J&J Talc Bankruptcy Case: Events Leading Up To Potential Dismissal Battle

Background

Johnson & Johnson’s newly-created subsidiary, LTL Management LLC (“LTL”), filed for bankruptcy in the Western District of North Carolina on October 14, 2021, with the primary goal of resolving thousands of tort claims (and nearly 40,000 pending lawsuits) related to the company’s talcum powder-based products – LTL’s only liabilities.  LTL was formed two days before the filing under a Texas law which allowed Johnson & Johnson subsidiary Johnson & Johnson Consumer Inc. to split into two new entities:  one (LTL) assigned its billions in talc liability and one (“New JJCI”) assigned with its remaining assets.  As part of the transaction, LTL also received certain assets, including approximately $6 million in cash and certain royalty streams, which the debtor projects will generate approximately $50 million in revenue per year over the next five years.  Additionally, Johnson & Johnson and New JJCI committed to:  (a) fund a trust with an aggregate amount of $2 billion to pay for current and future tac-related claims asserted against LTL; and (b) pay all costs and expenses of LTL in the normal course of business (up to the full value of New JJCI).

Venue

Almost immediately after filing, LTL faced scrutiny from multiple parties for filing in North Carolina versus New Jersey, where Johnson & Johnson’s corporate headquarters are located and where more than 35,000 talc-related cases are pending against Johnson & Johnson and its various subsidiaries.  On November 10, 2021, Judge Craig Whitley of the Western District of North Carolina issued a bench ruling moving LTL’s case to the Bankruptcy Court for District of New Jersey.  The judge noted that transferring the case to New Jersey was the “natural decision” given “all of the connections there” including that it is the location of Johnson & Johnson’s corporate headquarters, the principal place of business of other related Johnson & Johnson entities, thousands of Johnson & Johnson employees, and pending multidistrict litigation relating to the talc claims.

Third-Party Stay

Immediately following his venue ruling, Judge Whitley granted LTL’s request for a temporary extension of the automatic stay and a preliminary injunction barring talc litigation for 60 days against not only the debtor, LTL, but also non-debtor Johnson & Johnson and certain other “protected parties” (which include certain Johnson & Johnson affiliates and retailers).  The judge noted that the 60 day extension would allow the New Jersey bankruptcy court time to consider the propriety of a further injunction under applicable Third Circuit law.  In deciding the issue, Judge Whitley found that the claims against Johnson & Johnson and the other protected parties were “effectively claims against [LTL],” which would “conceivably have an effect on the estate.”

Dismissal

Once the case was officially transferred to New Jersey, the Official Committee of Talc Claimants (the “TCC”), which represents people who have sued Johnson & Johnson alleging that its talc products cause mesothelioma and ovarian cancer, filed a scathing initial statement, alleging, among other things, that LTL’s bankruptcy filing was “untethered to any legitimate chapter 11 purpose.”  On December 1, 2021, the TCC then filed its first formal motion in the case, asking the court to dismiss LTL’s bankruptcy for “cause” under section 1112(b) of the Bankruptcy Code.  The Third Circuit (and most other courts) hold that cause exists if a case is not filed in good faith.  In the Third Circuit, once a motion to dismiss for lack of good faith is filed, the burden shifts to the debtor to establish that the filing was in good faith.  This is in contrast to the Fourth Circuit – which includes North Carolina where LTL originally filed – where the party seeking dismissal for cause bears the burden to show both the “objective futility” of attempting to reorganize  and “subjective bad faith” by the debtor, each by a preponderance of the evidence.  In other words, the standard for dismissal is much higher in the Fourth Circuit, which is one of the reasons LTL argued the case should have remained in North Carolina.

In its dismissal motion, the TCC makes several allegations in support of its argument that LTL did not file its bankruptcy case in good faith.  The overarching theme of the TCC’s motion is that the debtor did not file its case with any legitimate purpose under the Bankruptcy Code, and LTL is a “mere instrumentality” of Johnson & Johnson, which created, owns, and controls the debtor.  The purpose of the bankruptcy, the TCC argues, is not to allow LTL to reorganize or obtain a fresh start, but to protect Johnson & Johnson and its assets.  The TCC goes so far as to argue that the creation and spinoff of LTL violated applicable law, because the sole purpose of the transaction was to “hinder and delay talc claimants in pursuit of their claims by separating the liability for those claims from the assets backing such claims.”

Judge Michael Kaplan, now overseeing LTL’s case in New Jersey, stated that he will reserve four days beginning on February 15, 2022 for a hearing on whether to dismiss the debtor’s bankruptcy case.  If the case is not dismissed, LTL noted its intention during the initial case conference in front of Judge Kaplan to request mediation of the talc liability during the bankruptcy case, which Judge Kaplan said he generally supports in the right circumstances.