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.
