By Mike Spector
(Reuters) – The bankruptcy filing filed by Johnson & Johnson’s subsidiary, which is carrying claims related to Talk, will soon be dismissed unless a US appeals court agrees to reconsider its decision, the company’s attempt to settle the lawsuit move to a Chapter 11 trial, a federal judge said Tuesday.
US Bankruptcy Judge Michael Kaplan said during a hearing in Trenton, New Jersey, that he intends to drop the Chapter 11 case once the Philadelphia-based 3rd Circuit Court of Circuits receives a formal mandate to carry out a ruling by the 30th Circuit to dismiss the matter.
The 3rd Circuit Panel ruled that the J&J subsidiary, called LTL Management, was not legitimately entitled to Chapter 11 protection because it was not in financial distress.
The firing is on hold as LTL asked the entire 3rd Circuit late Monday to reconsider the panel’s decision. Should the 3rd Circuit deny that motion, Kaplan could dismiss the case within days.
“It is my intention, if the mandate is granted, to issue an order dismissing the case,” Kaplan said during Tuesday’s hearing.
If the 3rd Circuit declines to rehear, LTL may seek further delay in dismissing the bankruptcy case, possibly in the US Supreme Court, an attorney for the J&J subsidiary, Greg Gordon, told the hearing.
Left unanswered, the 3rd Circuit’s decision would force J&J back in court to address nearly 40,000 lawsuits alleging that the company’s baby powder and other cosmetic products containing talc cause cancer. Gordon told the judge that LTL made a “Herculean effort to get the defense team back in place” to take cases to court should Kaplan dismiss the bankruptcy outright.
J&J believes its talc products are safe.
LTL’s bankruptcy had put the spate of Talk cases on hold. Kaplan on Tuesday granted a 24-year-old plaintiff’s motion to continue his case following the decision of the 3rd Circuit in California.
“The pendulum has swung,” Kaplan said, ruling that a trial for the terminally ill plaintiff should no longer be indefinitely suspended on the grounds that it could jeopardize LTL’s bankruptcy reorganization.
Kaplan said other cases would remain on short-term hold while LTL’s appeals process unfolds.
The 3rd Circuit decision more broadly cast a shadow over J&J’s use of a maneuver known as the Texas Two-Step, named after a Texas law the company used to split its consumer business into two new subsidiaries.
In October 2021, J&J shifted the tidal wave of talc lawsuits it was facing to one of its newly created entities, LTL, which subsequently filed for bankruptcy. Reuters detailed the secret Texas Two Steps planning by Johnson & Johnson and other big firms in a series of reports last year examining companies’ attempts to avoid lawsuits through bankruptcy.
J&J, with a market cap of more than $400 billion, has argued that the avalanche of lawsuits posed a serious financial threat. The company’s costs for judgments, settlements and attorneys’ fees have risen to about $4.5 billion, according to bankruptcy court filings, with no end in sight.
The 3rd Circuit’s reasoning underscored what some legal experts call an inherent contradiction: bankruptcies conducted by billions of dollars worth of multinational corporations that faced little risk of running out of money to pay suing creditors.
LTL filed for bankruptcy while J&J avoided seeking Chapter 11 protection, with all the financial and reputational damage that would ensue.
J&J said it generously funded LTL to ensure a fair settlement – better, the company and its subsidiary argued, than court cases where some plaintiffs receive overpayments while others receive little or nothing.
The 3rd Circuit found that J&J’s funding of the subsidiary, initially $2 billion and perhaps eventually more, undermines any claim of financial risk needed to justify LTL’s bankruptcy filing. In a petition for a rehearing filed Monday, LTL attorney Neal Katyal called that reasoning “wrong-side up.”
A 2018 investigation by Reuters found that J&J had known for decades that asbestos, a known carcinogen, was in its baby powder and other talc cosmetic products. The company said in May 2020 it would stop selling talc-based baby powder in the United States and Canada, in part due to what it called “misinformation” and “baseless allegations” about the product. The company later decided to stop selling talc-based baby powder worldwide starting that year. J&J has denied that its talc contains asbestos.
(Reporting by Mike Spector in New York; Editing by Will Dunham)
