Johnson & Johnson’s Texas two-step falls apart, again

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Johnson & Johnson’s second attempt to resolve its mass talc liabilities via bankruptcy fell apart after a federal judge dismissed the case.

In a July 28 ruling, Judge Michael Kaplan in Trenton said that LTL Management – a subsidiary created by the New Brunswick health care giant to handle such claims – is not eligible for Chapter 11 because the company is not in financial distress.

“In sum, this Court smells smoke, but does not see the fire,” Kaplan wrote. “Therefore, the emphasis on certainty and immediacy of financial distress closes the door of chapter 11 to LTL at this juncture.”

In January, a Third Circuit Court of Appeals panel in Philadelphia dismissed the first LTL bankruptcy filing, ruling that neither J&J nor is subsidiary were in dire financial straits. Three months later, LTL attempted again to use the strategy – which is known as the Texas two-step – filing a second time for Chapter 11 and proposing an $8.9 billion settlement to resolve current and future claims. That sum marked a significant increase from the $2 billion J&J committed during its October 2021 bankruptcy bid.

Shortly thereafter, Kaplan froze more than 38,000 lawsuits alleging J&J’s products caused cancer to allow more time for the sides to reach a deal.

Dismissal of the latest bankruptcy filing will return those cases back to the civil tort system, a move that a court-appointed committee of talc claimants said they were pleased with.

In sum, this Court smells smoke, but does not see the fire.
— Judge Michael Kaplan

The group had previously asked the court to toss LTL’s bankruptcy bid because it did not believe the petition was brought in good faith.

In a July 28 statement, they said, “This outcome now frees tens of thousands of victims to seek their justice through the tort system and, either before juries of their peers or by settlement on terms acceptable to them. The committee has consistently contended the tort system is the rightful place for these claims to be resolved. Today’s ruling validates the committee’s belief that J&J manipulated the bankruptcy system by using the ‘Texas Two-Step’ legal maneuver and wrongfully sought to manufacture financial distress in its ‘Legacy Talc Liabilities’ (LTL) Management subsidiary, solely to carry out a bad faith bankruptcy case. The company will now face the full weight of its conduct in the appropriate judicial forums.”

J&J, which has continued to maintain that its products are safe, vowed to appeal Kaplan’s ruling, saying that “litigating these cases in the court system would take decades and waste billions of dollars – mainly spent on lawyers’ fees.” It also defended its proposed settlement as “the most equitable resolution for all claimants” because of the “few cases that actually reach trial, the company has prevailed in the overwhelming majority and most claimants receive nothing.”

In a statement, Erik Haas, J&J’s worldwide vice president of litigation, said, “We respectfully disagree with the Bankruptcy Court’s conclusion that the ‘substantial liability’ that LTL faces from the massive volume of talc claims asserted against it does not establish ‘immediate’ financial distress under the standard imposed by the Third Circuit, which itself is found nowhere in the Bankruptcy Code and is contrary to the persuasive authority from other Circuit Courts and directives of the Supreme Court of the United States.”

“The Bankruptcy Code does not require a business to be engulfed in ‘flames’ to seek a reorganization supported by the vast majority of claimants. As the Bankruptcy Court urged in its decision, we will continue to work with counsel representing about 60,0000 claimants to pursue a resolution of the talc claims. In the event we return to the tort system—where we have prevailed in the overwhelming majority of cases tried—we will vigorously litigate these meritless claims and bring our own actions to address the plaintiffs’ bar abuses that engendered this spurious litigation,” Haas said.

J&J also said it would defend itself against lawsuits that are “specious and lack scientific merit.”

The bankruptcy petition’s dismissal comes 10 days after J&J was ordered to pay $18.8 million to a California man who blames the company’s baby powder for giving him cancer. That six-week trial was the first the company had faced in almost two years over accusations that the health conglomerate was hiding health risks of its talc products. It was allowed to proceed due to the plaintiff’s failing health.

J&J has said it plans to pursue an appeal “based on erroneous rulings by the trial judge.”