The 3rd Circuit Court of Appeals has tossed out an attempt by pharmaceutical giant Johnson & Johnson to reduce its liability by spinning off all of its baby powder assets and liabilities into a company called LTL Management. The Hanson & Payne team has been keeping a close eye on this case because it could have a big impact on the broader business bankruptcy system, and bankruptcy filers in Wisconsin.
Bankruptcy Is No Bandaid
Over the past decade, Johnson & Johnson has faced thousands of lawsuits over its well-known baby powder. The plaintiffs, mostly women, claim trace amounts of asbestos in the company’s product cause ovarian and other types of cancer.
After paying out over $2.5 billion to around 20 women, J&J took action to protect its core business from the additional 38,000+ similar lawsuits it faces. J&J’s dumped all of its baby powder assets and liabilities, plus a large chunk of cash into a subsidiary called LTL Management. Almost immediately after its creation, LTL filed for Chapter 11 bankruptcy. Under bankruptcy rules, LTL can temporarily pause the lawsuits filed against it, and work on a way to settle them all by setting up a bankruptcy trust.
This tactic, referred to as the Texas two-step, has been used by other companies on a smaller scale. And for a while it looked like it would work for J&J as well. A bankruptcy judge approved the J&J/LTL bankruptcy plan, saying it was an efficient way to handle mass tort litigation.
However, the case was appealed by those who claim this is not what the bankruptcy system was designed for, and the 3rd Circuit ruled against J&J/LTL:
A three-judge panel on the appeals court… [found] 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.”
Johnson & Johnson says it plans to appeal this ruling and try to win approval for its LTL bankruptcy plan. The next court up the chain is the United States Supreme Court. If it takes up the case, its ruling will impact business bankruptcy filings across the country.
A Bankruptcy Firm Milwaukee Area Businesses Can Count On
Milwaukee area businesses who are looking at this case, looking at lawsuits pending against them, and wondering if bankruptcy may be a way out, should proceed with caution. As the Hanson & Payne team frequently reminds our clients, bankruptcy is a tool, not a weapon or a magic wand. Filing for bankruptcy may be helpful in some scenarios, but not others. Our experienced team of business bankruptcy attorneys is ready to counsel you on the best path forward if you are thinking about filing for bankruptcy. Please contact us today to schedule a meeting.