Plaintiffs' attorneys accuse J&J of 'Texas Two-Step' to avoid liability

Plaintiffs' attorneys throughout the U.S. rushed to a North Carolina federal courthouse Wednesday to oppose what they called Johnson & Johnson's "Texas Two-Step" bankruptcy strategy, which would halt 40,000 talcum powder lawsuits, potentially worth billions of dollars in liability.

Plaintiffs' attorneys said they were surprised last week when Johnson & Johnson announced it had created a subsidiary, LTL Management LLC, "to hold and manage claims" in the nationwide talc litigation, and that the newly formed entity had filed for Chapter 11 bankruptcy protection.

After filing, J&J sent out automatic stay notices in nearly 40,000 lawsuits throughout the U.S. in which the company is accused of using cancer-causing asbestos in its baby powder products. However, since no bankruptcy judge approved the stay order, trial courts were left wondering whether to pause litigation proceedings or not.

Arguing Wednesday at an emergency hearing called by North Carolina Bankruptcy Judge Craig Whitley, plaintiffs' attorneys such as Oakland based Joseph D. Satterley of Kazan, McClain, Satterley & Greenwood APLC, said it was LTL that filed for bankruptcy, not Johnson & Johnson, and therefore no suit naming Johnson & Johnson as a defendant, should be stayed. In re: LTL Management LLC, 21-30589 (W.D. N. Carolina Bankruptcy Ct., filed Oct. 14, 2021).

"The U.S. bankruptcy system should not be abused by rich and powerful corporations simply looking to avoid their liabilities. The victims of J&J's cancer-causing products hope that today's hearing is a step in that direction," Satterley said in a phone interview after the hearing.

While refraining from lifting the stay, Whitley said Johnson & Johnson must file a preliminary injunction request as part of a temporary restraining order motion, if it wants to pause the talc litigation. Whitley will hear arguments for and against the restraining order Friday, but won't rule on the stay before a Nov. 5 hearing.

Whitley, one of only two bankruptcy judges in the Western District of North Carolina, said bankruptcy rules allow courts to raise a motion to change venues.

"So I'm raising the issue," he said. "The bottom line here is, I have a question whether the interests of judicial economy and the parties' convenience would make this case better served elsewhere and potentially in the District of New Jersey where the MDL case is going on."

J&J has agreed to fund LTL in amounts to be determined by a bankruptcy judge and will establish a $2 billion trust to settle current and future claims, including thousands consolidated into a federal multidistrict litigation in New Jersey and a Judicial Council Coordination Proceeding in California.

Arguing for Johnson & Johnson Wednesday, Dallas attorney Gregory M. Gordon of Jones Day, said the $2 billion fund is not intended to place a cap on the potential liability from talcum powder claims. Instead it should serve as an advance payment under the funding agreement to demonstrate that J&J is committed to paying claims in the event LTL is unable to do so.

"Having said that, your honor, the debtor ... and J&J believes that $2 billion exceeds any liability the debtor could reasonably have for talc related claims," he said.

Allowed under a Texas divisive merger statute, J&J on Oct. 12, went through a corporate restructuring where an old J&J entity ceased to exist, and two new entities were formed: the debtor LTL, and Johnson & Johnson Consumer Inc. Through this divisional merger, LTL received certain assets, and became solely responsible for the talc related liabilities, except for those related to workers' compensation, Gordon said.

New York attorney Jerome Block Levy Konigsberg LLP called Johnson & Johnson's bankruptcy strategy a fraudulent transfer of liabilities.

"Our firm's clients are shocked and appalled by the attempt of Johnson & Johnson and Johnson & Johnson Consumer Inc. to put its talc liabilities into bankruptcy through the brazen use of the so-called Texas Two-Step," Block said. "Our clients and their families don't understand how companies with billions of dollars could be using a bankruptcy system -- something our clients understand was intended for companies and people that are truly unable to pay their debts."

As of this month, Johnson & Johnson's market cap is more than $400 billion.

In a statement Thursday, Johnson & Johnson said the parent company and other affiliates did not file for bankruptcy protection and would continue to operate as usual. J&J said its bankruptcy plan involving LTL is not a concession of liability, and that more than 40 years of medical studies by experts around the world "continue to support the safety of cosmetic talc."

"We are taking these actions to bring certainty to all parties involved in the cosmetic talc cases," Executive Vice President General Counsel Michael Ullmann said. "While we continue to stand firmly behind the safety of our cosmetic talc products, we believe resolving this matter as quickly and efficiently as possible is in the best interests of the company and all stakeholders."

Despite J&J winning a fair amount of cases since thousands of mesothelioma patients began filing suits in 2016, juries have returned billions of dollars in plaintiff verdicts, and lawsuits continue to pour in. Many of the settlements have been with individual plaintiffs for undisclosed amounts. Litigants claim J&J's talcum powder products caused ovarian cancer and mesothelioma.