(Reuters) — Two U.S. military veterans sued 3M Co on Thursday. to block its planned spin-off of its healthcare business, which it called an illegal attempt to avoid compensating veterans for hearing damage caused by the company’s military-issue earplugs.
The veterans said in a lawsuit in federal court in Pensacola, Fla., that the spin-off was “little more than a formality” intended to “wall off” assets, violating a Florida law that prevents debtors from fraudulently transferring assets to protect them from creditors.
The case is expected to go before U.S. District Judge M. Casey Rodgers, who already oversees more than 220,000 lawsuits over the earplugs and has been harshly critical of the company̵7;s legal strategy.
“Fortunately, the law does not allow companies to donate their assets to shareholders when they cannot pay their debts,” Ashley Keller, an attorney for the veterans, said in a statement.
Tamara Sander, a 3M spokeswoman, said in an email that “the lawsuit is without merit and we will defend ourselves vigorously.”
Thursday’s filing comes after a bankruptcy court in Indianapolis rejected 3M’s bid to halt the cases before Judge Rodgers and instead settle the veterans’ claims through the bankruptcy of 3M subsidiary Aearo Technologies LLC, the original manufacturer of the Combat Arms Earplugs version 2.
The veterans’ lawsuits, which claim the earplugs failed to protect their hearing in combat or training, represent the largest mass tort litigation in US history.
Aearo filed for bankruptcy in July and agreed to indemnify 3M against earplug claims and set aside $1 billion to settle them. Judge Rodgers called the attempted maneuver “naked duplicity”.
On the same day, 3M announced its plan to spin off its healthcare business, which accounted for about 25% of its $35.35 billion in sales last year, into a new public company. Chief Executive Michael Roman told investors on a July 26 call that the spinoff and the Aearo bankruptcy were the result of “separate … strategies and decisions.”
The plaintiffs in Thursday’s lawsuit said the company had already depleted its cash reserves through dividends and share buybacks, and that the spinoff would leave it unable to meet its earplug debts, which they said were at least $82 billion but likely much more.
The company has lost 10 of the 16 earplug cases that have gone to trial so far, with about $265 million awarded in total to 13 plaintiffs.