NEWARK (Legal Newsline) - Johnson & Johnson’s Chapter 11 bankruptcy is proceeding in the wake of chief bankruptcy Judge Michael B. Kapland's dismissal of a challenge brought by talcum powder plaintiffs.
Plaintiff lawyers claiming their clients contracted ovarian cancer from using J&J Baby Powder had argued that the bankruptcy filing was done in bad faith because it employed the "Texas Two-Step."
“The law generally requires that a Chapter 11 bankruptcy should be seeking to preserve going concern value or seeking to maximize the value available to satisfy claims but the Plaintiffs argued that Johnson & Johnson had structured this whole thing as a litigation tactic to pay fewer damages on talc liability,” said University of Chicago Law School professor Anthony Casey. “In their view, there is no value in the bankruptcy proceeding and that it’s just a way to force a lower payment.”
After a five-day trial, on Feb. 25, Kaplan held denied the plaintiffs’ motion to dismiss, finding that J&J's bankruptcy filing was not done in bad faith.
“The filing of a chapter 11 case with the expressed aim of addressing the present and future liabilities associated with ongoing global personal injury claims to preserve corporate value is unquestionably a proper purpose under the Bankruptcy Code,” Kaplan wrote in his 56-page opinion.
Under the reorganization, LTL Management, was saddled with claims while the second company, Johnson & Johnson Consumer Inc (JJCI), took on the corporate assets. LTL Management then filed for bankruptcy to litigate the claims as a subsidiary on behalf of Johnson & Johnson.
“There's this funding agreement that says the liabilities will be paid up to the value before this merger divided the two entities,” Casey said. “In that way, the asset value of JJCI was not separated from the liabilities because the funding agreement brought it with.”
Plaintiffs have vowed to appeal the decision.
“The benefits of this system include certainty, especially the ability to resolve future claims, which is not available outside of bankruptcy, the uniformity of treatment across those claims and the equity across claims so that everyone is in the same proceeding and it's less of a kind of lottery system in the MDL or in the state law litigation," Casey added.