Third Circuit Court of Appeals Reverses Bankruptcy Court’s Decision and Dismisses the Chapter 11 Case filed by J&J entity LTLFebruary 6, 2023 – Herrick Restructuring Review
The Herrick Restructuring Review provides insights and information related to restructuring and finance litigation. The Herrick team regularly represents official and ad hoc creditor committees, hedge funds, distressed debt investors, bondholders, and other parties in interest, and often serve as conflicts or special counsel for large-scale complex litigation matters.
Herrick’s Work on Behalf of Well-Renowned Bankruptcy Professors Supported Dismissal
In October 2021, LTL Management LLC (“LTL”), an entity created by Johnson & Johnson (“J&J”) to hold its liabilities to cancer victims exposed to talc in J&J’s products, filed for Chapter 11 bankruptcy protection. The Herrick team filed amicus briefs on behalf of a group of well-renowned bankruptcy professors in support of the Official Committee of Talc Claimants’ motion to dismiss LTL’s chapter 11 case.
The matter was originally heard before the Bankruptcy Court, where the court denied a motion seeking to dismiss LTL’s Chapter 11 case on the basis that it was brought in bad faith. The appeal from that decision was then heard directly by the Third Circuit Court of Appeals. We are pleased to share that the Third Circuit reversed the Bankruptcy Court’s decision and dismissed the LTL Chapter 11 case.
Herrick’s amicus briefs argued that J&J created LTL with the sole intention of protecting J&J’s assets from its talc victims. While this was not the first time a company has sought bankruptcy relief to address its mass tort litigation exposure, the briefs emphasized that the strategy in this case—namely, J&J’s use of a divisive merger mechanism referred to as the “Texas Two-Step” to funnel all of its talc liabilities into a non-operating entity only for that entity to file for bankruptcy—was an egregious misuse of the bankruptcy system.
The Third Circuit stated in its opinion, “We start, and stay, with good faith. Good intentions—such as to protect J&J brand or comprehensively resolve litigation—do not suffice alone. What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not. Thus, we dismiss its petition.”
A copy of the Third Circuit opinion is available here.
For more information on this alert or other restructuring & finance litigation matters please contact:
Sean E. O'Donnell at +1 212 592 1545 or [email protected]
Stephen B. Selbst at +1 212 592 1405 or [email protected]
Steven B. Smith at +1 212 592 1474 or [email protected]
Silvia Stockman at +1 212 592 1583 or [email protected]
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