Johnson & Johnson’s latest bankruptcy attempt, tied to its proposed $8.9 billion settlement for talc litigations, has been shot down by the United States Bankruptcy Court for the District of New Jersey.
Last week, Bankruptcy Court Judge Michael Kaplan decided that Johnson & Johnson’s subsidiary LTL Management didn’t meet certain requirements to qualify as a good faith bankruptcy attempt.
In the court’s ruling, Judge Kaplan wrote that a company must demonstrate that it is suffering from financial distress, which must be “immediate and apparent” at the time of the bankruptcy filing. And in determining financial distress, “observing smoke may not be enough — one must see flames,” Kaplan wrote.
In a statement released after the decision, Johnson & Johnson said it will appeal the ruling, saying LTL launched its bankruptcy case “in good faith and in strict compliance with the Bankruptcy Code.”
The company said to avoid wasting decades and billions of dollars litigating the talc baby powder cases in the tort system, its proposed $8.9 billion settlement would afford timely and “equitable compensation” for all claimants. It said LTL will appeal the Bankruptcy Court’s ruling “to preserve claimants’ ability to avail themselves of that offer.”
Johnson & Johnson created LTL to handle its talc litigations, a controversial bankruptcy strategy called the Texas two-step that involves offloading liabilities to a subsidiary, which then files for bankruptcy.
Johnson & Johnson is facing more than 100,000 lawsuits claiming that its baby powder had asbestos that caused ovarian cancer and mesothelioma among other cancers.
Related: J&J Sues Baby Powder Researchers Over “Junk Litigation Opinions”
According to Bloomberg, this week, Johnson & Johnson and a committee of cancer victims agreed to speed up the court appeal.
The first time Johnson & Johnson put LTL into bankruptcy was in 2021. The case was dismissed, after which Johnson & Johnson struck a deal with tens of thousands of claimants and had LTL file for bankruptcy again, but the case was rejected.
The talc litigations are largely on hold amid the bankruptcy filings and appeals; however, Kaplan permitted one case to proceed in court, the decision of which awarded $18.8 million to plaintiff Anthony Hernandez Valadez.
Throughout the legal battles, Johnson & Johnson has maintained that its baby powder is safe. Despite this, the company pulled it off shelves in the US and Canada in 2020 and will do the same globally in 2023. The company has replaced it with a cornstarch version.
Last month, the company sued four physicians who published research papers about the dangers of the baby powder, saying the papers were parroting “junk litigation opinions.”
After the latest Bankruptcy Court ruling, Johnson & Johnson’s shares were down 4.1 percent on Monday, which was on track to be the largest daily percentage drop in the company’s shares since June 2020.
The Bankruptcy Court’s continued rejections of Johnson & Johnson’s Texas two-step bankruptcy strategy is certainly sending out a strong message to other companies that currently are, or may be looking to, utilize the approach. Currently, 3M and Georgia-Pacific are attempting to offload hundreds of thousands of injury claims through various versions of the technique.
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