On Wednesday, March 22, Johnson & Johnson’s motion to have the full U.S. Circuit Court of Appeals for the Third Circuit rehear its subsidiary, LTL Management LLC’s bankruptcy case was denied, related to the 38,000 filed talcum litigation cases. The decision prompted the New Jersey-based pharmaceutical giant to state it will seek review by the U.S. Supreme Court. In its ruling, the full Third Circuit agreed with the earlier panel that found that LTL was not in financial distress when it filed for bankruptcy, noting that J&J had committed to provide its newly-formed subsidiary with billions to resolve nearly 38,000 talcum lawsuits filed against it.
After LTL’s bankruptcy was dismissed by a three-judge panel of the Third Circuit in January 2023, J&J had petitioned for a rehearing by the full Third Circuit. At issue was J&J’s use of a controversial bankruptcy maneuver known as “the Texas two-step” in which the parent company creates a subsidiary into which it transfers all its litigation liabilities and then declares Chapter 11 bankruptcy for the newly spun-off subsidiary. J&J contends that this process is the best alternative to ensure that all those with talcum litigation claims will be fairly compensated. Plaintiffs argue, however, that the process is inherently unfair, allowing financially solvent parent companies to improperly avail themselves of the bankruptcy system, thereby shielding themselves from accountability for wrongdoing.
At the February hearing by a three-judge panel of the Third Circuit, the court ruled that:
Our decision dismisses the bankruptcy filing of a company created to file for bankruptcy. It restricts J&J’s ability to move thousands of claims out of trial courts and into bankruptcy court so they may be resolved, in J&J’s words, “equitably” and “efficiently.” LTL Br. 8. But given Chapter 11’s ability to redefine fundamental rights of third parties, only those facing financial distress can call on bankruptcy’s tools to do so. Applied here, while LTL faces substantial future talc liability, its funding backstop plainly mitigates any financial distress foreseen on its petition date.
In addition, the panel noted:
“Chapter 11 is appropriate only for entities facing financial distress. This safeguard ensures that claimants’ pre-bankruptcy remedies—here, the chance to prove to a jury of their peers injuries claimed to be caused by a consumer product—are disrupted only when necessary.”
J&J maintains that its talc products do not contain asbestos; in response to the Third Circuit decision, the company stated:
“Our review petition raised significant concerns with the Third Circuit’s decision, both in how it applied the law to the facts of Judge Kaplan’s ruling, as well as the impracticality of the Third Circuit’s new legal standard. We will immediately move for a stay of this opinion so we can seek review directly from the U.S. Supreme Court.
Today’s ruling ignores the facts established during the Bankruptcy Court’s trial regarding the appropriateness of LTL Management’s (LTL) formation and filing, as well as the Company’s intention to efficiently resolve the cosmetic talc litigation for the benefit of all parties, including current and future claimants.”