As succinctly summarized by the Court:

“Johnson & Johnson Consumer Inc. (Old Consumer), a wholly owned subsidiary of Johnson & Johnson (J&J), sold healthcare products with iconic names branded on consumers’ consciousness – Band-Aid, Tylenol, Aveeno, and Listerine, to list but a few. It also produced Johnson’s Baby Powder, equally recognizable for well over a century as a skincare product. Its base was talc, a mineral mined and milled into a fine powder. Concerns that the talc contained traces of asbestos spawned in recent years a torrent of lawsuits against Old Consumer and J&J alleging Johnson’s Baby Powder has caused ovarian cancer and mesothelioma. Some of those suits succeeded in verdicts, some failed (outright or on appeal), and others settled. But more followed into the tens of thousands. With mounting payouts and litigation costs, Old Consumer, through a series of intercompany transactions primarily under Texas state law, split into two new entities: LTL Management LLC (LTL), holding principally Old Consumer’s liabilities relating to talc litigation and a funding support agreement from LTL’s corporate parents; and Johnson & Johnson Consumer Inc. (New Consumer), holding virtually all the productive business assets previously held by Old Consumer. J&J’s stated goal was to isolate the talc liabilities in a new subsidiary so that entity could file for Chapter 11 without subjecting Old Consumer’s entire operating enterprise to bankruptcy proceedings. Two days later, LTL filed a petition for Chapter 11 relief in the Bankruptcy Court for the Western District of North Carolina. That Court, however, transferred the case to the Bankruptcy Court for the District of New Jersey. Talc claimants there moved to dismiss LTL’s bankruptcy case as not filed in good faith. The Bankruptcy Court, in two thorough opinions, denied those motions and extended the automatic stay of actions against LTL to hundreds of non-debtors that included J&J and New Consumer.”

Reversing on appeal, the Third Circuit starts, and stay, with good faith: “Good intentions – such as to protect the J&J brand or comprehensively resolve litigation – do not suffice alone. What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not. Thus we dismiss its petition.”

Explaining further: The Bankruptcy Code contemplates “the need for early access to bankruptcy relief to allow a debtor to rehabilitate its business before it is faced with a hopeless situation. A ‘financially troubled’ debtor facing mass tort liability, for example, may require bankruptcy to enable a continuation of its business and to maintain access to the capital markets even before it is insolvent. Still, encouragement of early filing does not open the door to premature filing. This may be a fine line in some cases, but our bankruptcy system puts courts, vested with equitable powers, in the best position to draw it. Risks associated with premature filing may be particularly relevant in the context of a mass tort bankruptcy. Inevitably those cases will involve a bankruptcy court estimating claims on a great scale – introducing the possibility of undervaluing future claims (and underfunding assets left to satisfy them) and the difficulty of fairly compensating claimants with wide-ranging degrees of exposure and injury. On the other hand, a longer history of litigation outside of bankruptcy may provide a court with better guideposts when tackling these issues….  Mass tort liability can push a debtor to the brink. But to measure the debtor’s distance to it, courts must always weigh not just the scope of liabilities the debtor faces, but also the capacity it has to meet them. We now go there, but only after detouring to a problem particular to our case: For good-faith purposes, should we judge the financial condition of LTL by looking to Old Consumer – the operating business with valuable assets, but damaging tort liability, that the restructuring and filing here aimed to protect? Or should we look to LTL, the entity that actually filed for bankruptcy? Or finally, like the Bankruptcy Court, should we consider the financial risks and burdens facing both Old Consumer and LTL?

Concluding that “the financial state of LTL – a North Carolina limited liability company formed under state law and existing separate from both its predecessor company (Old Consumer) and its newly incorporated counterpart company (New Consumer) – should be tested independent of any other entity. That means we focus on its assets, liabilities, and, critically, the funding backstop it has in place to pay those liabilities….  in the Bankruptcy Court’s projections of future liability for LTL extrapolated from the history of Old Consumer’s talc litigation: the latter’s successes. To reiterate, before bankruptcy Old Consumer had settled about 6,800 talc-related claims for under $1 billion and obtained dismissals of about 1,300 ovarian cancer and over 250 mesothelioma  claims without payment. And a minority of the completed trials resulted in verdicts against it (with some of those verdicts reversed on appeal). Yet the Court invoked calculations that just the legal fees to defend all existing ovarian cancer claims (each through trial) would cost up to $190 billion. It surmised one could argue the exposure from the existing mesothelioma claims alone exceeded $15 billion. These conjectures ballooned its conclusion that, even without a calculator or abacus, one can multiply multi-million dollar or multi-billion dollar verdicts by tens of thousands of existing claims, let alone future claims, to see that the continued viability of all J&J companies is imperiled.

“What these projections ignore is the possibility of meaningful settlement, as well as successful defense and dismissal, of claims by assuming most, if not all, would go to and succeed at trial. In doing so, these projections contradict the record. And while the Bankruptcy Court questioned the continuing relevance of the past track record after Ingham and the breakdown of the Imerys settlement talks, this assumes too much too early. Nothing in the record suggests Ingham – one of 49 pre-bankruptcy trials and described even by J&J as ‘unique’ and ‘not representative,’  a – was the new norm. Nor is there anything that shows all hope of a meaningful global or near-global settlement was lost after the initial Imerys offer was rebuffed. The Imerys bankruptcy remained a platform to negotiate settlement. And the progression of the multidistrict litigation on a separate track would continue to sharpen all interested parties’ views of mutually beneficial settlement values.

“Finally, we cannot help noting that the casualness of the calculations supporting the Court’s projections engenders doubt as to whether they were factual findings at all, but instead back-of-the-envelope forecasts of hypothetical worst-case scenarios. Still, to the extent they were findings of fact, we cannot say these were inferences permissibly drawn and entitled to deference. And as we locate no other inferences or support in the record to bear the Court’s assertion that the talc liabilities far exceed LTL’s capacity to satisfy them, we cannot accept this conclusion either.

“In this context, it becomes clear that, on its filing, LTL did not have any likely need in the present or the near-term, or even in the long-term, to exhaust its funding rights to pay talc liabilities. In the over five years of litigation to date, the aggregate costs had reached $4.5 billion (less than 7.5% of the $61.5 billion value on the petition date), with about half of these costs attributable to one ovarian cancer verdict, Ingham, to date an outlier victory for plaintiffs. While the number of talc claims had surged in recent years, still J&J, as of October 2021, valued the probable and reasonably estimable contingent loss for its products liability litigation, including for talc, under GAAP, at $2.4 billion for the next two years. Further, though settlement offers are only that, we do not disregard LTL’s suggestion that $4 billion to $5 billion was at one time considered by plaintiffs’ lawyers to be in the ballpark to resolve virtually all multidistrict ovarian cancer claims as well as corresponding additional claims in the Imerys bankruptcy. And as noted, we view all this against a pre-bankruptcy backdrop where Old Consumer had success settling claims or obtaining dismissal orders, and where, at trial, ovarian cancer plaintiffs never won verdicts that withstood appeal outside of Ingham and mesothelioma plaintiffs had odds of prevailing that were less than stellar.

“From these facts – presented by J&J and LTL themselves – we can infer only that LTL, at the time of its filing, was highly solvent with access to cash to meet comfortably its liabilities as they came due for the foreseeable future. It looks correct to have implied, in a prior court filing, that there was not any imminent or even likely need of [it] to invoke the Funding Agreement to its maximum amount or anything close to it. Indeed, the Funding Agreement itself recited that LTL, after the divisional merger and assumption of that Agreement, held assets having a value at least equal to its liabilities and had financial capacity sufficient to satisfy its obligations as they become due in the ordinary course of business, including any talc related liabilities.

“We take J&J and LTL at their word and agree. LTL has a funding backstop, not unlike an ATM disguised as a contract, that it can draw on to pay liabilities without any disruption to its business or threat to its financial viability. It may be that a draw under the Funding Agreement results in payments by New Consumer that in theory might someday threaten its ability to sustain its operational costs. But those risks do not affect LTL, for J&J remains its ultimate safeguard. And we cannot say any potential liquidation by LTL of Royalty A&M – a collection of bare rights to streams of payments cobbled together on the eve of bankruptcy – to pay talc costs would amount to financial distress. Plus LTL had no obligation, outside of bankruptcy, to sell those assets for cash before drawing on the Funding Agreement.

“At base level, LTL, whose employees are all J&J employees, is essentially a shell company formed, almost exclusively, to manage and defend thousands of talc-related claims while insulating at least the assets now in New Consumer. And LTL was well-funded to do this. As of the time of its filing, we cannot say there was any sign on the horizon it would be anything but successful in the enterprise. It is even more difficult to say it faced any serious financial and/or managerial difficulties calling for the need to reorganize during its short life outside of bankruptcy.

“But what if, contrary to J&J’s statements, Ingham is not an anomaly but a harbinger of things to come? What if time shows, with the progression of litigation outside of bankruptcy, that cash available under the Funding Agreement cannot adequately address talc liability? Perhaps at that time LTL could show it belonged in bankruptcy. But it could not do so in October 2021. While LTL inherited massive liabilities, its call on assets to fund them exceeded any reasonable projections available on the record before us. The attenuated possibility that talc litigation may require it to file for bankruptcy in the future does not establish its good faith as of its petition date. At best the filing was premature.

“In sum, while it is unwise today to attempt a tidy definition of financial distress justifying in all cases resort to Chapter 11, we can confidently say the circumstances here fall outside those bounds. Because LTL was not in financial distress, it cannot show its petition served a valid bankruptcy purpose and was filed in good faith under Code §1112(b).”



In re LTL Management, No.22-2003, 2023 U.S.App.LEXIS 2323 (3rd Cir. Jan. 30, 2023).


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