Brown Rudnick Helps Win Dismissal of J&J’s ‘Texas Two-Step’ Bankruptcy Case

In a groundbreaking decision, the U.S. Court of Appeals for the Third Circuit granted the Official Committee of Talc Claimants’ (the TCC) motion to dismiss the Chapter 11 bankruptcy case of Johnson & Johnson (J&J) subsidiary LTL Management for its “lack of good faith.”

On Jan. 30, the Third Circuit issued a 56-page opinion reversing the Bankruptcy Court’s approval of J&J’s controversial Chapter 11 filing meant to settle nearly 40,000 lawsuits alleging its talc-based products caused cancer. In a legal maneuver known as the “Texas two-step,” J&J spun the liabilities into a separate company called LTL and filed it for bankruptcy.

A three-judge panel held that in Chapter 11 filings, financial distress must not only be apparent, but it must be immediate enough to justify a filing, because absent financial distress, there is no reason for Chapter 11 and no valid bankruptcy purpose.

“We dismissed the petition for lack of good faith, relying on the debtor’s strong financial health,” the opinion stated. “We rejected arguments that the suits seriously threatened the company and could force it out of business, suggesting the magnitude of potential liability would not likely render it insolvent. And the filing was premature, as one could be later made — without risking the debtor’s ability to reorganize — at a time a company threatening judgment occurred.”

Brown Rudnick acts as co-lead counsel to the TCC, which represents more than 38,000 mesothelioma and ovarian cancer victims who sued J&J over its talc-related products, including baby powder, for allegedly causing sickness and death from one or more ingredients, including asbestos.

After years of defending against those lawsuits, J&J was forced in 2017 to disclose internal documents revealing that it knew all along that its products contained asbestos. Since then, juries have awarded plaintiffs massive judgements against J&J, including one award for billions in punitive damages. Jury verdicts against J&J exceed $3 billion.

In February 2022, Brown Rudnick led the trial team’s effort to have the LTL bankruptcy case dismissed for bad faith. After the TCC’s motion was denied in the Bankruptcy Court, Brown Rudnick led the application pursuant to which the Third Circuit granted the TCC’s request for direct appeal from the Bankruptcy Court’s dismissal decision and then played a key role in the appellate team that earned the reversal.

Brown Rudnick’s success in this matter helped the Firm win Law360’s 2022 “Practice Group of the Year” awards for Bankruptcy and Trials.

Partner David Molton leads the Brown Rudnick team, with support from Partners Robert Stark, Sunni Beville, Shari Dwoskin, Andrew Carty, Cathrine Castaldi, Ronald Rus, Eric Goodman, and Gerard Cicero, Counsel Susan Sieger-Grimm, and Associates Matt Sawyer, and Michael Reining. Partners Jeff Jonas and Mike Winograd led the trial team, which included Partner Ken Aulet and Associate W. Lydell Benson. Partners Mike Winograd and Marek Krzyzowski co-led and Associate Michael Reining played a key role on the appellate team.