When people usually think of bankruptcy, they usually think about it as a last resort response to large debts, mortgages they are behind on, and fatigue from the daily hounding of so many unknown numbers. The realization that student loan debt is not dischargeable by bankruptcy likely steals sleep from a good faction of our reader base too. If Johnson & Johnson hadn’t just faced a legal setback, it would have been at the top of many a corporate person’s bankruptcy associations.
A U.S. appeals court on Monday shot down Johnson & Johnson’s (JNJ.N) attempt to offload tens of thousands of lawsuits over its talc products into bankruptcy court. The ruling marked the first major repudiation of an emerging legal strategy with the potential to upend U.S. corporate liability law.
J&J is among four major companies that have filed so-called Texas two-step bankruptcies to avoid potentially massive lawsuit exposure. The tactic involves creating a subsidiary to absorb the liabilities and to immediately file for Chapter 11.
Our avid readers will know that we last covered this ploy here. Thousands of folks are suing Johnson & Johnson on the claim that the use of their talcum powder has given them or their loved ones cancer. Weird thing about talc, it and asbestos are besties. If the appeals court would have granted J&J’s attempt to head to bankruptcy court, it would have ushered in copycat stratagems where liability-facing companies would have been able to shift liability to a smaller entity, hit the “oh no bankruptcy” button, and save themselves potentially massive amounts of cash in payouts.
The court ruled the healthcare conglomerate improperly placed its subsidiary into bankruptcy even though it faced no financial distress. J&J’s two-step sought to halt more than 38,000 lawsuits from plaintiffs alleging the company’s baby powder and other talc products caused cancer. The appeals court ruling revives those lawsuits.
The cunning part of J&J’s legal strategy was their attempt to frame the bankruptcy offloading as being in the customer they allegedly gave cancer’s interest. Given the fact pattern, if there was a time that two-stepping bankruptcies would have been a thing, this would have been it. See if you buy J&J’s argument:
New Jersey-based Johnson & Johnson, valued at more than $400 billion, said its subsidiary’s bankruptcy was initiated in good faith. J&J initially pledged $2 billion to the subsidiary to resolve talc claims and entered into an agreement to fund an eventual settlement approved by a bankruptcy judge.
“Resolving this matter as quickly and efficiently as possible is in the best interests of claimants and all stakeholders,” J&J said.
A three-judge panel on the appeals court rejected J&J’s argument, finding the company’s subsidiary, LTL Management, was created solely to file for Chapter 11 protection but had no legitimate need for it. Only a debtor in financial distress can seek bankruptcy, the panel ruled. The judges pointed out that J&J assured that it would give LTL plenty of money to pay talc claimants.
“Good intentions – such as to protect the J&J brand or comprehensively resolve litigation – do not suffice alone,” the judges said in a 56-page opinion. “LTL, at the time of its filing, was highly solvent with access to cash to meet comfortably its liabilities.”
You know what they say — the road to offsetting corporate liability via two-stepping is paved with good intentions. The path is not completely blocked though; the company has already stated that it plans to challenge the ruling. Whatever the outcome, I hope that a speedy resolution is met for the sake of those who could have been negatively impacted.
Chris Williams became a social media manager and assistant editor for Above the Law in June 2021. Prior to joining the staff, he moonlighted as a minor Memelord™ in the Facebook group Law School Memes for Edgy T14s. He endured Missouri long enough to graduate from Washington University in St. Louis School of Law. He is a former boatbuilder who cannot swim, a published author on critical race theory, philosophy, and humor, and has a love for cycling that occasionally annoys his peers. You can reach him by email at email@example.com and by tweet at @WritesForRent.