A U.S. appeals court upheld the decision to end J&J’s second attempt to resolve tens of thousands of cancer lawsuits through a shell company’s bankruptcy. J&J, meanwhile, is pressing forward with its third bankruptcy strategy.
On Thursday, the 3rd U.S. Circuit Court of Appeals ruled that the company’s second effort, like its first, failed because the shell company it placed into bankruptcy was not in “financial distress.”
J&J, expecting this outcome, is moving ahead with a revised plan to settle lawsuits alleging its baby powder and other talc products were contaminated with asbestos, causing ovarian and other cancers. J&J maintains that its talc products do not contain asbestos and do not cause cancer but is pursuing a third bankruptcy to resolve claims from about 61,000 plaintiffs and prevent future lawsuits.
J&J is currently gathering votes from claimants alleging injury from their talc products and plans to place a shell company into bankruptcy for a third time if it garners support from 75% of these claimants. Votes on J&J’s proposal are due today, with counting expected to take a few weeks.
The 3rd Circuit’s decision upheld a U.S. bankruptcy judge’s dismissal of the earlier bankruptcy of J&J subsidiary LTL Management, which had provided only “speculative” evidence of sufficient “financial distress” to justify bankruptcy protections.
A three-judge panel of the appeals court rejected LTL’s argument that the “financial distress” standard was overly restrictive, preventing companies facing numerous lawsuits from seeking bankruptcy. Circuit Judge Thomas Ambro wrote that solvent companies facing mass-tort litigation could experience significant financial distress warranting bankruptcy if future insolvency is a realistic possibility based on meaningful evidence.
J&J plans to appeal to the U.S. Supreme Court, according to Erik Haas, the company’s vice president of litigation. However, Haas stated that the 3rd Circuit’s ruling will not affect J&J’s ongoing efforts to secure support for its revised settlement offer. J&J remains confident in obtaining votes from over 75% of talc claimants.
Andy Birchfield, an attorney representing ovarian cancer plaintiffs against J&J, warned that the decision should signal to J&J that its bankruptcy focus is “unlawful and also defies common sense.”
Even if J&J achieves the 75% threshold in its current voting period, its bankruptcy strategy faces legal challenges. The U.S. Supreme Court’s recent Purdue Pharma ruling limited courts’ ability to halt lawsuits against non-bankrupt entities like J&J without plaintiffs’ consent. Attorneys opposing J&J’s settlement offer argue that the new deal still fails under the “financial distress” standard set by the 3rd U.S. Circuit.
J&J contends that the Purdue ruling does not impact its settlement proposal, as it qualifies for specific non-debtor protections allowed for asbestos defendants under U.S. bankruptcy law. However, new legislation proposed this week could impede J&J’s strategy by limiting the “Texas two-step” tactic it used to transfer talc liabilities to a shell company. A bipartisan group of Senators argued that financially healthy companies like J&J should not exploit bankruptcy courts to evade responsibility for injuries caused.
The Texas two-step involves using Texas corporate law to split a business into two companies: one that retains assets and another, a shell company, that inherits liabilities, including lawsuits. The shell company then files for bankruptcy protection, blocking lawsuits against its well-funded affiliates.
The case is In Re: LTL Management, U.S. Court of Appeals for the Third Circuit, Nos. 23-2971 and 23-2972. For LTL, attorneys Gregory Gordon, Noel Francisco, and Kevin Marshall of Jones Day are representing. For the official committee of talc claimants, attorneys Jeffrey Lamken of MoloLamken and Jonathan Massey of Massey & Gail are representing.
