Johnson & Johnson incorporated a newly formed subsidiary in North Carolina and filed a chapter 11 petition for that company in Charlotte two days later. According to Bankruptcy Judge J. Craig Whitley, J&J undertook the restructuring “to fully resolve talc-related claims through chapter 11 reorganization without subjecting the entire J&J enterprise to a bankruptcy proceeding.”
On motion by the bankruptcy administrator, Judge Whitley transferred venue to New Jersey, where J&J is headquartered and where 35,000 multidistrict talc cases have been pending against J&J for five years.
In his opinion on November 16, Judge Whitley said that J&J was “trying to manufacture venue and is attempting to outsmart the purpose of the [venue] statute.” Although he considered the “purposeful creation of venue,” Judge Whitley sent the case to New Jersey as the “more appropriate venue for the administration of the estate.”
The Facts
Just before filing, J&J created two new subsidiaries. One was to be the debtor. In substance, the other took over J&J’s businesses.
The debtor was first created in Texas as a limited liability company and converted to a North Carolina limited liability company. On October 14, two days later, the debtor filed a chapter 11 petition in Charlotte.
The debtor was given all talc-related claims and insurance receivables, plus $6 million cash in a North Carolina bank account. The debtor was also given an interest in a newly created affiliate. [Note: This analysis does not deal with fraudulent transfer or similar theories. The description of the corporate structure has been abbreviated to highlight factors of significance regarding venue.]
The debtor’s principal place of business is New Jersey, and its employees all work in New Jersey. The debtor has no operations in North Carolina, Judge Whitley said.
Of 38,000 talc-related tort suits against J&J, 35,000 have been in a multidistrict litigation in New Jersey district court for five years. Insurance companies are prosecuting declaratory judgment suits against J&J in a New Jersey state court pertaining to their obligations under insurance policies.
Given “the apparent lack of a connection to this judicial district as well as its own judicial resources,” Judge Whitley entered an order to show cause on October 25 to consider the bankruptcy administrator’s motion to transfer venue. Other parties then filed motions of their own to transfer venue to New Jersey or Delaware. At the hearing on November 10, the debtor opposed transferring venue. [Note: North Carolina is one of two states with bankruptcy administrators rather than U.S. Trustees.]
The Venue Statute
Under 28 U.S.C. §1408(1), venue is proper where the debtor has its “domicile, residence, principal place of business . . . or principal assets.” Judge Whitley said that venue was proper in North Carolina because the debtor was “a North Carolina entity on the filing date, if only for two days.”
Under 28 U.S.C. §1412, the court may transfer venue “in the interest of justice or for the convenience of the parties.”
Judge Whitley said that the debtor’s choice of venue is given “substantial weight” and that transferring venue is “highly unusual.” However, he said, “this case is highly unusual.” He spent the bulk of his opinion explaining why “the convenience of the parties and the interests of justice [both] warrant transfer of this case to the District of New Jersey.”
Convenience of the Parties
Regarding the convenience of the parties, Judge Whitley listed five factors and concluded that all counseled for venue transfer. There was substantial litigation in another district. At the request of J&J, the multidistrict panel had selected New Jersey as the venue for the 35,000-case multidistrict litigation. The multidistrict panel, he said, chose New Jersey “because it was convenient and accessible for all the parties involved.”
Although the multidistrict suit is currently stayed by Section 362, Judge Whitley said:
[I]t could even be joined with the bankruptcy case to help efficiently resolve thousands of talc related claims and aid in any future estimation proceeding. Therefore, the administration of this estate is best served by transferring this case to the District of New Jersey.
Other factors weighing in favor of transferring venue were: (1) the debtor’s headquarters in New Jersey; (2) the location of the debtor’s employees and witnesses in New Jersey; (3) the location of the parent’s headquarters in New Jersey; and (4) the lack of the debtor’s connections to North Carolina, aside from the $6 million bank account.
Judge Whitley distinguished two seemingly similar mass tort cases pending in North Carolina where the bankruptcy courts declined to change venue. In one, there was no other “inherently more favorable” venue, and in the second case, the venue motion was not decided until two years after filing.
Judge Whitley mentioned the three other mass-tort cases in his district but said there had been no motions to transfer venue.
The Interests of Justice
While the interests-of-justice standard is “broad and flexible,” Judge Whitley said that “forum shopping is also a consideration.”
Judge Whitley said that the debtor underwent a corporate restructuring “purely for the purpose of filing bankruptcy.” Quoting In re Patriot Coal Corp., 482 B.R. 718, 745 (Bankr. S.D.N.Y. 2012), he said, “Setting up a company with the sole intent of filing bankruptcy in a certain district cannot be ‘the thing which the [venue] statute intended.’”
Judge Whitley said that the debtor was “attempting to outsmart the venue statute.” He cited the debtor for arguing that creditors wanted another venue “with a more friendly dismissal standard.”
Judge Whitley cited four other mass-tort cases where the debtors employed the so-called Texas Two Step and filed “for bankruptcy in this district shortly after its creation.” He said that “every debtor using the Texas Two Step filed for bankruptcy in this district. As a result, any superior experience and purported expertise this Court may possess as to divisional mergers exists only because it is the only court that has ever seen these issues.”
Judge Whitley saw “no reason this Court should be the only bankruptcy court to have the opportunity to weigh in on these novel legal issues, especially considering that the ‘Texas Two Step’ tactic is being employed by national corporations and impacts tens of thousands of present and future claimants across the country.”
Judge Whitley transferred venue to New Jersey, “potentially to be referenced to the Bankruptcy Court, should that Court deem it appropriate.”
Epilogue
The case has been transferred to the district of New Jersey, to be heard in Trenton before Chief Bankruptcy Judge Michael B. Kaplan. In New Jersey, the case number is 21-30589.
Johnson & Johnson incorporated a newly formed subsidiary in North Carolina and filed a chapter 11 petition for that company in Charlotte two days later. According to Bankruptcy Judge J. Craig Whitley, J&J undertook the restructuring “to fully resolve talc-related claims through chapter 11 reorganization without subjecting the entire J&J enterprise to a bankruptcy proceeding.”
On motion by the bankruptcy administrator, Judge Whitley transferred venue to New Jersey, where J&J is headquartered and where 35,000 multidistrict talc cases have been pending against J&J for five years.
In his opinion on November 16, Judge Whitley said that J&J was “trying to manufacture venue and is attempting to outsmart the purpose of the [venue] statute.” Although he considered the “purposeful creation of venue,” Judge Whitley sent the case to New Jersey as the “more appropriate venue for the administration of the estate.”