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On February 25, after a five day trial, U.S. Bankruptcy Judge Michael Kaplan of the U.S. Bankruptcy Court for the District of New Jersey, affirmed Johnson and Johnson’s use of a divisive merger known as the “Texas two-step” to resolve the talc-based litigation pending against it. In his 56-page opinion, Judge Kaplan rejected the argument that the move was an abuse of the Chapter 11 bankruptcy system, stating:
“Determining whether Debtor is pursuing a valid bankruptcy purpose through this chapter 11 proceeding also requires the Court to examine a far more difficult issue—whether there is available to Debtor and the tort claimants a more beneficial and equitable path toward resolving Debtor’s ongoing talc-related liabilities. For the reasons which follow, this Court holds a strong conviction that the bankruptcy court is the optimal venue for redressing the harms of both present and future talc claimants in this case—ensuring a meaningful, timely, and equitable recovery.”
Judge Kaplan noted that “defending just the over 38,000 pending ovarian cancer claims through trial would cost up to $190 billion”. He added further that “the Court simply cannot accept the premise that continued litigation in state and federal courts serves best the interest of their constituency” pointing to the “substantial risks” faced by plaintiffs in the tort system who have been denied any recovery at all or whose verdicts have been reversed on appeal.
J&J’s use of the controversial legal maneuver, which critics claim is an attempt by the company to avail itself of the bankruptcy system while remaining profitable and avoiding ongoing litigation, dates to October, 2021 when the company created the subsidiary LTL Management to absorb its talc litigation liabilities and two days later had the new company declare bankruptcy. J&J then also sought a stay of the litigation pending against it. The Official Committee of Talc Claimants then filed a motion to dismiss J&J’s chapter 11 case, alleging that it had not been filed in good faith. In its motion, the Committee stated that the purpose of the creation of LTL and its subsequent bankruptcy was to:
“protect J&J and its other valuable non-debtor affiliates. Specifically, this case was filed to shield J&J from liability for the production, marketing, and sale of carcinogenic products for decades, and to remove its valuable operating assets from the reach of a single group of creditors (the talc claimants). All of this, of course, without J&J and its operating entities having to subject themselves, and their assets, to the transparency and scrutiny of Chapter 11.”
According to an amicus brief filed by more than a dozen law professors earlier in February,
“the strategy employed here—manufacturing an undercapitalized company solely to file for bankruptcy for that entity—is a novel and dangerous tactic that represents a “significant departure from the use of Chapter 11 to validly reorganize financially troubled businesses.” The Amici Professors believe this strategy is a direct attack on the fundamental integrity of the Chapter 11 system, which is intended to protect honest but unfortunate debtors who are willing to subject themselves and their assets to the supervision of the Court. Solvent tortfeasors, like J&J, should not be permitted to use Chapter 11 as a tool to shield assets from the claims of their victims.”
The U.S Trustee also opposed the creation of LTL, arguing that its officers and directors were not sufficiently independent of the parent company, J&J, to act in good faith.
In response, J&J has maintained that the LTL bankruptcy and subsequent creation of a settlement trust fund with $2 billion is the most efficient and equitable way to handle its talc litigation liability and ensure all claimants are able to recover.
Counsel for a number of the claimants have stated they will pursue an appeal of Judge Kaplan’s ruling. At a hearing scheduled for March 8, the Judge as also stated he will consider appointing an independent examiner tasked with evaluating J&J’s corporate restructuring. The litigation stay will remain in place until June 29 while the parties pursue a settlement of J&J’s talc liabilities.
Read more of our blogs on the talc litigation.
