In a big win for plaintiffs suing over Johnson & Johnson’s baby powder, an appeals court dismissed a Chapter 11 talc case that had halted trials across the country.
On Monday, the U.S. Court of Appeals for the Third Circuit found that the subsidiary, LTL Management, which had a $61 billion funding agreement with Johnson & Johnson, was not in financial distress when it filed for bankruptcy in 2021. The ruling reverses a Feb. 25 decision by U.S. Bankruptcy Chief Judge Michael Kaplan of the District of New Jersey.
“Good intentions—such as to protect the J&J brand or comprehensively resolve litigation—do not suffice alone,” Judge Thomas Ambro wrote in the unanimous opinion. “What counts to access the bankruptcy code’s safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not.”
The ruling is a big win for plaintiffs alleging in nearly 40,000 talcum powder cases that Johnson & Johnson’s baby powder caused ovarian cancer or mesothelioma.
“The doors to the courthouse, which had been slammed shut by J&J’s cynical legal strategy, are once again open, as they should be,” wrote Leigh O’Dell, a partner at Montgomery, Alabama’s Beasley Allen who is co-lead plaintiffs counsel in the talc multidistrict litigation. “Given that, we will immediately seek to return these cases to their rightful venues in federal and state district courts, efficiently schedule and conduct trials, and establish the liability of Johnson & Johnson for the deaths and disease suffered by thousands of women.”
Chris Placitella of Cohen, Placitella & Roth in Red Bank, New Jersey, is liaison counsel in talc multidistrict litigation and represents mesothelioma clients. Placitella said he expected filing new complaints immediately, saying, “it’s over.”
“With all due respect to Judge Kaplan, who has stated multiple times on the record that he was waiting to hear from the Third Circuit as to whether he was going to continue the case, the Third Circuit has spoken today,” he said. “No, you can’t.”
The decision isn’t limited to talc cases, O’Dell added. She called it a “landmark ruling” for companies turning to bankruptcy to resolve mass tort litigation.
“The court has sent a message to corporate America that a bankruptcy action must be legitimately pursued in good faith for the purposes of reorganization, rather than solely to gain an advantage over consumers or other claimants in litigation,” she wrote.
A Johnson & Johnson spokeswoman said the company planned to petition the Third Circuit to rehear the bankruptcy case en banc.
The statement says: “LTL Management LLC (LTL) initiated this process in good faith and our objective has always been to equitably resolve claims related to the company’s cosmetic talc litigation. Today’s ruling does not reflect the facts established during the bankruptcy court’s trial regarding the appropriateness of LTL’s formation and filing, nor the company’s intention to efficiently resolve the cosmetic talc litigation for the benefit of all parties, including current and future claimants.”
‘At Best the Filing Was Premature’
LTL Management, which was created through a divisional merger called a “Texas two-step,” filed its Chapter 11 case in 2021. As part of the bankruptcy plan, Johnson & Johnson offered to compensate cancer victims with a $2 billion trust fund.
On Sept. 19, the Third Circuit heard oral arguments from LTL Management, the Official Committee of Talc Claimants, plaintiffs firm Arnold & Itkin, which has 7,000 talc clients, and the U.S. trustee, who argued to dismiss the Chapter 11 case.
At issue was whether LTL Management filed its bankruptcy in bad faith.
In Monday’s ruling, the Third Circuit steered its focus primarily on whether LTL Management was in financial distress at the time it filed for bankruptcy.
The panel parted with Kaplan on that issue largely because it considered the financial condition of LTL Management, created days before its Chapter 11 filing, apart from Johnson & Johnson’s consumer unit that existed before the bankruptcy. LTL Management had a funding “backstop, not unlike an ATM disguised as a contract” to pay for talc liabilities, the panel wrote.
“From these facts—presented by J&J and LTL themselves—we can infer only that LTL, at the time of its filing, was highly solvent with access to cash to meet comfortably its liabilities as they came due for the foreseeable future,” Ambro wrote. “At best the filing was premature.”
The panel also noted that, although one Missouri jury awarded nearly $4.7 billion to 22 ovarian cancer victims, that 2018 verdict, which was reduced on appeal, wasn’t the norm. Other verdicts totaled $39.7 million, while Johnson & Johnson won some trials and settled 6,800 others for less than $1 billion. Johnson & Johnson also got 1,300 talc cases dismissed, the panel noted.
The opinion relied heavily on Third Circuit precedential decisions that had dismissed other Chapter 11 cases for similar reasons. In a footnote, the panel noted that had LTL Management’s Chapter 11 case remained in the Fourth Circuit, where it was initially filed in the U.S. Bankruptcy Court for the Western District of North Carolina, the outcome could have been different.
“In the Fourth Circuit, a court can only dismiss a bankruptcy petition for lack of good faith on a showing of the debtor’s ‘subjective bad faith’ and the ‘objective futility of any possible reorganization,’” the footnote says. “The bankruptcy court in the district of New Jersey described this as a ‘much more stringent standard for dismissal of a case for lacking good faith’ than the Third Circuit’s test.”
“At the same time the bankruptcy court grappled substantially with existing circuit case law, it made much of LTL’s novel design and the reasons for it,” the panel wrote, referring to Kaplan. “Our precedents show a debtor who does not suffer from financial distress cannot demonstrate its Chapter 11 petition serves a valid bankruptcy purpose supporting good faith.”
That doesn’t mean bankruptcy isn’t a possibility for LTL Management down the line, should talc liabilities rise substantially, nor for other companies with financial hardships due to mass tort liabilities, the panel wrote, noting that “we mean not to discourage lawyers from being inventive.” The panel did not address the use of the “Texas two-step,” leaving that “for another day and another case.”
The panel wrote, “The takeaway here is that when financial distress is present, bankruptcy may be an appropriate forum for a debtor to address mass tort liability.”
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