat-out accuse the Delaware bankruptcy judges of being “debtor-friendly.”

Clearly the Teamsters need to purchase a Reorg subscription and get up to speed on what’s going on in Delaware. But the Teamsters don’t limit their attacks to the Delaware bankruptcy court alone. The union maintains it is “clearly unlikely to receive a fair trial” on Yellow’s claims in any bankruptcy court because “institutionally, bankruptcy is a forum designed to accommodate the Debtor and the needs of reorganization or liquidation.”

We haven’t felt this giddy since we were nine and a passing Teamster blew the air horn for us when we drove by in the family Pontiac.

In a related opposition filed Aug. 28, the Teamsters lit up the COR bat signal even brighter with an invocation of the dreaded Article I. The union calls Yellow’s motion to transfer the suit to the bankruptcy court before the district court decides the union’s motion to dismiss for lack of subject matter jurisdiction “brazen forum shopping and a flawed tactical maneuver that hinges on this Court granting their request to transfer the case to an Article I bankruptcy court.”

Maybe one of our subscribers is emailing this column to the Teamsters in violation of our terms of service? Ring the shame bell!

The Teamsters add that the requirements for standing to participate in a bankruptcy proceeding are also considerably looser than those under federal labor law. Of course that’s the whole point of bankruptcy - to bring everyone into the same court - but to the union this is grounds for keeping the suit in Kansas. According to the Teamsters, “[V]irtually anyone claiming an interest has standing to participate in any issue before the bankruptcy court,” including shareholders, creditors, lenders and “others that have a pecuniary interest in the outcome of the bankruptcy.”

Letting all these parties in on this two-party labor dispute, the Teamsters argue, would create a “free for all” by “combatants lacking any legitimate connection to the underlying labor dispute.” Are they suggesting that getting your unsecured claim for watering the office plants paid in full by the Teamsters is not a “legitimate connection” to a labor dispute?

Anyway, the gravamen of the Teamsters’ opposition to transfer is that the bankruptcy court has no business hearing disputes between Yellow and the union grounded on the union’s allegedly unfair labor practices under federal law - especially since Yellow filed the suit in Kansas while clearly planning for a possible bankruptcy in Delaware. The union has openly invited the Kansas district court to take a swipe at bankruptcy courts straying from their core role, and we are of course eager to see if another district judge joins the Article III bankruptcy overreach backlash.