In a recent decision, the Third Circuit Court of Appeals reversed the decision of the Bankruptcy Court for the District of New Jersey, which had allowed Johnson & Johnson to move forward with a controversial plan to channel thousands of talc lawsuits from across the country into the bankruptcy system instead of federal and state courts. The Third Circuit dismissed, as filed in bad faith, “the bankruptcy filing of a company created to file for bankruptcy.” This decision highlights the importance of understanding the purposes of the bankruptcy system and recognizing when it is being used in bad faith. Let’s take a closer look at this case and how TZ’s amicus brief—authored on behalf of public interest law firm Public Justice—was particularly helpful to the Court.
The Case Background
The case revolved around healthcare products manufacturer Johnson & Johnson. Over the last decade, consumers have filed tens of thousands of product-liability lawsuits against J&J over its “Baby Powder” line, which was composed of talc. These consumers alleged that J&J’s talc products contained dangerous asbestos, which caused them to develop fatal or life-threatening conditions like mesothelioma and ovarian cancer. Multiple juries across the country have found –J&J liable and awarded significant damages to talc claimants.
In response to these suits, J&J tried to use the bankruptcy system to limit its potential liabilities to talc claimants. Using a controversial tactic known as the “Texas Two-Step,” J&J spun off a new corporate shell company and placed its liabilities relating to talc litigation into that entity, while keeping nearly all its massive assets separate from the shell company. The split entity then filed a petition for Chapter 11 bankruptcy—a move intended to allow the bankruptcy court to handle and potentially resolve thousands of talc litigation claims outside the normal judicial process. These claims otherwise would have been decided by juries in court and funneling them into bankruptcy proceedings could have resulted in drastically limiting the amount of money that successful claimants could recover for their injuries. The Third Circuit reversed the bankruptcy court’s ruling that had allowed this filing to proceed. It determined that J&J’s bankruptcy petition was filed in bad faith because a person or entity seeking bankruptcy protection must be in legitimate financial distress to avail themselves of the bankruptcy laws, and J&J’s shell company—spun off and funded by one of the nation’s wealthiest and most profitable companies—is in no such distress.
Role of Amicus Brief
TZ and Public Justice’s amicus brief was helpful to the Court in making this determination. The brief focused on the purposes of the bankruptcy system and the crucial requirement that a debtor be in legitimate financial distress. The Court’s opinion closely tracked the brief’s discussion and adopted its reasoning, noting that the extraordinary powers of bankruptcy courts to resolve litigation claims outside of the normal court system can fundamentally alter people’s rights to seek redress for their harms in the civil justice system, and therefore that “only those facing financial distress can call on bankruptcy’s tools.”
The Impact of This Decision
This decision serves as an important reminder of the limits of bankruptcy protection and who can use them. It also provides guidance for courts on how they should evaluate petitions for involuntary Chapter 11 filings by debtors who are not facing genuine financial distress. Specifically, bankruptcy courts must carefully examine a debtor’s financial condition before deciding whether to accept or dismiss a bankruptcy petition. This decision will have broad implications for corporate bankruptcies going forward, as its principles must now be applied whenever evaluating any future petitions for involuntary chapter 11 filings. The Third Circuit’s decision makes clear that bankruptcy is not a tool for corporations to use to manipulate pending civil cases against them as they see fit; rather, it is a tool to rescue debtors from financial distress. Most importantly, the victims in the talc litigation now have a chance for financial reparation as Johnson & Johnson will no longer be able to use bankruptcy to delay or avoid paying out claims.
The case is In re: LTL Management, LLC, Nos. 22-2003, 22-2004, 22-2005, 22-2006, 22-0007, 22-2008, 22-2009, 22-2010, 22-2011 in the United States Court of Appeals for the Third Circuit.