By Dietrich Knauth

NEW YORK (Reuters) -A U.S. judge on Friday dismissed the bankruptcy of 3M subsidiary Aearo Technologies, rejecting an effort to resolve nearly 260,000 lawsuits alleging that 3M military earplugs caused hearing loss for veterans and U.S. service members.

U.S. Bankruptcy Judge Jeffrey Graham in Indianapolis ruled that Aearo, as a well-supported subsidiary of 3M, enjoys a “greater degree of financial security than warrants bankruptcy protection.”

The lawsuits, which have been consolidated in federal court in Pensacola, Florida, are the largest mass tort in U.S. history, with nearly 330,000 cases filed and approximately 260,000 pending cases, according to court statistics from March.

3M and Aearo had argued that the earplug litigation had spiraled out of control and could be resolved only in bankruptcy.

But Graham ruled the lawsuits against 3M and Aearo did not create any “impending” risk of insolvency, and there was no evidence that a settlement could not be reached outside of bankruptcy.

Graham acknowledged that the earplug litigation was “staggering,” representing 30% of all cases currently pending in the federal district courts. But Aearo’s bankruptcy was a “fatally premature” response, given the fact that 3M had borne the costs of litigation against Aearo and there was no evidence that either company had been seriously harmed by the court cases, Graham said.

3M said in a statement that Aearo was considering filing an appeal to revive its bankruptcy. Both 3M and Aearo are prepared to defend the earplugs’ safety in other courts, and 3M is also pursuing appeals that could correct the “flawed outcome” in some of the trials that have gone forward to date, 3M said. Those appeals could “fundamentally change the trajectory” of the earplug lawsuits, 3M said.

Bryan Aylstock and Chris Seeger, the lead lawyers representing earplug plaintiffs in the Florida litigation, said the bankruptcy was a “gross misuse of the bankruptcy courts.”

“The soldiers we represent deserve an opportunity to hold 3M accountable before a jury of their peers,” Aylstock and Seeger said.

The Florida litigation had mostly been on hold despite Graham’s earlier ruling that lawsuits could proceed against parent company 3M, which is not bankrupt. Aearo has appealed that ruling and is awaiting a decision from the 7th U.S. Circuit Court of Appeals.

3M has lost 10 of the 16 earplug cases that have gone to trial so far, with about $265 million being awarded in total to 13 plaintiffs.

3M’s bankruptcy strategy mirrors a similar effort by Johnson & Johnson, which has attempted to resolve lawsuits through the bankruptcy of a newly created subsidiary, LTL Management. The lawsuits allege that J&J baby powder and other talc products contained asbestos and caused cancer.

J&J denies the allegations.

A January ruling dismissing Johnson & Johnson’s bankruptcy gambit cast a “prominent shadow” over the Aearo case, according to Graham, who reached a similar conclusion that bankruptcy protections should be reserved for financially troubled companies.

Graham said he did not fault Aearo for trying, noting that it was “a real company with real debts,” unlike LTL.

LTL has not given up on its bankruptcy strategy, however, filing for bankruptcy a second time just hours after its case was dismissed.

(Reporting by Dietrich Knauth in New YorkEditing by Alexia Garamfalvi and Matthew Lewis)

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