By Christina Grube
This morning, the United States Court of Appeals for the Third Circuit dismissed a bankruptcy petition by Johnson & Johnson, forcing the company’s subsidiary, LTL Management, to continue litigating lawsuits filed by plaintiffs alleging the company’s talcum powder causes cancer and other serious health issues.
The ruling reverses a previous controversial decision made last year and allows approximately 40,000 talc lawsuits to move forward. The court found J&J’s claim of financial distress at the time of filing as meritless, with Judge Thomas Ambro affirming that bankruptcy court may not be abused by big businesses.
“What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes,” Judge Ambro wrote. “Only a putative debtor in financial distress can do so. LTL was not. Thus we dismiss its petition.”
In February 2022, U.S. Bankruptcy Chief Judge Michael Kaplan approved J&J’s bankruptcy petition filing by J&J, writing “There is nothing to fear in the migration of tort litigation out of the tort system and into the bankruptcy system.”
Plaintiffs’ attorneys condemned Kaplan’s controversial ruling which seemingly supported the “Texas-two step” method. Attorneys use the term “Texas-two step” to describe when a non-bankrupt company claims bankruptcy through a smaller subsidiary as means to more quickly and cheaply settle claims filed by plaintiffs.
Leigh O’Dell, Co-Lead Counsel of the Plaintiffs’ Steering Committee in the ovarian cancer multidistrict litigation (MDL No. 2738) describes the Third Circuit’s decision as a “landmark ruling.”
“The court has sent a message to corporate America that a bankruptcy action must be legitimately pursued in good faith for the purposes of reorganization, rather than solely to gain an advantage over consumers or other claimants in litigation,” O’Dell told law.com.
Texas two-step continues to gain popularity among big businesses wrapped up in mass tort litigation. 3M recently filed a similar petition which Judge Jeffrey J. Graham of the U.S. Bankruptcy Court for the Southern District of Indiana, rejected last August. Aearo Technologies, to continue with litigation and settlement of over 200,000 plaintiff cases regarding defective earplugs.
District Judge M. Casey Rodgers, overseeing the Florida based MDL, chided the 3M corporation for “naked duplicity” by attempting to use a bankruptcy claim as a get-out-of-jail-free card.
Anne Andrews of Andrews Thornton described the emerging pattern of Fortune 500 companies using bankruptcy filings to avoid plaintiff litigation during a 2022 interview with MTN’s LegalCast, specifically highlighting Johnson & Johnson Talcum MDL 2738.
“I’ve been predicting this for years,” Andrews said. “I think people thought I was crazy because ‘how can we ever replace the civil justice system and the 7th amendment right to a jury trial with bankruptcy,’ but guess what—that’s exactly what’s happening.”
J&J spokeswoman Allison Fennell confirmed the company’s intention to appeal the decision.
“As we have said from the beginning of this process, resolving this matter as quickly and efficiently as possible is in the best interests of claimants and all stakeholders,” Fennell said in a statement. “We continue to stand behind the safety of Johnson’s Baby Powder, which is safe, does not contain asbestos and does not cause cancer.”
Corporate entities have taken to using the loophole so frequently that Rep. Jerrold Nadler proposed Nondebtor Release Prohibition Act of 2021 (H.R. 4777) which would legally prevent companies from transferring bankruptcy debt and litigation to subsidiaries then declare the subsidiary bankrupt.
“The bankruptcy system is supposed to work for everyone,” said Nadler, “but in many cases it works only for the powerful, and too often it works best for big corporations and the very wealthy who have not even filed for bankruptcy but have figured out how to twist the system to obtain blanket immunity for their wrongdoing.”