liabilities

You have to actually be broke to file for bankruptcy protection — at least that’s what a federal appellate court ruled Monday.

Driving the news: The court dismissed the bankruptcy filing by a subsidiary of corporate giant Johnson & Johnson. J&J created the unit — dubbed LTL Management — for the express purpose of holding legal liabilities and then filing for Chapter 11.

Why it matters: The ruling undercuts the emerging corporate strategy of using bankruptcy to excise costly liabilities when the organization itself is perfectly solvent.

• “Because LTL was not in financial distress, it cannot show its petition served a valid bankruptcy purpose and was filed in good faith,” a three-judge panel said in its unanimous ruling.

Catch up quick: J&J faces some 38,000 lawsuits from people and their survivors claiming that the company’s talc-based powder caused cancer. J&J has repeatedly denied the allegation.

• Critics say that transferring the litigation claims to the new subsidiary and placing that unit in bankruptcy was a tactic to cap J&J’s exposure to the liabilities.

State of play: At the time it put newly formed subsidiary LTL Management into bankruptcy in October 2021, J&J had an equity value of more than $400 billion, a AAA credit rating, and $31 billion in cash and marketable securities.

• That means it almost surely had ample liquidity to pay LTL’s obligations — and can’t instead use the bankruptcy process, the court ruled. When LTL filed for bankruptcy, J&J was worth at least 25 times more than its estimated total product liabilities over