PHILADELPHIA (Legal Newsline) - While legislation is pending in Congress that would require the dismissal of Chapter 11 bankruptcy cases in which the debtor has created a divisional merger, federal appeals court judges in Philadelphia heard arguments this week about whether Johnson & Johnson’s bankruptcy case was filed in good faith.
“We'll get an opinion on whether Johnson & Johnson’s use of the 'Texas two-step' is legal,” said David Skeel, a professor at the University of Pennsylvania’s Carey School of Law.
Skeel was among panelists at the Law & Economics Center’s Bankruptcy Law 101: Briefing on Proposed Legislative 'Reform' Relating to Mass Tort Bankruptcies along with Samir Parikh, law professor at Lewis & Clark Law School in Oregon, and Lindsey Simon, assistant law professor at the University of Georgia School of Law.
The panel was moderated by Donald Kochan, law professor and deputy executive director of the Law and Economics Center, Antonin Scalia Law School at George Mason University.
“Johnson & Johnson wouldn't be doing this if they didn't think Johnson & Johnson were going to be released from these victims' claims even though Johnson & Johnson is not in bankruptcy,” Skeel added.
The U.S. Court of Appeals for the Third Circuit is reviewing Chief Bankruptcy Judge for the District of New Jersey Michael B. Kaplan’s decision to allow Johnson & Johnson’s In re LTL Management, LLC to proceed with its bankruptcy to resolve asbestos litigation.
“We hope the court agrees with Judge Kaplan’s well-reasoned opinion that this filing was done in good faith and is the right way to efficiently and equitably resolve these cases,” Johnson & Johnson told Bloomberg Law in an emailed 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.”
A so-called Texas two-step bankruptcy, also known as a divisional merger, allows a corporation to split into two separate entities. In Johnson & Johnson’s case, LTL Management filed for bankruptcy to litigate talcum powder asbestos claims as a subsidiary on behalf of Johnson & Johnson. While Johnson & Johnson Consumer Inc (JJCI) holds the corporate assets, LTL Management is saddled with the legal liabilities.
However, plaintiffs have complained that the bankruptcy will delay the resolution of their claims.
“We haven't seen the successful outcomes yet in other cases and I imagine if J&J could do it over again, maybe they wouldn't do it,” Parikh said.
The Nondebtor Release Prohibition Act of 2021, if approved by Congress, would ban divisional merger as well as third-party releases.
“The legislative proposal would limit to 90 days the ability for non-debtors to have the benefit of an injunction in bankruptcy so, I imagine if that provision were implemented, all of a sudden negotiations would move things along,” Simon said.