Following the Third Circuit’s dismissal of two prior attempts to shed asbestos liability in the bankruptcy court in New Jersey, a recently formed subsidiary of Johnson & Johnson filed a new, prepackaged chapter 11 case in Houston on September 20.

The very same day, the U.S. Trustee in New Jersey filed a motion in the New Jersey bankruptcy court to transfer venue of the new case to New Jersey under Bankruptcy Rule 1014(b). The U.S. Trustee is also asking the New Jersey bankruptcy court to enjoin proceedings in Houston pending resolution of the venue motion.

The Third Chapter 11 Effort

A newly formed subsidiary of J&J, called LTL Management, filed a chapter 11 petition in North Carolina in October 2021 designed to release the entire family of companies from liability for traces of asbestos allegedly contained in products containing talc. Less than one month later, the North Carolina court transferred venue to New Jersey because J&J was headquartered there. The North Carolina court also spotted forum-shopping as a reason for a venue transfer. In re LTL Management, LLC, Case No. 21-30589, 2021 WL 5343945 (Bankr. W.D.N.C. Nov. 16, 2021). To read ABI’s report, click here.

Eventually, the Third Circuit dismissed the first chapter 11 effort for lack of “financial distress.” In re LTL Mgmt. LLC, 64 F.4th 84 (3d Cir. Jan. 30, 2023). To read ABI’s report, click here.

Hours after dismissal, the J&J subsidiary filed a second chapter 11 petition in New Jersey, hoping to have created financial distress. Still finding financial distress, the bankruptcy court dismissed the second filing under the Third Circuit’s authority. The Third Circuit upheld dismissal in July. In re LTL Mgmt. LLC, 23-2971, 2024 BL 255940, 2024 WL 3540467 (3d Cir. July 25, 2024). To read ABI’s report, click here.

Following the second dismissal, J&J went to work on another chapter 11 plan, this time saying that it garnered votes of 83% of claimants in favor of the new plan. J&J believes that the new plan hits the bid for court approval under Section 524(g) by having won favorable votes for more than 75% of affected creditors.

To carry out the new plan, J&J subsidiary LTL went through a second “divisional merger” under Texas corporate law, a/k/a a “Texas two-step.” The new debtor, called Red River Talc LLC, filed the new chapter 11 petition after taking over the ovarian and gynecological cancer claims. Another newly formed subsidiary assumed liability for mesothelioma and governmental claims.

The new plan in the Red River case is to have a personal-injury trust funded with $9 billion payable over 25 years. The debtor says that the distributions to allowed claims will “more likely average” between $75,000 and $175,000.

The Venue Motion

Anticipating the new filing that arrived on September 20, the U.S. Trustee filed a motion on the same day in the New Jersey bankruptcy court under Bankruptcy Rule 1014(b) seeking to transfer the Houston case to New Jersey. The venue motion was filed before Chief Bankruptcy Judge Michael J. Kaplan in Trenton, N.J., the judge who had dismissed the second filing for lack of financial distress.

Titled “Procedure When Petitions Involving the Same Debtor or Related Debtors Are Filed in Different Courts,” Rule 1014(b) provides:

If petitions commencing cases under the Code . . . are filed in different districts by . . . a debtor and an affiliate, the court in the district in which the first-filed petition is pending may determine, in the interest of justice or for the convenience of the parties, the district or districts in which any of the cases should proceed . . . . The court may order the parties to the later-filed cases not to proceed further until it makes the determination.

The U.S. Trustee filed a separate motion in New Jersey to enjoin the Houston proceedings pending the outcome of the venue motion. Bankruptcy Judge Kaplan will hold a status conference on September 24 regarding the venue and injunction motions.

The Basis for the Venue Motion

Although dismissed, the case involving the second filing remains open in New Jersey to, among other reasons, resolve professional fee matters. In addition, the debtor LTL had asked Judge Kaplan to keep the case open pending the potential filing of a petition for certiorari to the U.S. Supreme Court.

Citing Rule 1014(b), the U.S. Trustee is arguing before Judge Kaplan that “the court in which the first-filed case is pending [is] the ‘decision maker’ if transfer of venue is sought.” The government’s bankruptcy watchdog contends that the two requirements for a change of venue are met: (1) A subsequent case was filed by the same debtor or an affiliate; and (2) the first-filed case remains open.

The U.S. Trustee claims that “it is irrelevant that [the prior case] is nearing dismissal or that only a limited number of matters remain.” On the merits of a change of venue, the U.S. Trustee argues that “venue should be transferred in the interests of justice to prevent the Debtor from forum shopping and thereby evading this Court’s prior rulings.” Evidently, the reference is to the New Jersey court’s dismissal of the second case for lack of financial distress.

The debtor in the third case, Red River, has filed an objection to the U.S. Trustee’s motions to shorten time for hearings on the venue and injunction motions. The debtor says, among other things, that the motions are “frivolous” and that the prior case is not pending, because it was dismissed.

Observations

By having dismissed the two prior filings for lack of financial distress, the Third Circuit had no reason to decide whether nonconsensual, third-party releases are permissible. That question was decided by the Supreme Court in Harrington v. Purdue Pharma L.P., 219 L. Ed. 2d 721, 144 S. Ct. 2071 (Sup. Ct. June 27, 2024). To read ABI’s report on Purdue, click here.

The Red River debtor presumably will argue that third-party releases are not an issue in the third filing because the plan complies with Section 524(g). However, the question remains as to whether the Third Circuit would see financial distress as inapplicable when a plan complies with Section 524(g).

The new, third case might raise the question of whether creditors must have the option of opting out of the third-party releases if the court determines that Red River is solvent or without financial distress. Conceivably, the new case could burrow into the question of whether a Texas two-step is a voidable fraudulent transfer.

If the new case remains in Houston, the Texas judge would not be bound by the Third Circuit’s requirement of financial distress.

Stay tuned!