Johnson & Johnson Refiles Talc Bankruptcy

The Third Circuit, in an opinion by Judge Ambro, dismissed Johnson & Johnson’s (“J&J”) Texas Two-Step bankruptcy attempt to place one of its subsidiaries holding talc liabilities in Chapter 11 bankruptcy, reasoning that the debtor did not suffer from financial distress. 

Facing nearly forty thousand claims for manufacturing baby powder allegedly containing carcinogenic talc, J&J took advantage of the Texas Two-Step to resolve its talc liabilities through a Chapter 11 bankruptcy. J&J split the subsidiary responsible for manufacturing baby powder containing talc (“Old Consumer”) into two corporate entities. The first corporate entity, J&J New Consumer (“New Consumer”), acquired all assets from Old Consumer and continued manufacturing and selling consumer goods. The second corporate entity, LTL Management (“LTL”), received all liabilities from Old Consumer, and LTL eventually filed for bankruptcy in the Western District of North Carolina to resolve its talc liabilities. The Western District of North Carolina transferred the case to New Jersey, which is in the Third Circuit. 

While J&J split these two entities, New Consumer entered into a funding agreement with LTL where it agreed to fund LTL’s talc liability up to the value of New Consumer at the time of the payment of funds. New Consumer’s value at the time of the Chapter 11 petition was estimated to be $61.5 billion. J&J also guaranteed the funding agreement, which meant that if the assets of New Consumer went down in value, J&J would make up the difference so that $61.5 billion in funds would still be available to LTL. 

Applying the good faith Chapter 11 petition standard under 11 U.S.C. § 1112(b), the Third Circuit noted that a valid bankruptcy purpose “assumes a debtor [is] in financial distress.” Focusing on the $61.5 billion right of payment against New Consumer and the J&J backstop if New Consumer’s assets fell below the $61.5 billion value, the Third Circuit held that LTL was not in financial distress when it filed its Chapter 11 petition. The Third Circuit reasoned that at the time of the Chapter 11 filing, LTL was highly solvent, with access to cash to meet its liabilities comfortably.  

After the Third Circuit’s bankruptcy dismissal, LTL re-filed a second bankruptcy action in April in the United States Bankruptcy Court for the District of New Jersey with the goal to equitably and efficiently resolve all claims arising from talc litigation against J&J. The second Chapter 11 proceeding includes an $8.9 billion settlement proposal backed by 80,000 claimants and the re-filed case addresses concerns cited in the Third Circuit’s opinion. On April 20, 2023, the New Jersey Bankruptcy Court authorized a preliminary injunction to extend the stay on pending cases in the J&J talc litigation. The stay will remain in place until June 15, 2023, providing additional time for the parties to reach a permanent resolution. In re LTL Mgt., LLC, 64 F. 4th 84 (3d Cir. Mar. 31, 2023).