Bankruptcy Law

Judge reluctantly tosses second bankruptcy attempt by baby powder maker Johnson & Johnson

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Baby powder from Johnson and Johnson being shaken into a person's hand

Johnson & Johnson is facing tens of thousands of lawsuits alleging that traces of asbestos could be found in its baby powder and other products, causing ovarian cancer and mesothelioma. Photo by Rafael Henrique/SOPA Images/Sipa USA via the Associated Press.

A federal bankruptcy judge has reluctantly thwarted Johnson & Johnson’s second attempt to protect itself from claims related to its baby powder through the bankruptcy of a subsidiary created to hold Johnson & Johnson liabilities.

Chief U.S. Bankruptcy Judge Michael B. Kaplan of the District of New Jersey on Friday dismissed the bankruptcy case filed by LTL Management, report, Reuters, Bloomberg Law and the New York Times.

Kaplan reasoned that LTL Management is not in imminent or immediate financial distress, the standard for bankruptcy set by the 3rd U.S. Circuit Court of Appeals at Philadelphia when it rejected LTL Management’s first bankruptcy.

Johnson & Johnson is facing tens of thousands of lawsuits alleging that traces of asbestos could be found in its baby powder and other products, causing ovarian cancer and mesothelioma.

When LTL Management initially filed for bankruptcy, it had a funding agreement entitling it to indemnity from Johnson & Johnson for talc cost. The estimated value of the agreement was about $61.5 billion.

In the new bankruptcy, Johnson & Johnson agreed to pay $8.9 billion into a trust fund to settle current and future talc cancer cases in a deal supported by about 60,000 talc plaintiffs. Johnson & Johnson also “watered down its support for LTL,” according to Bloomberg Law.

Kaplan had found sufficient financial distress in the first bankruptcy, but he was reversed by the 3rd Circuit. And he is bound by that precedent, Kaplan said.

“One can view the 3rd Circuit’s ruling as being somewhat at odds with a pro-active approach to trouble,” Kaplan wrote. “When one smells smoke, the wise course of action is to get out of the house and call for help. However, as it stands now, in gauging financial distress, observing smoke may not be enough—one must see flames.”

Kaplan noted a $4.5 billion verdict against Johnson & Johnson and wondered how many more similar-sized verdicts must be rendered until the claims are deemed a threat to LTL Management.

“At what frequency must large verdicts be handed out before it is apparent that a debtor will come close to exhausting its funding capacity?” he asked. “These are questions for another day.”

Johnson & Johnson created LTL Management in what is known as a “Texas two-step,” named for the Texas divisional merger statute. It involves a company splitting in two, with corporate assets and liabilities divided between the new entities. The old company then dissolves. The second new entity formed by Johnson & Johnson was Johnson & Johnson Consumer Inc., which later changed its name to Johnson & Johnson HoldCo.

Johnson & Johnson planned to appeal. The company also said it would continue to defend itself against suits that are “specious and lack scientific merit,” according to Reuters.

Erik Haas, Johnson & Johnson’s worldwide vice president of litigation, gave a statement to the New York Times and other publications with coverage.

“We respectfully disagree with the bankruptcy court’s conclusion that the ‘substantial liability’ that LTL faces from the massive volume of talc claims asserted against it does not establish ‘immediate’ financial distress under the standard imposed by the 3rd Circuit, which itself is found nowhere in the bankruptcy code and is contrary to the persuasive authority from other circuit courts and directives of the Supreme Court of the United States.”

See also: “‘The gloves are off’: Baby powder maker J&J sues doctors who linked talc products to cancer” “Johnson & Johnson tries once again to settle talc claims through ‘Texas two-step’ bankruptcy” “3rd Circuit tosses talc defendant’s ‘Texas two-step’ bankruptcy”

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

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