J&J’s ‘Baby Powder’ Chapter 11 Case Dismissed a Second Time: No Financial Distress

Twice within six months, Johnson & Johnson has suffered dismissal of chapter 11 petitions filed by a subsidiary that aimed to resolve asbestos liability for the entire corporate family, debtors and nondebtors alike.

The new dismissal will result from the July 28 opinion by Chief Bankruptcy Judge Michael B. Kaplan of Trenton, N.J. At the end of January, the Third Circuit reversed Judge Kaplan and ordered him to dismiss the first “Baby Powder” case because it was not filed in good faith given the lack of “financial distress.” See In re LTL Management LLC, 58 F.4th 738, 64 F.4th 84 (3d Cir. Jan. 30, 2023). To read ABI’s report on LTL II, click here.

Two hours after Judge Kaplan signed the dismissal order required by the Third Circuit in LTL II, J&J put the same subsidiary back into chapter 11. The new filing was accompanied by support agreements signed by lawyers saying they represented almost 60,000 asbestos claimants. In addition, the new filing had a different funding agreement with nondebtor J&J companies.

Bound by LTL II in his new opinion on July 28, Judge Kaplan directed dismissal of the new filing because there was no “imminent and immediate financial distress.”

The New Filing

LTL Management LLC was first created as a limited liability company in Texas and converted to a North Carolina limited liability company. Two days after its creation, the debtor filed a chapter 11 petition in Charlotte, N.C., that was transferred to New Jersey.

The creation of LTL was part of a so-called Texas divisional merger. The debtor LTL took no business operations of its own but assumed liability for all talc-related claims.

After being spurned by the Third Circuit, LTL filed a chapter 11 petition again on April 4. Dismissal of the first LTL case didn’t occur immediately after the Third Circuit’s January 30 opinion because the debtor filed unsuccessful petitions in the circuit for rehearing and rehearing en banc and for a stay of the circuit’s issuance of the mandate.

The new filing was accompanied by plan support agreements endorsed by lawyers allegedly representing almost 60,000 claimants who said they were injured by using J&J’s Baby Power, which allegedly contained asbestos. If confirmed, the plan described in the support agreements would have created an $8.9 billion trust at net present value. The funding agreement in the first chapter 11 case provided the debtor LTL with perhaps $61.5 billion to cover liabilities arising from the talc contained in Baby Powder that allegedly contained asbestos.

The J&J companies terminated the funding agreement that underpinned the first LTL filing. The new funding agreement obligates nondebtor J&J companies to pay for asbestos liabilities and other costs incurred in the normal course of business. The new agreement also has backstop funding for a chapter 11 plan, but only if the confirmed plan is consistent with the plan support agreements.

Soon after the new filing, Judge Kaplan entered a temporary restraining order imposing a stay on talc lawsuits. The new TRO protected both LTL and potentially hundreds of other nondebtor third parties, including the J&J parent and affiliates. As required on issuance of a TRO, Judge Kaplan scheduled a preliminary injunction hearing to be held on April 18. Two days later, he issued his opinion from the bench, vacating the original TRO while imposing a more limited preliminary injunction. He followed the bench opinion with a written opinion. LTL Management v. Those Parties Listed on Appendix A (In re LTL Management LLC), 23-01092, 2023 BL 143084 (Bankr. D.N.J. April 27, 2023). To read ABI’s report, click here.

In issuing the injunction, Judge Kaplan said he would revisit the injunction once again at a hearing that began in late June. At the same four-day evidentiary hearing, he also considered 10 motions to dismiss and two joinders filed by parties in interest who argued that the new filing, like its precedessor, was in “bad faith.”

Reasons for the Second Dismissal

The motions to dismiss contended there was “cause” for dismissal under Section 1112(b) because the new petitions were not filed in good faith. To qualify for chapter 11 relief, Judge Kaplan characterized the Third Circuit as having held in LTL II “that the Debtor’s financial distress must be ‘immediate, ‘imminent’ and ‘apparent.’”

Given the new funding agreement, Judge Kaplan fund “no immediate financial distress,” because even the forced liquidation value of the affiliates providing the funding “could cover the Debtor’s total estimated worst-case scenario for talc liability.”

Although he found “cause” for dismissal, Judge Kaplan identified Section 1112(b)(1) and (2) as requiring him to decide whether continuing the chapter 11 case would be “in the best interest of creditors.”

Judge Kaplan assumed, without finding, that “unusual circumstances” existed under Section 1112(b)(2) to obviate dismissal, and “the possibility that best interests of the creditors warrants continuation of this chapter 11 case” under Section 1112(b)(1).

Judge Kaplan held that the debtor’s lack of financial distress is not the type of bad faith “that could be subject” to the Section 1112(b)(2) exception to prevent dismissal. He said it was “clear” under Third Circuit precedent that “an alternative to dismissal is reserved for only those who properly belong in bankruptcy,” and the debtor LTL wasn’t properly in bankruptcy for lack of financial distress.

Before ending his decision, Judge Kaplan rejected the idea of appointing a trustee or examiner as an alternative to dismissal under Section 1112(b)(1).

While directing the parties to settle an order dismissing the case for “lack of imminent and immediate financial distress,” Judge Kaplan “strongly encouraged” everyone “to continue to pursue a global resolution.”

Unique Aspects of the Opinion

Not bearing directly on the debtor’s lack of financial distress, Judge Kaplan salted his opinion with language that could be used by courts more receptive to mass tort bankruptcies.

Judge Kaplan said that his “beliefs as to the benefits and advantages of bankruptcy, or the appropriateness of employing a chapter 11 filing to resolve mass tort liability, are of no moment for resolution of the pending Motions” to dismiss. He nonetheless questioned whether requiring immediate financial distress was in the best interests of the estate or creditors.

Waiting to pursue chapter 11 relief until distress is imminent “often gives rise to serious risks and increased costs that may threaten the viability of the business,” Judge Kaplan said. He added, “Drawing upon the history of mass tort bankruptcies, most companies fare no better when trying to ride out massive, decades-long litigation firestorms.”

Judge Kaplan offered his thoughts on the superiority of bankruptcy over the tort system when satisfying the claims of creditors. He alluded to “the incontrovertible fact that many plaintiffs are denied any recovery in the tort system altogether.” He was also troubled by the “sluggish speed of the tort system” and “the need to protect the interests of future claimants.”

With regard to a global settlement outside of bankruptcy, Judge Kaplan said:

No party or expert has identified even a single example of a global settlement outside of bankruptcy that has been achieved in circumstances like this case — where both latent injuries and unknown future claimants exist.

Similarly, Judge Kaplan was “unconvinced that procedural mechanisms and notice programs” would protect future claimants in the tort system.

Judge Kaplan was constrained to dismiss because he read the Code as precluding him from considering the best interests of creditors given a bad faith filing for lack of financial distress.