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INSIGHT-Corporate lawsuit dodge imperiled after court rejects J&J bankruptcy tactic

  • February 14, 2023

Attorney Greg Gordon, a partner at the Jones Day law firm, offered an innovative solution to Johnson & Johnson and other major companies that faced mountains of lawsuits alleging their products sickened or killed people: They could use the bankruptcy system to force all plaintiffs into one settlement.

It required fancy legal footwork — creating a subsidiary to shoulder all the liability, then putting that new company into Chapter 11. Plaintiffs’ lawyers attacked the gambit, known as the “Texas two-step,” charging it amounted to a bad-faith bankruptcy filing and a fraudulent ploy to shield the parent companies’ assets. Not so, Gordon told judges overseeing bankruptcies testing the novel strategy. The parent firms, he said, would give these subsidiaries plenty of money — billions of dollars — to compensate plaintiffs.

It turns out that Gordon’s play to reassure bankruptcy judges created a new legal problem. The 3rd Circuit Court of Appeals on Monday stopped the music on J&J’s two-step, ruling that its cash-flush subsidiary had no legitimate claim to bankruptcy protection because it wasn’t in “financial distress.” The ruling forces J&J back into trial courts to battle nearly 40,000 lawsuits and casts a cloud over the legality of the Texas two-step strategy. The plaintiffs allege J&J’s talc products, including Baby Powder, caused cancer, which the company denies.

The appeal court judges’ reasoning underscored what some legal experts call an inherent contradiction: bankruptcies being executed by multinational firms worth billions of dollars that were in little danger of running out of money to pay plaintiff-creditors. The panel dismissed the main argument underpinning Gordon’s and the companies’ primary defense of the strategy. The companies had contended the bankruptcies served the greater good of all parties, including plaintiffs, by delivering fair payouts more efficiently and equitably than the “lottery” offered

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