%1

The bankruptcy case filed by Johnson & Johnson's subsidiary shouldering talc-related lawsuits will soon be dismissed unless a U.S appeals court agrees to reconsider its decision to nix the company's attempt to offload the litigation into chapter 11 proceedings, a federal judge said yesterday, Reuters reported. Bankruptcy Judge Michael Kaplan said during a hearing in Trenton, New Jersey that he intends to toss the chapter 11 case once the Philadelphia-based 3rd U.S. Circuit Court of Appeals issues a formal mandate to carry out a Jan. 30 ruling by a three-judge panel to dismiss the matter. The 3rd Circuit panel ruled that the J&J subsidiary, called LTL Management, had no legitimate claim to chapter 11 protection because it did not face financial distress. The dismissal is on hold since LTL asked the full 3rd Circuit late on Monday to reconsider the panel's decision. Should the 3rd Circuit deny that request, Kaplan could dismiss the case within days. "It is my intent, when the mandate is issued, to issue an order dismissing the case," Judge Kaplan said during yesterday's hearing. Read more.

In related news, Johnson & Johnson is preparing to again defend thousands of lawsuits linking its talc-based products to cancer as the company attempts to revive a bankruptcy strategy that has kept the mass injury litigation on hold for more than 16 months, WSJ Pro Bankruptcy reported. Greg Gordon, a lawyer representing J&J’s bankrupt talc unit, LTL Management LLC, said yesterday the company is requesting that a federal appellate court revisit and reverse its recent ruling dismissing the chapter 11 case. LTL may pursue its appeal with the U.S. Supreme Court, if necessary, he said. In the interim, Mr. Gordon said the company is contingency planning and preparing to resume defending the talc litigation outside bankruptcy court. “It is a herculean effort to get the defense team back in place to manage cases around the country,” Mr. Gordon said during a hearing in the U.S. Bankruptcy Court in Trenton, N.J. Yesterday's hearing comes weeks after a three-judge panel of the U.S. Court of Appeals for the Third Circuit dismissed LTL’s chapter 11 case, which has kept the talc litigation on pause since October 2021. The appellate ruling found that LTL wasn’t eligible for bankruptcy because its parent, J&J, had agreed to fund its chapter 11 expenses and any potential settlement of claims that Johnson’s Baby Powder and Shower to Shower caused ovarian cancer and contained asbestos. Read more.

Did you miss experts discussing the 3rd Circuit's decision in the LTL Management case and what J&J's next legal steps may be? Watch a replay when you log in to ABI's CLE site (free registration)!

Avaya Holdings Corp. on Tuesday filed for chapter 11 for the second time in six years as it struggles to transform itself from a traditional office telecommunications equipment business into a subscription-based software provider, WSJ Pro Bankruptcy reported. The company said that it filed in the U.S. Bankruptcy Court in Houston with a plan supported by most senior lenders to cut its debt by more than 75%, to roughly $800 million from $3.4 billion, and turn the page on an earnings miss last year that depressed the prices of its debt and stock. Avaya said that it has received commitments for $628 million in debtor-in-possession financing, including a new $500 million loan from an investor group led by Apollo Global Management Inc. and Brigade Capital Management LP, as well as a $128 million credit facility from a bank syndicate led by Citigroup Inc. Certain members of the investor group have also agreed to provide an additional $150 million in new money through a rights offering. The company said that it expects to complete the prepackaged bankruptcy process in 60 to 90 days.

After the cryptocurrency exchange FTX collapsed last year, bankruptcy lawyers, federal prosecutors and forensic investigators embarked on a global hunt to recover billions of dollars in lost deposits and repay the firm’s customers. One large chunk of money has been sitting for months in an interest-bearing account at JPMorgan Chase, the world’s largest bank. JPMorgan holds $400 million that FTX’s founder, Sam Bankman-Fried, invested in an obscure hedge fund, Modulo Capital, the New York Times reported. The founders of Modulo, which has drawn scrutiny from prosecutors investigating FTX’s implosion, are now negotiating the return of the funds with bankruptcy lawyers representing the exchange, said two of the people, who were not authorized to speak publicly. There is no indication that the Modulo founders did anything wrong, and they are looking for FTX to release them from certain legal liabilities in exchange for returning the money. Recovering $400 million from Modulo would be a major coup for FTX. Last month, FTX’s lawyers said they had located $5.5 billion in cash, securities and digital assets held in customer accounts or stored in other parts of the company. But that total includes a large stash of cryptocurrencies whose actual value is hard to determine, and the company’s lawyers say that FTX still has a significant shortfall in assets. Read more.

The intersection of cryptocurrency and bankruptcy is one of the key issues to be discussed by expert panels at next week’s Alexander L. Paskay Memorial Bankruptcy Seminar in Tampa. Are you registered?

A former FTX executive’s foundation made millions of dollars off the company’s digital tokens while he was its chief of staff and is now trying to eke out a bit more from a frozen account on the exchange, WSJ Pro Bankruptcy reported. While working at FTX and its closely tied trading firm Alameda Research, Ruairi Donnelly helped run a charitable foundation that promoted research in effective altruism and artificial intelligence, topics of shared interest to him and FTX founder Sam Bankman-Fried. One of the first employees at Alameda, Mr. Donnelly became the chief of staff of FTX as the exchange launched in 2019 and introduced its own currency called FTT, a digital coin for use on the new platform. At the time, FTX offered early employees like Mr. Donnelly a deal to buy its FTT tokens for 5 cents each, weeks before trading opened to the public at an initial price of $1. Donnelly took advantage of the company’s offer and requested that $562,000 of his salary be exchanged into FTT, worth the equivalent of 11.2 million tokens, according to his lawyer. FTX then sent the tokens at his request as grant to a Switzerland-based charity he co-founded, known today as Polaris Ventures, according to the foundation’s financial statements. The foundation made millions of dollars selling the tokens after they began trading publicly at $1 in 2019 and 2020, while Mr. Donnelly was still working at FTX, according to people familiar with the matter and the foundation’s financial statements.

The soup recipes of Hale & Hearty, the New York chain forced into bankruptcy last year, are up for grabs after its lawyers settled a fight with a wholesale food manufacturer that claimed to own the brand, Bloomberg News reported. The deal, announced in bankruptcy court yesterday, clears the way for the beleaguered chain to sell its soup recipes and other intellectual property — including its website and branding — to the highest bidder. The process had been stymied by a dispute with Mauzone Food Services, a kosher food maker that has been selling soups under the Hale & Hearty name in recent months. Mauzone said it bought the rights to Hale & Hearty’s brand when it took over the soup chain’s Brooklyn factory last year, but the trustee overseeing Hale & Hearty’s liquidation disagreed. “We are trying to sell the intangible assets as quickly as possible,” Lauren Kiss, an attorney representing the trustee who’s overseeing the business’s liquidation, said in a bankruptcy hearing Tuesday. “The longer the brand is out of the market the less valuable it is.” The brand — once a lunchtime favorite for Midtown office workers — is likely one of the most valuable assets left for the company. The parties came to a tentative settlement yesterday before a hearing with US Bankruptcy Judge James Garrity. Under the deal, Hale & Hearty is allowed to sell all of its intellectual property, while Mauzone will hand over branding it has been using and pay $50,000 for furniture, fixtures and equipment at the Brooklyn facility. Mauzone will also have to prove it is no longer making Hale & Hearty soups.

A new judge has been assigned to oversee tens of thousands of lawsuits in New Jersey federal court against Johnson & Johnson over its talc products, two weeks after an appeals court rejected the company's plan to offload the claims into bankruptcy, Reuters reported. U.S. District Judge Michael Shipp, based in Trenton, will take over the long-running litigation from former Chief District Judge Freda Wolfson, who retired from the bench on Feb. 1, according to an order filed on Monday. The cases, numbering more than 38,000, had been on hold since October 2021, when a J&J subsidiary newly created to hold the talc liabilities filed for bankruptcy. Plaintiffs have said that J&J's Baby Powder and other talc products contain asbestos and caused cancer. J&J maintains its consumer talc products are safe and confirmed through thousands of tests to be asbestos-free. The company has said it will challenge the ruling by the Philadelphia-based 3rd U.S. Circuit Court of Appeals dismissing the bankruptcy, which it said was intended in good faith to resolve talc claims efficiently and equitably.

Biopharmaceutical company Sorrento Therapeutics Inc. has filed for bankruptcy weeks after being hit with judgments totaling more than $173 million in a licensing dispute with affiliates of billionaire health entrepreneur Patrick Soon-Shiong’s NantWorks LLC, WSJ Pro Bankruptcy reported. Sorrento filed for chapter 11 on Monday in the U.S. Bankruptcy Court in Houston, an action that immediately pauses NantWorks affiliates’ attempt to collect the judgments awarded over alleged breaches by Sorrento of an exclusive licensing agreement between the companies related to the development of anticancer immunotherapies. An arbitrator awarded NantCell Inc. and Immunotherapy NANTibody LLC the judgments in December, a decision confirmed last week by a Los Angeles Superior Court judge. NantCell was awarded more than $156.8 million and NANTIbody was awarded more than $16.6 million, according to U.S. Securities and Exchange Commission and bankruptcy filings. The judgments are part of a broader legal dispute between Sorrento, NantWorks affiliates and Dr. Soon-Shiong. In December, Sorrento was awarded $125 million in a separate arbitration with NantPharma LLC related to the development of the cancer drug Cynviloq. Sorrento said that before filing for bankruptcy that it faced significant disruption to its business because the NantWorks affiliates planned to immediately take steps to levy the company’s assets to satisfy the judgments it was awarded in the licensing dispute. Sorrento said in December that it believed the arbitration was wrongly decided and would explore its options for vacating the judgments.

Tuesday Morning Corp. filed for bankruptcy protection for the second time since the onset of the COVID-19 pandemic, Bloomberg News reported. The Dallas-based discount retailer filed in the Northern District of Texas, listing assets and liabilities of $100 million to $500 million, in its bankruptcy petition. It emerged from its last bankruptcy in January 2021 after closing about 200 stores, cutting its employee headcount and slashing debt. But the company soon found itself in trouble again, battling inflation and supply chain bottlenecks. It recently added BDO USA as a restructuring adviser, Bloomberg News reported last month. That came after an investor group led by Retail Ecommerce Ventures — which owns brands such as Pier 1 Imports and Modell’s Sporting Goods — and existing management provided a $35 million financial lifeline in September. The retail sector is reeling from a disappointing holiday season as inflation and rising interest rates dampen consumer spending. Party City Holdco Inc., a U.S. specialty retailer that struggled to rebound after sales plummeted during the pandemic, sought bankruptcy protection in January. Bed Bath & Beyond Inc. only managed to avert bankruptcy with a last-gasp $1 billion deal last week. Founded in 1974, Tuesday Morning operates 490 stores and specializes in home goods, furnishings and related products. As of June 30, 2021, it employed 1,607 people full‑time, and 4,692 part-time staffers. The company also moved to delist its stock in late December.

Bed Bath & Beyond Inc. could face tough negotiations with landlords and pay a high price to close out leases on hundreds of stores as the retailer attempts to downsize without the protection of bankruptcy, WSJ Pro Bankruptcy reported. A last-minute equity financing of up to $1 billion provided the company enough capital to pay down bank loans, which Bed Bath defaulted last month. But staying out of chapter 11 also means it loses negotiating leverage it would otherwise have in bankruptcy. One of the biggest drains on its limited resources may be landlords who may not let it off the hook without demanding much more money in rent than they would get if the retailer had filed for bankruptcy, according to some landlords and bankruptcy lawyers. “Rightsizing the footprint can be done outside bankruptcy, but it’s a lot more expensive,” said Bradford Sandler, a bankruptcy attorney at Pachulski, Stang, Ziehl & Jones LLP. The chapter 11 code gives companies certain tools to cap financial liabilities for breaking leases. Landlords owed money on leases are treated like other low-ranking creditors: they get what is left after the debtors pay top lenders and essential expenses. Read more.

Occupancy issues are at the heart of many significant retail cases, as detailed in the ABI publication Retail and Office Bankruptcy: Landlord/Tenant Rights, available at the ABI Store.

The Roman Catholic Diocese of San Diego is warning it may have to file bankruptcy in the future because of the potential fallout from hundreds of pending lawsuits alleging sexual abuse by clergy over the last 75 years, the Los Angeles Times reported. The warning comes nearly 15 years to the day since the diocese last sought the sanctuary of the bankruptcy code, filing for chapter 11 reorganization in the face of 144 claims of sexual abuse by clergy. The bankruptcy was dismissed eight months later, after the diocese reached a settlement with the victims for $198 million. Now the diocese might have to go down the same path, said Keven Eckery, the communications director for the sprawling diocese of 1.3 million Roman Catholics in San Diego and Imperial counties. On Thursday night at a 90-minute meeting with priests from the 96 diocesan parishes, Cardinal Robert McElroy informed them of the possibility the diocese could again file for reorganization under chapter 11 of the Bankruptcy Code. Lawyers representing accusers criticized the move and said the diocese was trying to avoid or lessen its liability for clergy misconduct, as well as pressure plaintiffs into seeking a settlement. Irwin Zalkin, who represents about 120 of the 400 plaintiffs who have filed suits in San Diego Superior Court, said the diocese has enough assets to pay settlements. Zalkin represented hundreds of claimants in the 2007 cases and was instrumental in negotiating the final settlement.