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On July 25, the Third Circuit Court of Appeals upheld U.S. Bankruptcy Judge Michael B. Kaplan’s July, 2023 dismissal of Johnson and Johnson’s second attempt to file bankruptcy using the controversial “Texas two-step” maneuver. The plan would have resulted in a divisive merger of the business by which J&J would have transferred all the talc-related liability to a newly created entity, LTL Management LLC that would in turn receive a $30 billion funding agreement from J&J intended to cover LTL’s litigation liabilities and bankruptcy expenses and effect a settlement with the 61,000 claimants who allege that use of J&J’s talc-based products such as Johnson’s Baby Powder and Shower to Shower, caused their cancer. The three-judge panel ruled that the plan failed because LTL was not in “financial distress”, a requirement for filing “in good faith” for bankruptcy, and had not sufficiently proved that it warranted the protections of the bankruptcy court. In a 12-page opinion, Circuit Judge Thomas Ambro wrote:
No doubt that solvent companies, confronted by mass-tort litigation, can encounter significant financial distress that warrants bankruptcy. And when future insolvency is a realistic possibility based on meaningful evidence – not just the result of a highly speculative “worst-case” scenario – a mass-tort defendant has a viable case for bankruptcy.
In an effort to resolve the cases, J&J intends to file for bankruptcy a third time, provided it can get support from 75% of the claimants for a nearly $6.48 billion settlement that will extend over 25 years and is intended to resolve nearly 100% of the company’s ongoing talc litigation: voting on the plan ended July 26, 2024.
J&J maintains that its products are not contaminated with asbestos and have never caused cancer and has indicated that it will appeal the Third Circuit’s decision to the U.S. Supreme Court, arguing that the Third Circuit’s ruling is irreconcilable with the U.S. Bankruptcy Code.
The company continues to take the position that the bankruptcy plan as drafted and that the settlement is in the best interests of the claimants.
Resources
https://www.law360.com/articles/1862401/3rd-circ-again-tosses-j-j-talc-unit-s-texas-two-step-ch-11