Johnson & Johnson: A Bankruptcy Filed In Good Faith – Lexology

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Johnson & Johnson and its affiliates (“J&J”) have been selling baby powder for decades.
Along the way, studies began showing that talc in J&J’s baby powder can cause ovarian cancer and mesothelioma. So, since 2016, over 38,000 lawsuits have been filed against J&J contending its baby powder talc causes cancer.
In July of 2018, the talc litigation against J&J built-up serious steam when a jury awarded 22 women a $4.69 billion (yes, with a “b”) verdict against J&J—an appellate court reduced the verdict to $2.25 billion.
Since January of 2020, J&J has been receiving service (on average) of one or more ovarian cancer complaints every hour of every day of the week.
To address the mounting litigation problem, J&J turns to bankruptcy.[Fn. 1] To do so, J&J goes through a corporate restructuring (on the eve of filing bankruptcy) with this stated purpose:
Corporate Restructuring Before Bankruptcy
In October of 2021, J&J does a complex series of transactions through which it, (i) ceases to exist, and (ii) is replaced by two new companies: LTL (the bankruptcy debtor) and JJCI (the new operating entity).
Here’s how the restructuring works:
Motion to Dismiss J&J’s Bankruptcy
In response, various talc claimants move for dismissal of LTL’s bankruptcy, based on the following:
Debtor’s Response
Debtor takes a far more positive view, insisting that the goal of the bankruptcy filing:
Debtor says:
Legal Standard—Good Faith
A bankruptcy must be filed in “good faith.” When a debtor’s overriding motive is to delay creditors without benefitting them in any way—that’s not “good faith.”
The good faith inquiry is based on a totality of facts and circumstances. It ordinarily focuses on whether the debtor’s objectives are within the legitimate scope of bankruptcy laws, by looking at whether the bankruptcy petition:
The Court’s Conclusion
The Bankruptcy Court refuses to dismiss the LTL bankruptcy as a bad faith filing, under the legal standards cited above. [Fn. 2]
The Court’s Rationale
What follows is a summary of portions of the Bankruptcy Court’s analysis.
–Valid Reorganization Purpose
A company facing mass-tort litigation, that threatens its long term viability, has a valid reorganization purpose for filing bankruptcy.
Two main functions of bankruptcy laws are, (1) preserving going concerns, and (2) maximizing value for creditors.
LTL’s bankruptcy filing will maximize value for talc claimants, will dramatically reduce costs, and will ensure balanced recoveries for both present and future talc claimants.
Filing a Chapter 11 bankruptcy to address personal injury claims and to preserve corporate value is unquestionably proper under the Bankruptcy Code.
From the outset, J&J and Debtor have been candid and transparent about:
A bankruptcy is necessary because, at the time of filing the bankruptcy:
–Bankruptcy Function
Attempting to address mass-tort claims through bankruptcy is wholly consistent with the function of the Bankruptcy Code.
Debtor seeks to use the bankruptcy forum and function to obtain:
–Preserving Value
This is not a case of too big to fail. Rather, it is a case of too much value to be wasted—value that could be better used to pay talc victims.
This is not a failing company facing a forced liquidation. Instead, the J&J enterprise is a profitable supplier of health products, consumer products and pharmaceuticals, employing over 130,000 individuals globally, whose families are dependent upon continued successful operations.
Keeping J&J’s operating entity out of bankruptcy is legitimate and proper, especially when putting that entity into bankruptcy offers “no palpable benefits” to talc victims or their families. In such circumstance:
Adding hundreds of millions of dollars, that would be spent on professional fees alone, would be better directed to a settlement trust for the benefit of talc victims.
–No Intent to Hinder or Delay
Debtor filed this case:
Claimants argue that allowing this case to proceed will “open the floodgates” to similar machinations and chapter 11 filings by others facing mass-tort claims.
–Equitable Considerations
Bankruptcy courts are not courts of equity. Rather, they are specialized courts with limited jurisdiction that apply statutory law and may address both legal and equitable claims:.
Section 105(a) of the Bankruptcy Code empowers bankruptcy courts to “[i]ssue any order, process or judgment that is necessary or appropriate to carry out the provisions of” the Bankruptcy Code.
As this case proceeds, the Court will employ its limited equitable authority under § 105(a) to facilitate a fair and just result for all, consistent with the policies and objectives of the Bankruptcy Code.
In a thorough and well-reasoned opinion, the Bankruptcy Court determines that the Johnson & Johnson bankruptcy filing, after a corporate restructure, is in good faith and for a proper purpose.
Here’s guessing that this opinion will provide a foundation for other and future companies, facing mass-tort litigation, who want to maximize value for their claimants while preserving a going concern value for the benefit of the many innocent people who rely upon that value for their livelihood.
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