J&J bankruptcy must be heard in New Jersey, judge rules

Johnson & Johnson's $2 billion bankruptcy strategy to end its liabilities in the nationwide talcum powder litigation hit another roadblock Tuesday after a North Carolina judge punted the case to New Jersey, out of the company's preferred venue.

U.S. Bankruptcy Judge Craig Whitley is one of only two to rule in bankruptcy cases involving the corporate restructuring model J&J is attempting to use to limit liability in nearly 40,000 lawsuits accusing it of selling cancer-causing baby powder. However, signaling a desire to have another court hear the case, Whitley issued a strongly worded order Tuesday, saying J&J more than forum shopped, it manufactured a forum and created a venue to file bankruptcy.

"Here, the debtor is trying to manufacture venue and is attempting to outsmart the purpose of the statute," Whitley wrote. "[A]ny forum shopping by the parties weighs against them both in looking at the factors, but in this case, the debtor is not just forum shopping; the debtor is manufacturing forum and creating a venue to file bankruptcy. Thus, the purposeful creation of venue, although not dispositive by itself, must be considered in the interest of justice analysis."

Johnson & Johnson faces 38,000 lawsuits consolidated in California and New Jersey, claiming the company's baby powder contains asbestos and causes ovarian cancer and mesothelioma. Considering J&J's parent company is in New Jersey and most of the lawsuits have been consolidated into a multidistrict litigation there, Whitley said it was a more appropriate venue.

Of the last 193 cases involving a large public company accused of forum shopping, none were returned to the jurisdiction where the company is physically located, according to UCLA School of Law professor Lynn M. LoPucki. The UCLA-LoPucki research database tracks more than 1,000 large public companies that have filed bankruptcy cases since 1979.

"The reason J&J is different is that the forum shopping in bankruptcy is overwhelmingly to judges who want the cases and have already signaled they will not send the cases back," LoPucki said. "I think Jones Day mistook this judge for having joined those."

"It demonstrates that this judge is not competing to attract cases," he said. "There are several courts around the country that are clearly attempting to attract cases and this appeared to be one to some people, because he got four in a row. But, I think this puts to rest the idea that this judge is trying to get big cases."

In October, using a Texas divisive-merger statute, J&J dissolved one of its baby powder-making subsidiaries on Oct. 12. Two days later, it created two new companies: Johnson & Johnson Consumer Inc. and a North Carolina company called LTL Management LLC. However, according to Tuesday's filing, the only connection J&J has to North Carolina is a bank account it created for LTL in which the company deposited $6 million. In re: LTL Management LLC, 21-30589. (W.D. N.C., filed Oct. 14, 2021).

All the debts and liabilities from the talcum powder litigation will go into LTL management and the new J&J CI will continue operating as usual, according to J&J's state plan. Plaintiffs' attorneys objecting to the bankruptcy plan that would have J&J pay $2 billion into a fund in exchange for a shield against liability in the talc litigation called the strategy the "Texas Two-Step."

J&J, represented by Gregory M. Gordon of Jones Day, said the case should stay with Whitley because of the judge's experience with mass tort cases and divisional mergers. Responding Tuesday, Whitley said, "It is not an accident that this court has this experience," because Jones Day has tried the "Texas Two-Step" in his court before.

"This case mirrors four other bankruptcy cases filed in this district: Bestwall, DBMP, Aldrich Pump, and Murray Boiler," Whitley wrote. "In each of these cases, a corporation with substantial asbestos liability hired the law firm of Jones Day, the corporation used the 'Texas Two Step' to create a North Carolina entity with limited assets and all or most of its predecessors' asbestos liability, and the North Carolina entity filed for bankruptcy in this district shortly after its creation."

Any superior experience Whitley may possess as to divisional mergers exists only because his court is the only one to encounter them, he said.

"There is no reason this court should be the only bankruptcy court to have the opportunity to weigh in on these novel legal issues, especially considering that the 'Texas Two Step' tactic is being employed by national corporations and impacts tens of thousands of present and future claimants across the country," Whitley said.

Also commenting Tuesday, bankruptcy and transactional expert David S. Kupetz of SulmeyerKupetz PC said Whitley had signaled through his order that Jones Day had attempted an "abusive tactic" to get the case before him.

"He doesn't use that word but when you read between the lines, he's basically saying this was an abusive strategy," Kupetz said. "That doesn't necessarily mean that the underlying Texas Two-Step was abusive, but the fact that one component of it was an abusive attempt to manufacture bankruptcy court jurisdiction isn't helpful."

Despite J&J winning a fair amount of cases since thousands of mesothelioma and ovarian cancer patients began filing suits, juries have returned billions of dollars in plaintiffs' 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.