Court Denies Dismissal of Chapter 11 Case in LTL Mass Tort Matter
In a ruling issued February 25, 2022, the U.S. Bankruptcy Court for the District of New Jersey denied motions to dismiss the chapter 11 case of Jones Day client LTL Management LLC (“LTL”), an indirect subsidiary of Johnson & Johnson (“J&J”). In so doing, the bankruptcy court: (1) determined that bankruptcy provides the optimal forum to resolve mass tort liability; and (2) found that the implementation of a “Texas Two-Step” divisional merger prior to the bankruptcy filing did not harm talc claimants. Despite a series of objections by representatives for talc claimants, the bankruptcy court ruled that LTL filed its chapter 11 case in good faith—and not as an improper litigation tactic—and concluded that, as compared with the U.S. tort system, bankruptcy offers both present and future LTL talc claimants the best opportunity to obtain equitable and timely recoveries.
The former Johnson & Johnson Consumer, Inc. (“Old JJCI”), which had manufactured and sold Johnson’s Baby Powder since 1979, was the subject of a deluge of talc-related litigation—38,000 pending cases, with about $4.5 billion in incurred indemnity and defense costs—alleging that JOHNSON’S® Baby Powder caused ovarian cancer and/or mesothelioma. As part of a strategy to effect an equitable and efficient resolution of all current and future talc claims without subjecting the entire Old JJCI enterprise to a complex, costly and value destructive bankruptcy proceeding, Old JJCI implemented a corporate restructuring that allocated its liability for talc claims to LTL. Under Texas law, the company undertook a divisional merger whereby Old JJCI ceased to exist and two new companies—LTL and a new Johnson & Johnson Consumer, Inc. (“New JJCI”)—were created. LTL was allocated all talc-related liabilities of Old JJCI and certain assets, and New JJCI was allocated all of Old JJCI’s other assets and liabilities. LTL also acquired rights under a funding agreement that jointly obligates New JJCI and J&J to fund liability for talc claims in an amount up to the enterprise value of New JJCI (without accounting for talc liability).
The funding agreement and LTL's other assets served to ensure that LTL would have the same, if not greater, ability to fund the costs of defending and resolving talc claims as Old JJCI did prior to the restructuring.
LTL filed for chapter 11 protection on October 14, 2021. An official committee of talc claimants appointed in the LTL bankruptcy and a talc plaintiffs’ law firm filed motions to dismiss the case, arguing that talc claimants were best served by seeking recoveries through the U.S. tort system and that LTL (and the J&J enterprise generally) abused the bankruptcy system by commencing a chapter 11 case following the corporate restructuring. The movants also argued that J&J orchestrated the “Texas Two-Step” in bad faith to shield itself from liability and cap plaintiff recoveries.
LTL countered that the corporate restructuring and bankruptcy filing were intended “to produce an equitable resolution of both current and future talc claims by means of a settlement trust that can promptly, efficiently, and fairly compensate claimants.” LTL characterized its experience in the U.S. tort system as a “lottery in which a few plaintiffs have obtained recoveries ranging from tens of millions to multiple billions in dollars, while others have been denied recoveries completely,” providing scant protection to future talc claimants. LTL also argued that neither the corporate restructuring nor the bankruptcy would enable LTL or its affiliates to escape liability, and that all of the assets and funding sources that were available pre-bankruptcy to satisfy talc claims would remain available in the bankruptcy.
In his opinion denying the motions to dismiss, Chief U.S. Bankruptcy Judge Michael B. Kaplan wrote “Let’s be clear, the filing of a Chapter 11 case with the expressed aim of addressing the present and future liabilities associated with ongoing global personal injury claims to preserve corporate value is unquestionably a proper purpose under the Bankruptcy Code.”
According to Chief Judge Kaplan, the “Debtor’s efforts to address the financially draining mass tort exposure through a bankruptcy is wholly consistent with the aims of the Bankruptcy Code.” He also noted that “[T]his 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.”
Chief Judge Kaplan regarded as “folly . . . the contention that the tort system offers the only fair and just pathway of redress and that other alternatives should simply fall by the wayside.” Instead, he wrote, “It is manifestly evident that Congress did not share this narrow view in developing the structure of asbestos trusts under §524(g)” and the chapter 11 process offers “a meaningful opportunity for justice, which can produce comprehensive, equitable, and timely recoveries for injured parties.”
Consistent with Old JJCI's fiduciary obligations and corporate responsibilities, Chief Judge Kaplan found it unsurprising that Old JJCI (or J&J management) would seek to limit exposure to present and future talc claims. He also found that, “merely seeking to limit liabilities, standing alone, does not demonstrate ‘bad faith’ for purposes of filing under chapter 11.”
“Let me be clear,” Chief Judge Kaplan wrote, “this is not a case of too big to fail . . . rather, this is a case of too much value to be wasted, which value could be better used to achieve some semblance of justice for existing and future talc victims.”
He further observed that “The decision to seek resolution of the present and future talc claims within the bankruptcy system, through a § 524(g) asbestos settlement trust in lieu of continued state court litigation, is consistent with congressional objectives dating back to implementation of the § 524 asbestos provisions, which codified the approach taken in In re Johns-Manville.” In addition, he wrote, “Without more, merely availing itself of chapter 11 tools does not constitute an improper litigation tactic.”
Addressing the use of the “Texas Two-Step,” Chief Judge Kaplan found “nothing inherently unlawful or improper with application of the Texas divisional merger scheme in a manner which would facilitate a chapter 11 filing for one of the resulting new entities.”
The Jones Day restructuring team advising LTL is led by Greg Gordon and includes Dan Prieto, Brad Erens, Dan Merrett, Amanda Rush, Caitlin Cahow, Genna Ghaul and Isel Perez.