U.S. Appeals Court Dismisses J&J’s Bankruptcy Strategy for Talc Lawsuits

January 30, 2023

The Third U.S. Circuit Court of Appeals in Philadelphia denied a Chapter 11 bankruptcy filing by LTL Management, a subsidiary of Johnson & Johnson established in 2021 solely as a means of transferring tens of thousands of lawsuits against the company that claimed their talc products caused users to develop cancer, including mesothelioma. Claimants deemed this bankruptcy strategy, known in the legal community as the Texas Two-Step, was not only a means for Johnson & Johnson to avoid liability and protect its assets, but also a great misuse of U.S. bankruptcy law. Seemingly, the three-judge panel presiding over this case in the federal appeals court agreed.

The court determined that LTL Management, per the funding agreement it had with J&J at the time of the Chapter 11 filing, had access to as much as $61.5 billion in capital. In their 56-page ruling, the judges stated: "Good intentions - such as to protect the J&J brand or comprehensively resolve litigation - do not suffice alone. LTL, at the time of its filing, was highly solvent with access to cash to comfortably meet its liabilities."

In short, LTL Management was not proven to be in any type of financial distress at the time of the bankruptcy filing. Judge Thomas Ambro, one of three judges on the panel and a leading expert on bankruptcy law, wrote: “What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not. Thus we dismiss its petition.”

Upon the ruling, Johnson & Johnson, with global headquarters in New Jersey, announced that it will appeal the decision and maintained that its intention in creating the subsidiary and filing for bankruptcy was all with good intentions to “efficiently resolve the cosmetic talc litigation for the benefit of all parties, including current and future claimants.” Johnson & Johnson continues to affirm that its baby powder “does not contain asbestos and does not cause cancer.” The company, however, will stop selling the talc-based version of its product globally by 2023.

With this ruling, the doors of the courts are once again open to hearing legal claims against Johnson & Johnson’s talc products as the company’s efforts to block these lawsuits and limit liability through bankruptcy have been thwarted. If its appeal of this decision is not successful, Johnson & Johnson will be forced to face the more than 40,000 cancer claims that have already been filed, in addition to future claims, and likely take on billions of dollars in talc liability.

Sources

Church S and Feeley J. J&J’s Talc Bankruptcy Case Gets Tossed by Appeals Court (1). Bloomberg Law. January 2023.

Horsley S and Mann B. Appeals court clears the way for more lawsuits over Johnson's Baby Powder. NPR. January 2023.

Randles J and Loftus P. J&J’s Talc Bankruptcy Case Thrown Out by Appeals Court. The Wall Street Journal. Updated January 2023.

Simonetti I. Johnson & Johnson’s Attempt to Contain Talc-Related Liabilities Is Rebuffed. The New York Times. January 2023.

Smyth J. Johnson & Johnson blocked from using bankruptcy to resolve talcum powder lawsuits. Financial Times. January 2023.