A federal judge in New Jersey dismissed Johnson & Johnson's second attempt at bankruptcy landing plaintiffs in the tort system to litigate their talc claims.
U.S. Bankruptcy Judge Michael Kaplan decided July 28 that J&J’s level of financial distress is not enough to warrant bankruptcy.
"In sum, this Court smells smoke, but does not see the fire," Kaplan wrote in his opinion. "Therefore, the emphasis on certainty and immediacy of financial distress closes the door of Chapter 11 to LTL at this juncture."
To resolve more than 38,000 lawsuits alleging that the use of talc-based Baby Powder caused cancer, J & J embarked upon a controversial bankruptcy strategy called the Texas 2-Step that pawned the legal liabilities off onto LTL Management, a shell company created specifically for bankruptcy protection.
However, as previously reported in Legal Newsline, the Third Circuit Court of Appeals ruled against the first bankruptcy.
The second bankruptcy was filed to adhere to the requirements set out in the Third Circuit’s opinion.
“Judge Kaplan was bound to follow what the Third Circuit said, which was if you're not in financial distress, then you can't avail yourselves of bankruptcy protection under the bankruptcy laws so he followed the law and I respect his decision but in some respects, it's going to delay any prospective compensation to the tort claimants,” said Majed Nachawati, attorney and founder of the Nachawati Law Group who represents more than 5,000 ovarian cancer victims.
J&J is vowing to appeal Judge Kaplan's decision, which nullifies a proposed $8.9 billion resolution.
“We respectfully disagree with the Bankruptcy Court’s conclusion that the ‘substantial liability’ that LTL faces from the massive volume of talc claims asserted against it does not establish ‘immediate' financial distress under the standard imposed by the Third Circuit, which itself is found nowhere in the Bankruptcy Code and is contrary to the persuasive authority from other Circuit Courts and directives of the Supreme Court of the United States,” said Erik Haas, worldwide vice president of litigation for J&J. “The Bankruptcy Code does not require a business to be engulfed in ‘flames’ to seek a reorganization supported by the vast majority of claimants.”
As previously reported, the verdicts, settlements, and legal fees exceed $4.5 billion.
Most recently, a California jury returned an $18.8 million verdict on behalf of a man who allegedly developed cancer after using Johnson’s Baby Powder.
"What the judge concluded at the end of the day was you can create a company overnight as a subsidiary and say it's worth billions but that can be seen as a manufactured distress," Nachawati told Legal Newsline. "You've got to be in real distress, and it can't just be you saying you're in financial distress if you're a multi-billion dollar corporation."
Nachawati was among the plaintiffs' attorneys who negotiated the $8.9 billion resolution with J&J.
"We saw it as a pathway that would've given our clients closure after 10 years of litigation," he added.