US Court Of Appeals Rejects Bid To Revive Talc Bankruptcy By J&J

US Court Of Appeals Rejects Bid To Revive Talc Bankruptcy By J&J

Rules that its subsidiary company was not in financial distress

The United States Court of Appeals for the Third Circuit has affirmed a decision ending the second attempt of Johnson & Johnson (J&J) to resolve millions of lawsuits related to cancer through its shell company LTL Management’s bankruptcy.

The court comprising Judge Thomas Ambro ruled that the company's second effort, like its first, failed because its subsidiary company placed into bankruptcy was not in ‘financial distress’.

Meanwhile, J&J is making efforts to settle lawsuits alleging that its baby powder and other talc products were contaminated with asbestos and caused ovarian and other cancers. The company, however, maintained that its talc products do not contain asbestos and can’t cause cancer.

It is pursuing a third bankruptcy to end lawsuits from 61,000 claimants and prevent similar lawsuits in the future.

J&J is collecting votes from people who allege they have been injured by their talc. It placed a shell company into bankruptcy for a third time if it can get support from 75 percent claimants.

The court observed that the earlier bankruptcy of LTL was dismissed by a US bankruptcy judge.

LTL had presented ‘speculative’ evidence that the talc lawsuits created sufficient ‘financial distress’ to warrant bankruptcy protection.

A three-judge panel of the appeals court rejected LTL's argument that the ‘financial distress’ standard was so restrictive, which would rule out bankruptcy as an option for companies facing many lawsuits.

On behalf of the panel, Judge Ambro stated, "No doubt that solvent companies, confronted by mass-tort litigations, can encounter significant financial distress that warrants bankruptcy.”

He added, "When future insolvency is a realistic possibility based on meaningful evidence - not just the result of a highly speculative 'worst-case' scenario, a mass-tort defendant has a viable case.”

J&J intends to approach the Supreme Court, the company's vice president of litigation Erik Haas said. He added that the company had expected the court’s response, which was unlikely to impact J&J's efforts to gather support for its revised settlement offer. The firm was confident of securing votes from 75 percent of claimants.

Meanwhile, Andy Birchfield, an attorney representing the people who filed ovarian cancer lawsuits against J&J, said the decision should be a warning to J&J that its focus on a bankruptcy settlement was unlawful.

Even if it reaches the 75 percent threshold, the firm’s bankruptcy strategy faces legal hurdles.

The recent ruling of the Supreme Court in the Purdue Pharma bankruptcy case narrowed the courts' ability to stop lawsuits against people and companies like J&J, which are not bankrupt.

However, the attorneys opposed to J&J's settlement offer will argue that the new deal still fails under the ‘financial distress’ standard articulated by the Third Circuit Court.

J&J said the Purdue ruling did not impact its settlement proposal, as it qualified for specific non-debtor protections that the US bankruptcy laws allow to asbestos defendants.

The new legislation proposed recently could restrict by placing limits on the so-called ‘Texas two-step’ strategy that J&J used to place its talc liabilities into a shell company. Some senators said that financially healthy companies should not be allowed to use bankruptcy courts to evade responsibility for injuries they caused.

The two-step tactic involves using Texas corporate law first to split a business into two companies - one that inherits the assets and a shell company saddled with liabilities, including lawsuits. The shell company files for bankruptcy protection, using it to block lawsuits from proceeding against its well-funded affiliates.

Gregory Gordon, Noel Francisco, and Kevin Marshall of Jones Day appeared for LTL.

Jeffrey Lamken of MoloLamken, and Jonathan Massey of Massey & Gail represented the official committee of talc claimants.