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Johnson and Johnson (J&J) have been making headlines recently due to its controversial bankruptcy process

After its subsidiary, Ethicon, filed for Chapter 11 bankruptcy in 2020 to deal with the liabilities arising from lawsuits related to pelvic mesh implants, J&J followed suit and filed for Chapter 11 bankruptcy in June 2021. However, the initial bankruptcy filing faced criticism as it was seen as a tactic to prevent new lawsuits from being filed against J&J for their talc products. The talc lawsuit liabilities have been a major concern for J&J as it faces future talc claims worth billions of dollars. The rejected subsidiary bankruptcy has also resulted in the spin company’s talc liabilities being transferred back to J&J, adding further pressure on the company’s finances. Despite this, J&J has announced its strategy to continue fighting other plaintiffs’ claims while ensuring that there is no future liability for the company. The company has set up a $2 billion trust fund to settle current and future talc cases. However, the frozen proceedings and automatic stay that came with the initial bankruptcy filing have caused delays in ongoing talc cases.

In a move to settle tens of thousands of lawsuits filed by women alleging J&J’s baby powder caused their gynecologic cancer, the company has proposed resolving the cases through bankruptcy. It hopes a judge will accept the new bankruptcy filing by its subsidiary, LTL Management.

The firm also wants to persuade 75% of claimants to support the plan. Many lawyers representing cancer victims have blasted the proposal.

The Third Circuit Court of Appeals Reverses the Third Circuit Court of Appeals Decision

The Third Circuit Court of Appeals has rejected Johnson and Johnson’s appeal of its January ruling that the company’s bankruptcy spin-off was improper. The appeal is the company’s first chance to get a hearing by the Supreme Court, but there’s little chance it will succeed. The company will likely need to settle the talc lawsuits if it wants to avoid large punitive damages awards, which would send a clear message that J&J’s talcum powder was dangerous.

The talc bankruptcy spin-off was intended to be a strategy for the company to settle tens of thousands of tort cases alleging that its baby powder was contaminated with asbestos, causing ovarian cancer in many of those who used it. In 2021, the company formed a subsidiary to hold its asbestos-contaminated talc liabilities and transferred very few of its assets. Then it filed for bankruptcy, a tactic known as the “Texas two-step.”

Bankruptcy court Judge Kaplan approved the spin-off and the plan to settle current and future talc lawsuits for $8.9 billion, though the settlement is not final until it receives approval from the bankruptcy court. J&J will also have a temporary stay on new lawsuits while the settlement is in process.

In a hearing, the judges asked J&J lawyers several difficult questions. For example, one judge pointed out that the company’s lawyers made no effort to show that it was not seeking an advantage in the litigation by its bankruptcy filing. J&J’s attorneys said that this was not the intent, but the judges seemed skeptical that J&J’s actions were not to gain an advantage in the litigation.

The judges also questioned the rationale for having a special master estimate claims on such a large scale. The experts will review the evidence and determine how much money each plaintiff should get. J&J is expected to make a final proposal for claimants in mid-May, and it expects that the bankruptcy court will approve the plan.

The bankruptcy spin-off will not affect the upcoming trial by jury in Missouri, which was scheduled to begin on May 9, 2023. That case involves a woman who sued J&J, claiming her ovarian cancer was caused by the company’s talcum powder. The trial is expected to last three to four weeks. The talc cases in other states are continuing as well, and more than 37,520 lawsuits have been transferred to multidistrict litigation. J&J has already paid a price for this costly litigation, and it is likely to pay more in the future. Talc bankruptcy is just the latest chapter in a long history of mass torts in which companies have tried to use bankruptcy laws to shield themselves from massive liability. However, the mass tort process has not yet produced a result that has been fair to claimants.

J&J Subsidiary LTL Management Files for Second Bankruptcy

The Johnson & Johnson company that tried to get out of 38,000 talc lawsuits by using a bankruptcy trick has suffered another legal setback. The United States Court of Appeals rejected a second attempt by the J&J subsidiary to use the “Texas two-step” strategy. The tactic involves creating a firm to handle lawsuits and declaring that firm bankrupt. Then, the surviving company can avoid lawsuits by transferring the lawsuits to the new firm.

After the first bankruptcy attempt was thwarted by the courts, lawyers representing talc claimants filed an appeal with the U.S. Court of Appeals for the Third Circuit. The lawyers argue that the second bankruptcy filing by LTL Management was designed to manipulate the bankruptcy process and defraud the talc claimants. The lawyers also argue that the filing violates the laws that prohibit fraudulent conveyances.

In its request for permission to file a second bankruptcy, the J&J subsidiary asserts that its new plan will result in $8.9 billion over 25 years to resolve all existing and future talc claims. This is an increase from the previous offer of $2 billion in its initial bankruptcy filing in October 2021. The company also contends that the new offer would be supported by 60,000 to 70,000 of its current talc claimants. However, most of the top law firms representing talc claimants in the multidistrict litigation are rejecting the proposal and have vowed to fight the bankruptcy filing.

Lawyers for the talc plaintiffs are asking Judge Kaplan to dismiss the new bankruptcy filing. They argue that J&J’s attempt to evade responsibility for its talcum powder is fraudulent and erodes the integrity of the bankruptcy process. They say it was never Congress’ intention that companies with plenty of assets could spin off a division and use the bankruptcy code to evade accountability from juries in lawsuits by putting their claims in the hands of a trustee.

The ad hoc committee of talc claimants has filed an opposition brief to the bankruptcy filing that describes it as “the largest fraudulent conveyance in the history of the United States.” The brief cites case law from the U.S. Court of Appeals that establishes bankruptcy rules that prevent bad-faith transactions.

J&J Subsidiary LTL Management Files for Third Bankruptcy

The federal appeals court that blocked the first bankruptcy attempt by J&J’s talc subsidiary has struck down the second one. The court found that the company didn’t meet the requirement to access the Bankruptcy Code’s “safe harbor,” which requires a debtor to be experiencing financial distress to use the process.

The court also ruled that J&J’s new plan to settle talc cases was too vague to qualify as an effort to resolve them. The company must get the bankruptcy judge to accept its latest proposal and must persuade 75% of talc claimants to approve it.

J&J created LTL Management in 2021 through a divisional merger, splintering off liability and using the bankruptcy system as a shield against legal exposure to talc claims. That move was criticized by plaintiffs and ultimately blocked in the U.S. bankruptcy court for the District of New Jersey.

In its first bankruptcy filing, LTL said the company was suffering from a series of costly defense verdicts and escalating settlement costs related to the talc litigation. The company claimed it needed the protection of Chapter 11 to pay for these expenses and avoid having them reflected on its stock price. But the court rejected that argument, finding the company’s assertions to be “unsupported and unsubstantiated.”

The court also argued that the bankruptcy court’s projections of future claim costs were too casual. It found that the bankruptcy court relied on “back-of-the-envelope calculations and projections.” And it questioned whether the court considered a potential future settlement or successful defense verdicts.

The new bankruptcy was filed on April 4. It must be approved by the same court and 75% of the talc claimants that rejected the earlier offer. The court will hold a hearing on the issue in June. If it’s accepted, the plan would pause all active talc suits and allow the parties to negotiate a settlement. If it’s rejected, it will mean that the company will have to continue to defend itself against individual talc claims or take them to trial. It could also face a larger payout from the plaintiffs’ lawyers. That’s because they will have the chance to argue that the bankruptcy was improper and should be dismissed. It will also create uncertainty about what companies can and cannot use in the bankruptcy process. That will likely impact large corporations that try to use strategies like the Texas two-step to cabin off liabilities.

Ed Lott, Ph.D., M.B.A.
President and Managing Partner
ZeroRisk Cases®
Call 833-ZERORISK (833-937-6747) ext 5

Summary

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Current Status of Johnson and Johnson Bankruptcy and Effects on Talc Suit

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The plan would pause all active talc suits and allow the parties to negotiate a settlement. If it’s rejected, it will mean that the company will have to continue to defend itself against individual talc claims or take them to trial.

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Ed Lott, Ph.D., M.B.A.

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ZeroRisk Cases, LLC

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