In a major decision today, the U.S. Court of Appeals for the Third Circuit rejected Johnson & Johnson’s attempt to use bankruptcy to strictly curtail its liability for claims that talc in its consumer products caused cancer.
As the Court explained:
With mounting payouts and litigation costs, [J&J’s] Old Consumer [entity], through a series of intercompany transactions primarily under Texas state law, split into two new entities: LTL Management LLC (“LTL”), holding principally Old Consumer’s liabilities relating to talc litigation and a funding support agreement from LTL’s corporate parents; and Johnson & Johnson Consumer Inc. (“New Consumer”), holding virtually all the productive business assets previously held by Old Consumer. J&J’s stated goal was to isolate the talc liabilities in a new subsidiary so that entity could file for Chapter 11 without subjecting Old Consumer’s entire operating enterprise to bankruptcy proceedings.
Consumers who claimed death and suffering was caused by J&J moved to dismiss the bankruptcy, and the bankruptcy court denied those motions. The Third Circuit reversed, finding that the LTL did not file for bankruptcy in good faith, as “LTL, at the time of its filing, was highly solvent with access to cash to meet comfortably its liabilities as they came due for the foreseeable future.”
Of note, DOJ’s Bankruptcy Trustee had previously objected to the “bankrupt” entity’s payment of lawyer Neal Katyal at a rate of $2,465 an hour for his work on appeal arguing that J&J could manipulate the bankruptcy laws to avoid responsibility for the harms its products caused.