Johnson & Johnson: A Bankruptcy Filed In Good Faith

Good faith activity? (Photo by Marilyn Swanson)

By: Donald L Swanson

Johnson & Johnson and its affiliates (“J&J”) have been selling baby powder for decades.

Along the way, studies began showing that talc in J&J’s baby powder can cause ovarian cancer and mesothelioma.  So, since 2016, over 38,000 lawsuits have been filed against J&J contending its baby powder talc causes cancer.

In July of 2018, the talc litigation against J&J built-up serious steam when a jury awarded 22 women a $4.69 billion (yes, with a “b”) verdict against J&J—an appellate court reduced the verdict to $2.25 billion.

Since January of 2020, J&J has been receiving service (on average) of one or more ovarian cancer complaints every hour of every day of the week. 

To address the mounting litigation problem, J&J turns to bankruptcy.[Fn. 1]  To do so, J&J goes through a corporate restructuring (on the eve of filing bankruptcy) with this stated purpose:

  • to globally resolve talc claims through a chapter 11 reorganization; but
  • without subjecting the entire J&J enterprise to a bankruptcy proceeding. 

Corporate Restructuring Before Bankruptcy

In October of 2021, J&J does a complex series of transactions through which it, (i) ceases to exist, and (ii) is replaced by two new companies: LTL (the bankruptcy debtor) and JJCI (the new operating entity). 

Here’s how the restructuring works:

  • LTL assumes responsibility for all talc liabilities and receives all rights under a Funding Agreement;
  • Under the Funding Agreement, J&J and the new operating entity are obligated to pay all talc litigation expenses and liabilities, up to the value of the new operating entity;
  • LTL has no repayment obligation, so the Funding Agreement is not a loan; and
  • Then, LTL files bankruptcy. 

Motion to Dismiss J&J’s Bankruptcy

In response, various talc claimants move for dismissal of LTL’s bankruptcy, based on the following:

  • filing bankruptcy is not a proper litigation tactic;
  • LTL’s creation, hours before the bankruptcy filing, is improper, since the stated purpose of its creation is to file bankruptcy and keep its solvent parent and affiliates out of bankruptcy;
  • Additionally, LTL has no business purpose, no employees of its own, and a management that owes 100% fealty to J&J;
  • Further, Debtor has no trade creditors, lenders, bondholders, customers, suppliers, vendors, landlords, tax creditors, etc.;
  • LTL’s bankruptcy offers nothing of value;
  • J&J’s purpose in creating LTL and having it file bankruptcy is to force delay and a “bankruptcy discount” upon talc claimants; and
  • LTL’s creation and bankruptcy filing is “an obvious legal maneuver to impose an unfavorable settlement dynamic on talc victims.” 

Debtor’s Response

Debtor takes a far more positive view, insisting that the goal of the bankruptcy filing:

  • is to produce an equitable resolution for current and future talc claimants; and
  • is accomplished by creating a settlement trust in bankruptcy that will promptly, efficiently, and fairly compensate all talc claimants. 

Debtor says:

  • the regular mass-tort process, outside bankruptcy, is inefficient and creates inequities and delay;
  • the jury system produces claim-disparities, ranging from tens of millions of dollar recoveries for some, to multiple billions for a fortunate few, with others denied recoveries altogether;
  • all J&J assets and funding sources remain available in the bankruptcy to pay talc claims; and
  • the fair market value of all J&J entities (pegged by Debtor’s management at $60 billion) is available to talc claimants.

Legal Standard—Good Faith

A bankruptcy must be filed in “good faith.”  When a debtor’s overriding motive is to delay creditors without benefitting them in any way—that’s not “good faith.”

The good faith inquiry is based on a totality of facts and circumstances.  It ordinarily focuses on whether the debtor’s objectives are within the legitimate scope of bankruptcy laws, by looking at whether the bankruptcy petition:

  • serves a valid bankruptcy purpose; or
  • is filed merely to obtain a tactical litigation advantage. 

The Court’s Conclusion

The Bankruptcy Court refuses to dismiss the LTL bankruptcy as a bad faith filing, under the legal standards cited above. [Fn. 2]

The Court’s Rationale

What follows is a summary of portions of the Bankruptcy Court’s analysis.

–Valid Reorganization Purpose

A company facing mass-tort litigation, that threatens its long term viability, has a valid reorganization purpose for filing bankruptcy.

Two main functions of bankruptcy laws are, (1) preserving going concerns, and (2) maximizing value for creditors.  

LTL’s bankruptcy filing will maximize value for talc claimants, will dramatically reduce costs, and will ensure balanced recoveries for both present and future talc claimants. 

Filing a Chapter 11 bankruptcy to address personal injury claims and to preserve corporate value is unquestionably proper under the Bankruptcy Code. 

–Transparency

From the outset, J&J and Debtor have been candid and transparent about:

  • employing bankruptcy to address talc liabilities and defense costs; 
  • restructuring so that J&J’s business can continue; and 
  • resolving current and future claims in an equitable and efficient manner.

–Need

A bankruptcy is necessary because, at the time of filing the bankruptcy:

  • Debtor and J&J are facing 40,000 pending tort claims, with thousands more expected annually for decades to come;
  • Since June of 2018, 13 mesothelioma verdicts have awarded $320.6 million in punitive damages and $155.2 million in compensatory damages, averaging $36.6 million per claim;
  • 430 mesothelioma claims are on file, with projected mesothelioma exposure of $15 billion, before even considering the tens of thousands of ovarian cancer claims; and
  • Debtor faces indemnification claims of talc suppliers, estimated between $25 billion to $118.2 billion. 

–Bankruptcy Function

Attempting to address mass-tort claims through bankruptcy is wholly consistent with the function of the Bankruptcy Code.

Debtor seeks to use the bankruptcy forum and function to obtain:

  • a breathing spell provided by § 362;
  • the efficiencies of claims allowance and estimation processes; and
  • an opportunity to negotiate global resolutions to the torrents of talc litigation. 

–Preserving Value

This is not a case of too big to fail.  Rather, it is a case of too much value to be wasted—value that could be better used to pay talc victims.

This is not a failing company facing a forced liquidation. Instead, the J&J enterprise is a profitable supplier of health products, consumer products and pharmaceuticals, employing over 130,000 individuals globally, whose families are dependent upon continued successful operations.

Keeping J&J’s operating entity out of bankruptcy is legitimate and proper, especially when putting that entity into bankruptcy offers “no palpable benefits” to talc victims or their families.  In such circumstance:

  • Why place at risk the livelihoods of employees, suppliers, distributors, vendors, landlords, retailers—just to name a few innocent third parties? 
  • Why increase, dramatically, the costs and risks of a bankruptcy filing for the operating entity, when there is no palpable benefit to those suffering and their families?

Adding hundreds of millions of dollars, that would be spent on professional fees alone, would be better directed to a settlement trust for the benefit of talc victims.

–No Intent to Hinder or Delay

Debtor filed this case:

  • to resolve the potentially crippling costs and financial drain associated with defending—over the next several decades—tens of thousands (if not hundreds of thousands) of personal injury claims with a multi-billion dollar exposure; and
  • with no intention to “hinder and delay talc claimants”—instead, Debtor hopes to accelerate payments to talc victims and their families.

Claimants argue that allowing this case to proceed will “open the floodgates” to similar machinations and chapter 11 filings by others facing mass-tort claims. 

  • Quite simply, however, the Court does not anticipate the forecasted parade of horribles.

–Equitable Considerations

Bankruptcy courts are not courts of equity.  Rather, they are specialized courts with limited jurisdiction that apply statutory law and may address both legal and equitable claims:.

Section 105(a) of the Bankruptcy Code empowers bankruptcy courts to “[i]ssue any order, process or judgment that is necessary or appropriate to carry out the provisions of” the Bankruptcy Code. 

As this case proceeds, the Court will employ its limited equitable authority under § 105(a) to facilitate a fair and just result for all, consistent with the policies and objectives of the Bankruptcy Code.

Conclusion

In a thorough and well-reasoned opinion, the Bankruptcy Court determines that the Johnson & Johnson bankruptcy filing, after a corporate restructure, is in good faith and for a proper purpose.

Here’s guessing that this opinion will provide a foundation for other and future companies, facing mass-tort litigation, who want to maximize value for their claimants while preserving a going concern value for the benefit of the many innocent people who rely upon that value for their livelihood.

———————————

Footnote 1.  The Johnson & Johnson bankruptcy case is In re LTL Management LLC, Case No. 21-30589 in the New Jersey Bankruptcy Court (filed October 14, 2021). 

Footnote 2.  The New Jersey Bankruptcy Court’s opinion is filed on 02/25/2022 (Doc. 1572). An appeal is pending.

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