Retailers not shielded by J&J bankruptcy move, judge says

A maneuver Johnson & Johnson made in bankruptcy court to isolate the company from thousands of lawsuits that allege its talc products cause cancer will not shield retailers who sold the products from the litigation, a judge ruled Friday.

The ruling by U.S. Bankruptcy Judge Craig Whitley in North Carolina effectively means that at least for the moment more than 40,000 cases, many in California, will be placed on hold as they relate to Johnson & Johnson Consumer Inc. Whitley said he will decide in two weeks whether Johnson & Johnson jumped the gun in sending out automatic stay notices in the nationwide talc powder lawsuits.

"Effectively, we're putting a BAND-AID on a situation that we all know has a lot of issues to be addressed," Whitley wrote. "I'm issuing the TRO in claims against the debtor and old J&J CI, which no longer exists. I'm not going any further. I don't know whose liabilities these are but the evidence presented today gives me grave concerns that these may be independent liabilities of the Johnson and Johnson [parent] company that were not subject to the divisional merger and thus not brought into this bankruptcy case."

Earlier this month, Johnson & Johnson infuriated plaintiffs' lawyers when it formed a shell company named LTL Management LLC, in which it placed all liability claims for its talc products and then sought Chapter 11 protection for the LTL shell. Johnson & Johnson, which has a market cap of more than $400 billion, became Johnson & Johnson Consumer Inc.

The maneuver was done through a process derisively called by plaintiffs' attorneys a "Texas Two-Step" because of a unique Texas law that allows for the transfer a corporation's debts and liabilities into one of two companies, so a parent company can take advantage of the bankruptcy system with one subsidiary while continuing to do business with another entity.

Commenting on the "Texas Two-Step," Whitley said he believed only he and one other North Carolina bankruptcy judge had ever ruled on its propriety and that an appellate court would eventually need to weigh in.

"Depending on your perspective, this is either a brilliant strategy by which public corporations can access the provision of the bankruptcy code that deals with asbestos liabilities, without immersing the entire company into the throes of bankruptcy and all the negative things that come out of that," Whitley said before offering an alternative viewpoint. "On the other side, from the claimants' perspective, the idea of an otherwise solvent company dividing itself in half and putting the bad part into a bankruptcy, seeking relief for the benefit of the good part, well that strikes you as manifestly unfair."

"Which is it? I can't decide that today," he added.

Plaintiffs' attorneys said they were pleased with Whitley's decision.

"We are happy that we can continue to proceed against many of the other companies that are responsible for selling cancer-causing products and we look forward to presenting further evidence in two weeks," said Joseph D. Satterley of Kazan, McClain, Satterley & Greenwood APLC in Oakland.

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 at an emergency hearing Wednesday, 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, he said.

"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.

Despite J&J winning a fair amount of cases since thousands of mesothelioma and ovarian cancer 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 contain asbestos and cause ovarian cancer and mesothelioma. J&J points to several studies that found no evidence its talc products cause cancer.

J&J has repeatedly said that reputable studies show that is not true.

The case is In re: LTL Management LLC, 21-30589 (W.D. N. Carolina Bankruptcy Ct., filed Oct. 14, 2021).