Johnson & Johnson is exploring placing a subsidiary that takes on tens of thousands of talc lawsuits into bankruptcy proceedings for the second time, despite a January federal appeals court ruling overturning the so- Texas’ two-step legal maneuver, according to a court filing and four people familiar with the case.
A J&J attorney tasked with settling about 40,000 lawsuits alleging the company’s iconic baby powder and other talc-based cosmetics cause cancer has approached plaintiffs’ attorneys in recent weeks. The attorney offered the two sides a deal to resolve the dispute, which would then be consummated after the J&J subsidiary filed for bankruptcy again, the sources said. Some plaintiffs’ attorneys have signed confidentiality agreements to discuss the idea, one of the people said.
In a court filing on Tuesday, attorneys representing a committee of creditors for talc plaintiffs said they had recently become aware of discussions regarding the bankruptcy of a second J&J subsidiary. “As the [committee] is charged with representing the interests of all talc plaintiffs, it must now advise this Court and the public that Johnson & Johnson and/or its affiliates…have threatened to file for a second bankruptcy filing.”
Johnson & Johnson did not immediately respond to requests for comment.
J&J executed a two-step bankruptcy in Texas in October 2021. The new tactic is to use a Texas state law to split a sued company in two, then transfer liability to one of the newly created subsidiaries. The J&J subsidiary that was to absorb responsibility for the talc business, LTL Management, declared bankruptcy almost immediately after its creation.
LTL initially offered to pay $2 billion to settle the dispute and possibly more. J&J agreed to fund any settlement that a bankruptcy court ultimately approved.
Many plaintiffs’ attorneys have decried J&J’s two-step, describing it as an abuse of the bankruptcy system by a multinational conglomerate with a market capitalization of over $400 billion that is unlikely to run out of money to pay plaintiffs.
Andy Birchfield, plaintiffs’ attorney at law firm Beasley Allen, said on Tuesday that the claims “could easily be resolved if Johnson & Johnson stopped playing games and abusing the bankruptcy court process.”
J&J and its subsidiary argued that bankruptcy served a greater good for all parties, including plaintiffs: restructuring could provide more just, efficient and equitable settlement payments than a “lottery” offered by the courts of trial, where some litigants get big rewards and others get nothing.
Last year, Reuters detailed secret two-step Texas planning by J&J and three other big companies in a series of reports exploring the companies’ attempts to evade prosecution through bankruptcies.
The 3rd US Circuit Court of Appeals in Philadelphia dismissed J&J’s scheme in January, ruling that the cash-flow subsidiary had no legitimate claim for bankruptcy protection because it was not in financial difficulty. The appeals court pointed to a funding agreement between J&J and its subsidiary that provided the new unit with the financial means to settle the lawsuits.
The appeals court in late March rejected the J&J subsidiary’s offer to delay the ruling as it seeks a review by the U.S. Supreme Court. The appeals court also previously denied the J&J subsidiary’s request to reconsider its decision.
The judge handling the case on Tuesday said he plans to dismiss the bankruptcy of the J&J unit as of today. This would allow prosecutions and trials to resume in courts across the United States.
Now talks are underway for the J&J subsidiary to file for bankruptcy a second time and again seek to end the lawsuits and force a settlement in bankruptcy court, people familiar with the matter said.
How the J&J subsidiary could reconcile such a decision with the decision of the court of appeal remained unclear.
One strategy the J&J subsidiary could try is to reach a settlement with a super majority of plaintiffs before any filing for bankruptcy, people familiar with the matter said. The essence of this strategy is to persuade lawyers representing 75% of plaintiffs to settle in advance.
This threshold is required for a bankruptcy judge to approve settlements in cases involving asbestos, a higher bar than other types of Chapter 11 court restructurings. A December 2018 Reuters investigation found that J&J was aware for decades of tests showing its talc sometimes contained carcinogenic asbestos, but hid this information from regulators and the public. J&J has denied that its talc contains asbestos.
Getting a broad agreement among the plaintiffs for a settlement could ease the J&J subsidiary’s path if it files for a second bankruptcy. In the first instance, litigants resisted the arrangement, balking at the company’s initial $2 billion offer. Court-ordered mediation sessions did not result in an agreement.
Even with a pre-arranged settlement, however, a minority of talc plaintiffs could ask the bankruptcy judge to dismiss the Chapter 11 filing again, triggering the same hearings and rulings that led the appeals court to strike down the tactic in first place.
A JUDGE’S WARNING
The key challenge facing J&J is how to circumvent the problem identified by the 3rd Circuit – the fact that its well-capitalized subsidiary had no legal right to bankruptcy protection. The decision cited the funding agreement between J&J and its subsidiary, calling on J&J to provide billions of dollars to pay the settlements.
However, abandoning the funding agreement could create further legal issues for J&J. Judge Thomas Ambro, the appeals court judge who wrote the ruling reversing J&J’s two-steps, warned that without the funding agreement, the company could breach fraudulent transfer prohibitions.
These rules generally apply to companies seeking to transfer assets out of a company just before filing for bankruptcy, in order to put them out of reach of creditors. In J&J’s case, however, transferring all lawsuits to another company — one with no money to compensate plaintiffs — could run afoul of the same rules.
J&J has long been aware of this legal trap. Greg Gordon, the Jones Day attorney who led J&J’s two-stage planning and execution in Texas, previously said the financing deal was designed to shield J&J from charges of such fraudulent conduct.
“We don’t even want to discuss” fraudulent transfers, Gordon said at an April 2021 conference in Washington, explaining why J&J accepted “unlimited funding” from the subsidiary under bankruptcy protection.
Jones Day did not immediately respond to requests for comment.
Ambro, in the appeals court ruling, said of those assurances, “We take J&J and LTL at their word and agree” that the subsidiary had a lot of money, explaining why LTL did not qualify for the bankruptcy.
The judge noted that J&J’s promise of unlimited funding was essentially an “ATM” for the subsidiary, insulating it from “any threat to its financial viability”.