Bankruptcy Law

Johnson & Johnson tries once again to settle talc claims through 'Texas two-step' bankruptcy

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A Johnson & Johnson unit is back in bankruptcy court again, after its first attempt to settle looming talcum powder cases failed because it wasn’t in financial distress.

This time, Johnson & Johnson is agreeing to pay $8.9 billion to settle the cancer cases, which “dwarfs J&J’s original offer of $2 billion,” Reuters reports.

The $8.9 billion in funding would “constitute the largest resolution in any mass tort product liability bankruptcy case,” according to an April 4 court filing.

Other publications with coverage include the Washington Post, Legal Dive and Bloomberg Law (here and here). An April 4 press release is here.

Plaintiffs’ lawyers had appealed and won after the first bankruptcy filing. The 3rd U.S. Circuit Court of Appeals at Philadelphia ruled in January that the new unit, LTL Management, couldn’t seek bankruptcy protection because it wasn’t in financial distress because of an indemnity agreement with Johnson & Johnson.

Johnson & Johnson said the refiled case “addresses the 3rd Circuit’s concerns.” The original indemnity agreement has been terminated, and a new funding agreement is in place.

Bloomberg Law spoke with experts who doubted the new bankruptcy will work.

“This is a rather audacious ploy,” said Ralph Brubaker, a professor at the University of Illinois College of Law. “Such cynical strategic machinations to manufacture self-inflicted financial distress hardly bolster the case for a legitimate, good faith resort to bankruptcy relief.”

Mikal Watts, a plaintiffs lawyer who helped negotiate the agreement, told Reuters that the settlement will win approval because it has support from a sufficient number of plaintiffs. In asbestos-related bankruptcies, a restructuring plan needs approval from 75% of creditors to get a bankruptcy judge’s approval, according to Reuters.

More than 60,000 current talc claimants have committed their support for the plan through their lawyers.

Johnson & Johnson is seeking to limit its liabilities through a “Texas two-step” bankruptcy. It involves a company splitting in two, with corporate assets and liabilities divided between the new entities. The old company then dissolves.

Johnson & Johnson’s two-step created LTL Management, which mostly held the talc liabilities, and Johnson & Johnson Consumer Inc., which mostly held almost all the old Johnson & Johnson’s productive business assets.

Plaintiffs suing Johnson & Johnson allege that talc in the company’s baby powder caused ovarian cancer and mesothelioma. Tens of thousands of lawsuits have been filed. Some suits produced verdicts, some failed and others settled. One jury awarded $4.69 billion to 22 ovarian cancer patients, which was reduced on appeal to $2.24 billion to 20 plaintiffs still in the litigation.

In its press release, Johnson & Johnson said the bankruptcy filings are not “an admission of wrongdoing, nor an indication that the company has changed its longstanding position that its talcum powder products are safe.”

See also:

ABA Journal: “Gaming the System? Inside the ‘Texas two-step’ strategy profitable companies use to file for bankruptcy”

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