On January 30, 2023, the U.S. 3rd Circuit Court of Appeals in Philadelphia dismissed Johnson & Johnson’s bankruptcy tactic. After a lengthy back and forth to determine whether J&J can legally resolve tens of thousands of talcum powder lawsuits through Chapter 11 bankruptcy, an appeals court has rejected the company’s plan. The court determined that J&J placed its subsidiary, LTL Management, into bankruptcy though it faced no financial distress. This ruling brings us closer to reviving talcum powder cancer claims in MDL-2738.
J&J Looked To Escape Talc Claims Through “Texas Two-Step”
In 2021, Johnson & Johnson faced over 38,000 lawsuits alleging its talc-based products cause cancer, including ovarian cancer and mesothelioma. Following several massive plaintiff verdicts numbering in the billions and no sign of the litigation slowing down, the company resorted to a controversial bankruptcy tactic known as the “Texas Two-Step.” J&J launched a subsidiary LTL Management and transferred all talcum powder liabilities to this new business. LTL Management immediately filed for Chapter 11 bankruptcy, which halted talc litigation.
Plaintiff talcum powder lawyers were outraged, stating the company was blatantly abusing the Chapter 11 protections to save itself from having to compensate talc victims appropriately. However, J&J replied that it initiated bankruptcy in good faith to resolve talcum powder cases efficiently and quickly in bankruptcy court rather than through multidistrict litigation.
Bankruptcy Judge Michael Kaplan previously affirmed J&J’s right to pursue a “fair and less-costly settlement” through Chapter 11 bankruptcy in February 2022. Talcum powder attorneys denounced Judge Kaplan’s decision, which seemingly supported the “Texas Two-Step” method.
Court Rules J&J Improperly Filed for Bankruptcy
Talcum powder lawsuits stuck in limbo for nearly two years may finally see the light of day. The U.S. 3rd Circuit Court of Appeals in Philadelphia concluded J&J wrongly put LTL Management in bankruptcy. Since J&J transferred all talcum powder products and brands under LTL Management, the subsidiary is worth approximately $61.5 billion, according to the court. So, LTL Management filed for bankruptcy despite having access to ample funding.
With LTL Management in good financial standing and J&J valued at over $400 billion, the court wrote, “What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not. Thus we dismiss its petition.”
Effect on Other “Texas Two-Step” Cases
The appellate court’s dismissal of Johnson & Johnson’s bankruptcy ploy may have repercussions for other companies with their own “Texas Two-Step” bankruptcies. While the 3rd Circuit court’s ruling has no “direct” effect on these cases, it may indicate similar outcomes.
For example, 3M has attempted its own Texas “Two-Step” by placing its subsidiary Aearo Technologies into Chapter 11 bankruptcy. Servicemembers have filed 3M earplugs lawsuits, alleging the company’s defective Combat Arms earplugs left them with hearing loss and tinnitus. However, in August 2022, U.S. Bankruptcy Judge Jeffrey J. Graham ruled Aearo Technologies’ bankruptcy protections do not extend to 3M. Instead, 3M earplugs lawsuit will continue against 3M outside of Aearo’s restructuring.
Legal experts worry that more lucrative companies will employ the “Texas Two-Step” to avoid dealing with extensive and costly lawsuits.