Eight days after the appeal was submitted, the Third Circuit upheld dismissal of a Johnson & Johnson subsidiary’s second attempt at disposing of present and future claims based on its Baby Powder, which allegedly contained traces of asbestos.

Circuit Judge Thomas L. Ambro was the author of the first decision in January 2023 dismissing the chapter 11 petition filed by J&J subsidiary LTL Management LLC. He held that the petition was filed in bad faith, because there was no “financial distress.”

Two hours after the first case was dismissed, LTL filed a second time in the same bankruptcy court in New Jersey. The bankruptcy judge dismissed the second filing for lack of “financial distress.” The Third Circuit accepted a direct appeal.

The new opinion on July 25 allowed Judge Ambro to explain why his first opinion should not be read narrowly. For instance, he said, “the ‘attenuated’ possibility of insolvency far in the future does not offer sufficient financial distress today to justify a Chapter 11 filing.” [Emphasis added.]

On the other hand, Judge Ambro said that “a mass-tort defendant has a viable case for bankruptcy” when “future insolvency is a realistic possibility based on meaningful evidence — not just the result of a highly speculative ‘worst-case’ scenario.” [Emphasis added.]

Judge Ambro’s new opinion is nonprecedential. This writer expects it nonetheless will be the definitive interpretation of the first LTL decision.

The Second Filing

Judge Ambro’s first decision was 40 pages in length. In re LTL Mgmt., LLC, 64 F.4th 84 (3d Cir. 2023). To read ABI’s report, click here. The new opinion is a scant 12 pages.

Reciting history more succinctly in the new opinion, Judge Ambro said that “J&J claims to have transferred all talc liability to the newly formed LTL, which received a funding agreement directly obligating J&J to cover LTL’s talc liabilities and bankruptcy expenses up to roughly $61.5 billion.” [Emphasis added.] He had called for dismissal of the first petition, given “[w]ell-established Third Circuit caselaw [that] bars a bankruptcy absent financial distress.” He said that the funding agreement was “an ATM disguised as a contract.”

In the second chapter 11 filing, Judge Ambro explained how J&J had modified the funding agreement by narrowing the coverage to some $30 billion underwritten only by the parent holding company. He quoted testimony by LTL’s inside counsel as admitting that J&J “agreed to shrink the funding agreement to . . . place LTL in financial distress.” The bankruptcy court granted a motion by the talc committee to dismiss the second filing in July 2023. In re LTL Mgmt., LLC, 652 B.R. 433 (Bankr. D.N.J. 2023). To read ABI’s report, click here.

Factfinding Is Ok

On a direct appeal, the debtor contended that the bankruptcy court “erred in its factfinding” and that the bankruptcy court had misapplied Judge Ambro’s first decision.

As to factfinding, Judge Ambro pointed to testimony from the debtor’s own expert who said that liability was not more than $21 billion, less than the holding company’s $30 billion going-concern value. Judge Ambro said that the bankruptcy court did not err by failing to consider the possibility of “blockbuster verdicts,” because the debtor “points to no evidence projecting the likelihood and size of those verdicts.”

Finding no clearly erroneous findings of fact because “any risk of funding exhaustion is, on this record, quite ‘attenuated,’” Judge Ambro turned to the question of whether the bankruptcy court had misapplied his first decision.

The First Decision Isn’t Narrow

The debtor contended that the bankruptcy court erred in believing that the first decision only looked to current conditions.

Judge Ambro began the analysis by observing that “bankruptcy requires ‘apparent’ financial distress.” He saw no error below because the debtor’s assets exceeded its worst-case scenario. On those facts, he saw no “insolvency-based financial distress.” Furthermore, he said that “the ‘attenuated’ possibility of insolvency far in the future does not offer sufficient financial distress today to justify a Chapter 11 filing.”

Even if the parent holding company were required to liquidate assets, Judge Ambro said “that is not the question — our analysis must focus on LTL.”

The Ad Hoc Committee’s Argument

An ad hoc committee of creditors who support the plan made a different argument: Vast creditor support presented “unusual circumstances” under Section 1112(b)(2) to bypass dismissal in the interest of creditors.

The bankruptcy court had rejected the argument, Judge Ambro said, in “a thoughtful review of the caselaw” because “that ‘lack of financial distress is not the type of “bad faith” that could be subject to the § 1112(b) exception[.]’”

Talc Committee Fees

The bankruptcy court had authorized the continued existence of the talc committee after dismissal because the committee was responsible for having the second filing dismissed. The debtor argued that the committee ceased to exist on dismissal and was not entitled to have the debtor pay its expenses. Judge Ambro disagreed.

Among other grounds, Judge Ambro cited Section 1109(b) to mean that the committee had an “indisputable interest in litigating appeals on behalf of those it represents.” Were there no entitlement to recover fees, he said that “an official committee could win a dismissal for its constituents but be unable to defend that order from an appellate challenge.”