Bla­tant abuse of Chap­ter 11? J&J says its use of 'Texas two-step' is all about fair­ness

As a five-day tri­al over John­son & John­son’s con­tro­ver­sial talc bank­rupt­cy wrapped up last week, the phar­ma gi­ant had a fi­nal ar­gu­ment to make: That plain­tiffs’ at­tor­neys have a “per­verse in­cen­tive” be­hind their re­jec­tion of the phar­ma gi­ant’s bank­rupt­cy strat­e­gy.

The case stems from 38,000 law­suits claim­ing J&J’s wide­ly used ba­by pow­der and oth­er talc prod­ucts con­tained as­bestos and caused mesothe­lioma and ovar­i­an can­cer. As cas­es mount­ed, J&J at­tempt­ed to dig it­self out by spin­ning the talc-re­lat­ed li­a­bil­i­ties in­to a new com­pa­ny called LTL Man­age­ment, which then filed for bank­rupt­cy.

To do so, the com­pa­ny in­voked a Texas law that al­lows li­a­bil­i­ties to be sep­a­rat­ed from as­sets in­to a new en­ti­ty, a process for­mal­ly known as a di­vi­sion­al merg­er but col­lo­qui­al­ly called a “Texas two-step” bank­rupt­cy. But while J&J ar­gues the bank­rupt­cy fil­ing was nec­es­sary to deal with un­ten­able court costs, oth­ers ar­gue the move is a bla­tant mis­use of the Chap­ter 11 sys­tem.

A com­mit­tee rep­re­sent­ing the talc claimants filed a mo­tion to dis­miss the case, re­sult­ing in a five-day tri­al that oc­curred last week. US bank­rupt­cy judge Michael Ka­plan of New Jer­sey said a de­ci­sion is ex­pect­ed by Feb. 28, ac­cord­ing to a source with knowl­edge of the mat­ter.

Dur­ing the tri­al, LTL’s lawyers ar­gued that plain­tiffs’ at­tor­neys have their own in­cen­tive to re­ject the bank­rupt­cy case, as they could po­ten­tial­ly pock­et more mon­ey from fil­ing law­suits than by ne­go­ti­at­ing a deal, ac­cord­ing to Bloomberg, which first re­port­ed the news. J&J said in Oc­to­ber that it had racked up near­ly $1 bil­lion in de­fense costs and about $3.5 bil­lion in pay­ments for set­tle­ments and ver­dicts.

“Af­ter a week-long tri­al, undis­put­ed ev­i­dence from more than 10 wit­ness­es demon­strat­ed the ob­jec­tive fact that a bank­rupt­cy res­o­lu­tion will be more fair to more claimants and pro­vide eq­ui­table com­pen­sa­tion in the short­est amount of time,” Al­li­son Brown, a Skad­den Arps part­ner rep­re­sent­ing LTL, told End­points News. “The fierce op­po­si­tion to such a res­o­lu­tion mount­ed by plain­tiffs’ lawyers rais­es se­ri­ous ques­tions about a per­verse in­cen­tive of the mass tort sys­tem, which re­wards plain­tiffs’ lawyers with con­tin­gency fees of up to 45% of ju­ry ver­dicts.”

Mean­while, those on the claimants’ side — in­clud­ing a group of law pro­fes­sors who filed a “friend of the court” brief — ar­gue that the Texas two-step move is a “di­rect at­tack on the fun­da­men­tal in­tegri­ty of the Chap­ter 11 sys­tem,” that would “de­prive in­no­cent talc vic­tims of their day in court.”

On­ly a hand­ful of talc-re­lat­ed suits have made it to tri­al and been re­solved over the last decade — and though the com­pa­ny says it has pre­vailed in a ma­jor­i­ty of cas­es, it’s al­so had its share of loss­es, in­clud­ing a Mis­souri case in 2018 when a ju­ry award­ed plain­tiffs more than $4.7 bil­lion in dam­ages.

An at­tor­ney rep­re­sent­ing the claimants de­clined to com­ment.

Though ques­tions about whether J&J’s ba­by pow­der con­tained as­bestos first sur­faced back in the 1970s, J&J main­tains that it has “nev­er man­u­fac­tured a prod­uct that con­tained as­bestos,” and that its talc prod­ucts are safe. The phar­ma gi­ant stopped man­u­fac­tur­ing the talc-based pow­der in May 2020, but cit­ed de­clin­ing sales as its rea­son­ing.

The com­pa­ny said in a state­ment to End­points on Tues­day:

John­son & John­son has long-stat­ed that we have been con­sid­er­ing all op­tions with re­gard to man­ag­ing the talc lit­i­ga­tion. The plain­tiffs’ lawyers have failed to pro­vide any al­ter­na­tive so­lu­tion to re­solve these cas­es while LTL stands ready to move for­ward, me­di­ate and find a fair and eq­ui­table res­o­lu­tion.

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