Bankruptcy experts want to weigh in against J&J’s ‘abuse’ of system

Bankruptcy experts want to weigh in against J&J's 'abuse' of system

Asking to file amicus briefs in a New Jersey bankruptcy case, a group of law professors said Johnson & Johnson's "blatant abuse" of the bankruptcy system would allow the pharmaceutical giant to escape liability in the nationwide talc litigation.

Seven bankruptcy professors from universities across the nation filed a motion Tuesday, asking Bankruptcy Judge Michael B. Kaplan to allow them to file friend-of-the-court briefs in a bankruptcy case filed by J&J's newly-created subsidiary LTL Management. In October, J&J announced it created LTL Management to "hold and manage" thousands of talc claims, only two days before filing for bankruptcy.

The professors want to file amicus briefs in support of a group of talc claimants who say if the bankruptcy petition is not thrown out, thousands of cancer victims will be robbed of "their day in court."

"J&J, an obviously solvent company with a market capitalization of about $400 billion, created LTL, a shell corporation with no operating business and no reorganizational purpose, specifically to distance and protect J&J's assets from its talc victims, end all existing and future litigation against J&J, and deprive innocent talc victims of their day in court," the motion reads.

J&J's bankruptcy strategy is not about granting a fresh start to an unfortunate debtor or maximizing estate value for the benefit of creditors, the professors argue. Rather, it's about "minimizing estate value to the detriment of J&J's tort victims," according to a memorandum in support of their motion.

Bankruptcy Professor Robert K. Rasmussen of USC Gould School of Law, one of the seven seeking to file briefs, said Kaplan should exercise his discretion and dismiss LTL's bankruptcy petition because it threatens the integrity of the bankruptcy system.

"At some level, this isn't really about J&J, this is more about the integrity of the bankruptcy system," Rasmussen said. "The bankruptcy system is designed to reorganize companies that are in financial distress. J&J is not a company in financial distress. It is trying to convert bankruptcy into a system whereby healthy companies can deal with potential mass tort liabilities, and that standing alone is not a goal of the bankruptcy system."

J&J faces 38,000 lawsuits consolidated in California and New Jersey, claiming the company's baby powder contains asbestos and causes ovarian cancer and mesothelioma. The pharmaceutical giant has for years denied its products cause cancer and said it has won the majority of cosmetic talc-related jury trials.

After losing a number of significant jury trials in 2021, J&J in October announced the creation and the bankruptcy of a new liability-holding subsidiary, LTL. Using a Texas divisive-merger statute, J&J dissolved one of its baby powder-making subsidiaries and two days later, created two new companies: Johnson & Johnson Consumer Inc. and a North Carolina company called LTL Management LLC.

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

Some lawmakers have questioned Purdue Pharma's recent bankruptcy plan that would allow the pharmaceutical company's founders to receive third-party liability release in the national opioid litigation. Others have questioned the Boy Scouts of America's bankruptcy plan that would allow it to escape further liability in the sex abuse litigation. While those cases may or may not be problematic for other reasons, they were filed by companies facing financial distress, Rasmussen said.

"We have good arguments about should the Sacklers get releases as part of that bankruptcy. That's a different question, but Purdue Pharma is a company that is clearly insolvent; it belongs in bankruptcy," Rasmussen said. "I'm perfectly comfortable with companies that are facing financial distress filing for bankruptcy and then using Bankruptcy Code to address that financial distress even if it involves mass torts. What troubles me is when you have a company that's not in financial distress, trying to use bankruptcy to deal with potential mass tort liability."

Other professors who joined Rasmussen include Kenneth Ayotte of U.C. Berkeley School of Law; Susan Block-Lieb of Fordham University School of Law; Diane Dick of Seattle University School of Law; Jared Ellias of University of California, Hastings College of the Law; Bruce Markell of Pritzker School of Law, Northwestern; and Yesha Yadav of Vanderbilt University Law School. They are represented by New York attorney Sean E. O'Donnell of Herrick Feinstein LLP.

The talc claimants will argue to dismiss the case at a hearing next month before Kaplan. J&J did not respond to a request for comment Thursday.