J&J cannot use the bankruptcy of its subsidiary, LTL Management LLC, to settle claims that its talc-based products, like baby powder, caused cancer, Judge Michael Kaplan of the US Bankruptcy Court for the District of New Jersey ruled July 28.
The ruling leaves J&J boxed out of its preferred venue to settle the claims, although the company said it would appeal. Aside from an appeal, J&J can settle individual claims, negotiate with plaintiff firms or pursue a global settlement.
J&J didn’t immediately respond to a request for comment. Lawyers pursuing claims against the company are weighing next steps, and some have said they are continuing to discuss a resolution with J&J.
Although it would be more challenging for the company to resolve all claims through mass tort litigation,“there are ways of resolving this outside of bankruptcy,” said Otterbourg PC attorney Adam Silverstein, who represents the official committee of claimants in the LTL bankruptcy.
LTL was not in “imminent and immediate financial distress” and therefore did not qualify for the benefits of bankruptcy, Kaplan ruled. J&J had been trying to settle all talc liability against the company for $8.9 billion.
Civil Court Resolution
Barring a successful appeal, J&J and its talc unit will be forced back into civil court to face thousands of asbestos suits. Although J&J has gone to great lengths to avoid that, repeatedly arguing that a mass settlement in bankruptcy is the best resolution for all parties, it has reached trial court deals before.
In 2020, the company settled over 1,000 suits for more than $100 million with several law firms.
The company could try reaching a deal similar to the National Football League in its litigation with former players who suffered long term brain trauma from concussions, Silverstein said. Another option would be to set up a trust for victims modeled after the September 11th Victim Compensation Fund, he said.
Finding ways to settle with current plaintiffs in multidistrict litigation, which has been mostly on hold since the first bankruptcy, could be straightforward, according to Judith Fitzgerald, an attorney with Tucker Arensberg PC and a former bankruptcy judge.
Dealing with claimants whose injuries haven’t become apparent yet could prove difficult, but that doesn’t mean J&J can’t figure out a way to deal with that issue or allow future plaintiffs to try their luck in the trial courts when that time arrives, said Fitzgerald.
“I think there are numerous ways it could be done,” she said.
Kaplan suggested that J&J could find a bankruptcy court solution in the ongoing Chapter 11 of its former talc supplier, Imerys Talc America Inc. The company had previously offered around $4 billion to settle ovarian cancer claims in the MDL and corresponding claims against J&J entities in the Imerys case, according to court papers.
Limited Appellate Options
The precedent created by its first bankruptcy leaves an uphill battle to victory on appeal in its second bankruptcy, said Ralph Brubaker, a bankruptcy professor at the University of Illinois.
The imminent financial distress standard comes from a previous effort by J&J to use bankruptcy to resolve its talc liability. The US Court of Appeals for the Third Circuit earlier this year threw out that attempt when it determined that LTL did not qualify for bankruptcy relief because it was not in financial distress.
J&J again placed LTL in bankruptcy just hours after its first maneuver was dismissed by the bankruptcy court.
Kaplan stuck closely to that Third Circuit ruling in determining that LTL wasn’t in financial distress, Brubaker said. It will be hard for J&J to argue to the court that created the standard that it was incorrectly applied or otherwise misguided.
“I think its going to be very difficult to get much traction in the Third Circuit,” he said.
The circuit court landscape on the issue is still being developed, and the Supreme Court may want to wait until more courts have clarified their stance before weighing in, Brubaker said.
But given its long odds in the Third Circuit, Supreme Court review may be J&J’s best hope for appellate relief, said Anthony Sabino, a bankruptcy law professor at St. John’s University.
The case raises important questions about what constitutes a good faith bankruptcy filing and how federal bankruptcy law interacts with the Texas state law J&J used to isolate its liability, Sabino said.
“I still think that there’s an argument to be made that the LTL bankruptcy is still viable under our bankruptcy code, and I think that’s something that the Supreme Court would sink its teeth into,” he said.
Continuing to Negotiate
Plaintiffs’ attorneys say they are ready to work with J&J.
“I’m committed to working with J&J toward a global resolution,” said James Onder, whose firm OnderLaw LLC represents about 20,000 claimants. “It’s premature to speculate on how that might look,” he added.
Onder’s firm was one of several that supported LTL’s second bankruptcy approach, providing the company with some momentum. Nachwati Law Group, which represents about 5,000 talc claimants, was also in the group that backed the rejiggered bankruptcy.
“We’re in constant communication with J&J as early as today about engaging in a dialogue about finding a pathway forward,” lead attorney Majed Nachawati said Monday. “We’re inclined to follow Judge Kaplan’s ruling while at the same engage in good-faith negotiations.”
J&J’s chances to reach a bankruptcy court resolution have slimmed, but it may still try to fashion a deal with plaintiff firms in state or federal court, Nachawati said.
“A resolution outside of bankruptcy is a possibility and that is being considered by all parties, for sure,” he said. “In my view the market has spoken and it says there needs to be a fair resolution outside of bankruptcy or trials will continue to go forward.”
The case is LTL Management LLC, Bankr. D.N.J., No. 23-12825-MBK, 7/28/23.
