After the Johnson & Johnson talc chapter 11 case was transferred from North Carolina to New Jersey, the U.S. Trustee in New Jersey appointed a second official committee to represent a subset of talc claimants to serve alongside the official talc committee that had been approved by the bankruptcy judge in North Carolina.
The debtors and others challenged the U.S. Trustee’s appointment of the additional official committee. According to Bankruptcy Judge Michael B. Kaplan of Trenton, N.J., the U.S. Trustee asserted “that his decisions in this area cannot be subjected to judicial review [and] that he need not provide either the Court or other parties with his rationale or reasoning behind the actions taken.”
Saying that he “respectfully [] disagrees with this position,” Judge Kaplan disbanded the newly formed committee without prejudice.
In his January 20 opinion, Judge Kaplan went beyond the confines of his holding to lay down rules about the review of decisions by the U.S. Trustee that may arise later in the case.
The Two Committees
Just before the chapter 11 filing, Johnson & Johnson created two new subsidiaries. One was to be the debtor, and the other took over J&J’s businesses.
The debtor was first created as a limited liability company in Texas 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’s principal place of business is New Jersey, and its employees all work in New Jersey. The debtor had no operations in North Carolina.
In an opinion on November 16, Bankruptcy Judge J. Craig Whitley transferred venue to New Jersey, where the case was assigned to Judge Kaplan. To read ABI’s report, click here.
North Carolina is one of two states with Bankruptcy Administrators rather than U.S. Trustees. Immediately after filing in North Carolina, the Bankruptcy Administrator sought interest from claimants wishing to serve on an official talc committee. Recommending who should serve on the committee, the Bankruptcy Administrator filed a motion asking the North Carolina judge to appoint the committee.
The North Carolina judge entered an order establishing an official talc claimants’ committee with 11 members. The order was without prejudice to further consideration by the North Carolina judge or any other judge presiding over the reorganization.
About five weeks after the case landed in New Jersey, the U.S. Trustee appointed a second talc committee and reconstituted the original talc committee. One committee, with nine members, was to represent ovarian cancer claimants, and the second, with seven members, was for mesothelioma claimants. Members of the original committee were spread between the two committees.
The debtor and lawyers representing thousands of claimants filed motions to vacate the appointment of the new committee and reinstate the original committee. Judge Kaplan granted the motion.
U.S. Trustee May Not Abrogate a Court Order
Judge Kaplan first considered whether the U.S. Trustee’s reconstitution of the committees was void. He noted that nothing in Section 1102(a)(1) requires a court order before the U.S. Trustee appoints a committee or an additional committee. It says that “the United States trustee shall appoint a committee of creditors holding unsecured claims and may appoint additional committees of creditors or of equity security holders as the United States trustee deems appropriate.”
However, Judge Kaplan said, “nothing in the referenced language [in Section 1102] empowers the U.S. Trustee to modify a court order by unilaterally ‘reconstituting’ a committee of creditors whose composition has been established by such an order.”
The debtor contended that the order appointing the one committee was law of the case. As a transferee court, Judge Kaplan said that he was “without power to modify or vacate a transferor judge’s order without adequate justification.”
Although the U.S. Trustee has statutory power to appoint a committee, Judge Kaplan said that the U.S. Trustee “may not use those powers to unilaterally side-step an existing order.” He held that the appointment of a new committee and the reconstitution of the original committee “violates law of the case doctrine and this Court is obligated to vacate same and re-establish the force and effect of the [North Carolina order appointing one committee].”
Judge Kaplan was careful to say that he was making no determination about the propriety of two committees, nor was he saying that the U.S. Trustee had no authority to reconstitute the original committee. “Indeed,” he said, “such actions may be warranted.” Rather, the U.S. Trustee cannot use Section 1102 to “overrule” the North Carolina order appointing one committee.
The proper procedure, Judge Kaplan said, was for the U.S. Trustee to seek relief from the North Carolina committee order under Bankruptcy Rule 9024 or Section 105.
Other Issues
His ruling that the U.S. Trustee did not have unilateral authority to deviate from the existing committee-formation order was sufficient in itself for Judge Kaplan to strike the appointment of the new committee, without prejudice, to disband the two committees and to reinstate the original committee. To avoid uncertainty going forward, Judge Kaplan opined on related issues.
According to Judge Kaplan, the U.S. Trustee argued that Section 1102(a)(1) “vests him with sole discretion regarding the composition of creditor/equity committees, as well as the initial appointment of additional committees, as he ‘deems appropriate’” and that “his decisions in this area cannot be subjected to judicial review.”
“Likewise,” Judge Kaplan said, “the U.S. Trustee takes the position that he need not provide either the Court or other parties with his rationale or reasoning behind the actions taken.”
Judge Kaplan dissented, for several reasons.
Although courts disagree, Judge Kaplan said he was persuaded by decisions from a majority of courts “that favor judicial review.” The “notion,” he said, “that the U.S. Trustee’s decisions regarding committee appointments are not subject to any type of review by any authority seems to belie common sense.” [Emphasis in original.]
In view of “the long-standing, strong presumption that Congress intends judicial review of administrative actions,” Judge Kaplan said that “judicial review of a U.S. Trustee’s committee decisions is available if the circumstances so warrant.” He saw “no express language [in the statute] that prohibits a bankruptcy court from engaging in judicial review of a trustee's committee appointments.”
Judge Kaplan saw additional support in Sections 1102(a)(2) and (a)(4), which allow the bankruptcy court to order the appointment of additional committees and change the membership of a committee. “These provisions necessarily require . . . a review of U.S. Trustee’s decisions,” he said.
A similar implication of judicial review appears in Bankruptcy Rule 2020, which says that a “proceeding to contest any act or failure to act by the United States trustee is governed by Rule 9014.”
Judge Kaplan also dealt with the standard of review and decided to follow the decision by Bankruptcy Judge Alan Trust in In re JNL Funding Corp., 438 B.R. 356, 360 (Bankr. E.D.N.Y. 2010). The standard, he said, is “arbitrary and capricious” or “abuse of discretion” and means that actions by the U.S. Trustee are entitled to deference.
Basing his power to disband a committee on Section 105(a) and applying the facts to the law, Judge Kaplan said he was left with “no choice but to grant the Motions . . . unless and until the U.S. Trustee pulls back the curtains on the decision-making process.” Without prejudice, he disbanded the two committees and reinstated the original talc committee appointed in North Carolina.
After the Johnson & Johnson talc chapter 11 case was transferred from North Carolina to New Jersey, the U.S. Trustee in New Jersey appointed a second official committee to represent a subset of talc claimants to serve alongside the official talc committee that had been approved by the bankruptcy judge in North Carolina.
The debtors and others challenged the U.S. Trustee’s appointment of the additional official committee. According to Bankruptcy Judge Michael B. Kaplan of Trenton, N.J., the U.S. Trustee asserted “that his decisions in this area cannot be subjected to judicial review [and] that he need not provide either the Court or other parties with his rationale or reasoning behind the actions taken.”
Saying that he “respectfully [] disagrees with this position,” Judge Kaplan disbanded the newly formed committee without prejudice.
In his January 20 opinion, Judge Kaplan went beyond the confines of his holding to lay down rules about the review of decisions by the U.S. Trustee that may arise later in the case.