Johnson & Johnson’s Second Attempt at a Texas Two-Step Bankruptcy Case is Rejected by the Bankruptcy Court
We previously reported on the Third Circuit’s decision to dismiss the New Jersey bankruptcy case filed by a Johnson & Johnson (“J&J”) subsidiary, LTL Management LLC (“LTL”). The Third Circuit concluded that J&J’s attempt to consolidate and resolve more than 40,000 lawsuits alleging its baby powder products caused cancer by creating LTL and transferring the liability to it prior to commencing bankruptcy constituted an improper and bad faith filing.
As also reported, in response to the dismissal, LTL commenced a second bankruptcy case in the District of New Jersey to obtain approval of a reorganization plan providing for an $8.9 billion proposed settlement payout to lawsuit claimants, which represented an increase of $6.9 billion over the $2 billion J&J previously agreed to establish as a qualified settlement fund in the prior case.
Notwithstanding its new financing arrangements, on July 28, 2023, Chief Bankruptcy Judge Michael B. Kaplan dismissed the new filing due to debtor’s lack of “imminent and immediate financial distress” after holding a four-day evidentiary hearing where he considered ten motions to dismiss the bankruptcy case.
In his opinion, Judge Kaplan began by noting the movants all sought dismissal of the second chapter 11 case “for cause” under 11 U.S.C. §1112(b), as not having been filed in good faith. The Court explained that “good faith necessarily requires some degree of financial distress on the part of a debtor,” and that the Third Circuit requires a debtor’s distress to be “immediate”, “imminent” and “apparent.” The Third Circuit has also stated that “an attenuated possibility standing alone” fails to adequately demonstrate good faith. Judge Kaplan explained that “as it stands now, in gauging financial distress, observing smoke may not be enough—one must see flames.”
Although it is undisputed that LTL faces massive tort liability, both presently and in the future, Judge Kaplan focused on several facts that did not establish debtor’s financial distress, including the fact that LTL was solvent and able to satisfy its liabilities as of the petition date. In addition, due to a new funding agreement, a forced liquidation “could cover the Debtor’s total estimated worst-case scenario for talc liability.” Thus, the Court concluded that LTL was not satisfactorily distressed to escape dismissal of its chapter 11 case … again.
The Official Committee of Talc Claimants (“Talc Claimants”), a committee appointed by the Office of the United States Trustee, agreed with Judge Kaplan’s decision, and stated they would like a provision in the dismissal order prohibiting LTL from filing another chapter 11 case for six months. Judge Kaplan asked the parties to submit short letter briefs about their stances on any disputed provisions along with any supporting case law.
J&J intends to appeal the dismissal immediately and will seek permission to bypass the District Court and have the appeal heard by the Third Circuit Court of Appeals. The attorney for the Talc Claimants stated his clients will agree to a certification for direct appeal. However, even if expedited directly to the Third Circuit, it is anticipated J&J’s appeal will take at least several months. Falcon Rappaport & Berkman will continue to follow this case and provide updates to its clients and colleagues.
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