Trustee wants Jones Day out of subsidiary bankruptcy case

Johnson & Johnson's plan to end nearly 40,000 nationwide talcum powder lawsuits through bankruptcy hit yet another roadblock this week after a New Jersey trustee, citing a conflict of interest, objected to Jones Day's involvement in the case.

J&J faces some 38,000 lawsuits consolidated in California and New Jersey, claiming the company's baby powder contains asbestos and causes ovarian cancer and mesothelioma.

Since October, J&J's counsel Jones Day and Dallas partner Gregory M. Gordon have tried to end the talc litigation by using a corporate restructuring known as the Texas Two-Step. Under a Texas divisive merger statute, J&J dissolved one of its baby powder-making subsidiaries and created two new ones, one of which J&J dumped all talc liabilities into before it filed for bankruptcy two days later.

Gordon did not respond to an emailed request for comment Thursday.

As part of its bankruptcy plan, J&J, through its new subsidiary called LTL Management LLC, would pay $2 billion in exchange for a shield against all current and future talc litigation.

A coalition of plaintiffs' attorneys and several Congress members have called for J&J to end the plan, calling it an effort to exploit and "manipulate the bankruptcy law," and "a way to dodge accountability," in the talc litigation.

Jones Day, perhaps the only firm to successfully use this corporate restructuring strategy, has done so at least four times before in a small bankruptcy court in North Carolina. However, after the firm's fifth attempt, U.S. Bankruptcy Judge Craig Whitley, saying J&J more than forum shopped to get its new company into his North Carolina bankruptcy court, punted the case to New Jersey, where most talc lawsuits are being heard in a multidistrict litigation.

Before moving the case to New Jersey, Whitley also ruled LTL's chapter 11 bankruptcy did not trigger an automatic stay in the talc litigation for J&J and other defendants, as Jones Day and its client had hoped.

In the latest setback for J&J, New Jersey trustee Andrew Vara filed an objection Wednesday to Jones Day's representation of LTL Management because the firm represents the J&J parent company and several other subsidiaries that did not file for bankruptcy and could have conflicts of interest.

"Jones Day appears to be the architect of the divisional merger, which raises several questions for Jones Day concerning issues of fundamental, inherent, and structural conflicts, intercompany claims and other issues that may exist between and among the debtor, J&J, Old JJCI, New JJCI and other related J&J affiliates and subsidiaries," Vara wrote.

Commenting Thursday, bankruptcy and transactional expert David S. Kupetz of SulmeyerKupetz PC said while Jones Day could overcome Vara's objection, the complexity of J&J's restructuring deal, makes it difficult to say definitively.

"If you take a very technical view, you could possibly conclude that Jones Day is either representing or holding interests adverse to the bankruptcy estate," Kupetz said. "On the other hand, I'm guessing Jones Day will reply to this with additional information and ultimately, I would expect their retention to be approved."

"My one disclaimer would be that this case is pretty unusual in that it is unusual to have done a divisional merger to create a debtor for the purpose of going into bankruptcy and having done that two days before you file bankruptcy. That alone makes it a little bit of an outlier. There are uncertainties regarding that transaction,"

Also commenting Thursday, UCLA School of Law professor Lynn M. LoPucki, who recently wrote a paper criticizing corporate forum shopping in bankruptcy, said Jones Day may not have faced this level of scrutiny over its dual representation if it had filed for LTL's bankruptcy in a court competing to hear cases.

"Normally the case would have gone to a competing court, and then the competing court would have glossed over a whole bunch of issues in order to please Jones Day and J&J, the people who brought the case to it," LoPucki said. "But now that the case fell off the wagon through transfer, the New Jersey court is not indebted to Jones Day or J&J for bringing the case. So the case will be decided by the law."

J&J has for years denied its products cause cancer and said it has won the majority of cosmetic talc related jury trials. However, after losing a number of significant jury trials as lawsuits continue to pour in, the company in October announced the creation and bankruptcy of LTL Management, a company with one purpose, "to hold and manage claims" in the nationwide talc litigation.

A hearing to determine whether Jones Day can continue to represent both J&J and LTL, is scheduled for Dec. 15. LTL Management LLC, 21-03032 (N.J. Carolina Bankruptcy Ct., filed Oct. 21, 2021).