Dismissing Johnson & Johnson’s third attempt at extinguishing talc claims through chapter 11, Bankruptcy Judge Christopher Lopez of Houston nixed theories for evading the Purdue prohibition of nondebtor releases.

In his March 31 opinion, Judge Lopez put strictures on releases for nondebtors that can sometimes be permissible in asbestos cases under Section 524(g)(4)(A)(ii). The product of a two-week trial, his 57-page, single-spaced opinion is the definitive, detailed, inside history of J&J’s efforts at obtaining absolution for talc claims through creative legal theories.

After saying that J&J was willing to commit $9 billion to discharge 90,000 claims, Judge Lopez opened his opinion by describing the previous chapter 11 cases that ended in two dismissals in New Jersey that were upheld in the Third Circuit. For those without time to read the entire 57 pages, the first five pages provide a workable summary of the findings and holdings to follow. He pointed out, “This case is different. It is not like Boy Scouts, Purdue Pharma, or Imerys.”

The Third Chapter 11 Case

Immediately after the second dismissal in New Jersey was upheld in the Third Circuit, Judge Lopez described the negotiations leading to a new chapter 11 plan and the third filing in Houston in September 2024.

With a contribution of $9 billion from J&J over time, the new plan would have released claims against all J&J entities, not only the newly formed subsidiary named Red River Talc that became the debtor after being created under a Texas divisional merger. Hundreds of nondebtors also would be released, including retailers. Creditors were not given the option of opting out and would be bound by releases even if they voted against the plan.

Aiming for nondebtor releases that are permissible in an asbestos case under Section 524(g), the debtor needed 75% of the affected class to accept the plan. When the vote first came in, only 70% were accepting. The acceptance level jumped to 83% after a law firm purportedly changed the votes of its 11,000 clients from reject to accept.

The chapter 11 filing in Houston brought a motion to transfer venue to New Jersey, which Judge Lopez denied. Then, the U.S. Trustee and “many parties” objected to confirmation of the plan and sought dismissal of the case.

The Defective Vote on the Plan

Judge Lopez devoted the largest part of his opinion to explaining how “over 90,000 votes were cast, but at least half of them cannot count. There were numerous prepetition voting irregularities and solicitation hiccups that make it impossible certify the vote.” Consequently, he found that “the requisite 75% claimant support has not been met for plan confirmation purposes.”

Although voting ended too quickly, the major flaw resulted from lawyers who purported to vote on behalf of their clients. Judge Lopez gave examples explaining why “the majority of these votes were not supported by a power of attorney.”

For instance, Judge Lopez said that thousands of votes submitted by two law firms based on their retention agreements “do not give them express authority to vote on behalf of their clients in this bankruptcy.” “With one or two exceptions,” he said, “the majority of the engagement letters for the law firms that” voted on behalf of their clients had the same flaws.

“Another reason these votes cannot be certified is that the lawyers,” Judge Lopez said, “were likely settling claims without client approval.”

With regard to the law firm whose clients switched from reject to accept, Judge Lopez said that “women with cancer had two business days and a weekend to respond and indicate their votes. This is an ‘unreasonably’ short time for a creditor vote under Bankruptcy Rule 3018(b), and therefore, regardless of the other issues the Court has discussed, these votes cannot be counted.”

Judge Lopez ruled that “the entire vote cannot be certified.” The master ballots used by law firms to vote for hundreds or thousands of clients “would have worked, but it was not carefully followed.”

The Purdue Violation

Beyond the vote, “The Plan contains improper nonconsensual third-party releases,” Judge Lopez said. He identified releases in favor of “hundreds of nondebtor third parties related to J&J.” In addition, he said, “There is no dispute that voters had no opportunity to opt in or opt out of these releases. Thus, voters who affirmatively voted to reject the Plan would still be bound by the Third-Party Releases.”

The debtor contended that the Purdue prohibition did not apply because it was a “full pay” plan, possibly carved out by the Supreme Court from the nondebtor release proscription. See Harrington v. Purdue Pharma L.P., 602 U.S. 204, 226-27 (2024). Judge Lopez did “not read Purdue as implicitly endorsing the third-party releases in this case because this is not a ‘full pay’ case.” Moreover, he said, “the Fifth Circuit has stated many times that nonconsensual third-party releases are not permissible.”

Nondebtor Releases Under Section 524(g)

In asbestos cases, Section 524(g) can permit nondebtor releases. In the debtor’s plan, there would have been releases for 700 entities, including retailers who sold the J&J product. The plan would not be feasible without the nondebtor releases, because retailers would have indemnification claims against J&J.

For permissible nondebtor releases, Judge Lopez cited the Second and Third Circuits for holding “that § 524(g)(4)(A)(ii) only enjoins actions against third parties that are derivative of claims against the debtor.” He held that claims against retailers were not derivative claims qualifying for releases under Section 524(g)(4)(A)(ii).

Dismissal or ‘Redo’?

Judge Lopez ended his opinion by addressing the question of dismissal for “cause” under Section 1112(b)(1).

Regarding the Third Circuit’s dismissal of prior filings for lack of “financial distress,” Judge Lopez said that the Philadelphia-based court’s “decision is not binding on this Court. But, under Fifth Circuit precedent, a debtor’s financial condition is a factor a court can consider in its analysis.” He went on to say in a footnote that the Houston case had “countless factual differences” from the prior New Jersey cases, so that the third filing could not be dismissed “under the doctrine of collateral estoppel.”

Turning to the facts of the third filing with regard to dismissal, Judge Lopez said that the debtor “unnecessarily rushed the solicitation process at the cost of obtaining actual votes from creditors.” He said that the plan was not feasible since retailers could not be given releases.

Normally, Judge Lopez said that a court would deny confirmation, then call for a new disclosure statement, a new plan and new solicitation, with opt in or opt out for nondebtor releases. “But that will not work here,” he said. “There is no way to confirm the solicited plan or the amended versions. The entire construct of the Plan requires re-thinking from a post-Purdue perspective.”

Judge Lopez found that it was “in the best interests” of the debtor and creditors “to dismiss this case for cause.” He mentioned the “prepetition voting and solicitation irregularities, including the unreasonably short voting time for thousands of creditors [that were] all done to get to 75% at any cost.”

Judge Lopez dismissed the case, saying that “not any one individual factor . . . requires this result” but that it is “all of them together that require the Court to dismiss this case.”