Johnson & Johnson (J&J) affiliate LTL Management filed for Chapter 11 again today (4 April), hours after an order hit officially dismissing its prior bankruptcy case for bad faith, backed by a USD 8.9bn offering to talc claimants from J&J – a USD 6.9bn increase from its prior agreement.
According to a statement from the debtor “regarding refiling of [its] Chapter 11 case,” it comes back to the table with a plan support agreement (PSA) centered on a massively upsized offering for talc claimants. Broadly, it contemplates a USD 8.9bn commitment from LTL and J&J over a 25-year period to fund a trust that would resolve current and future claims. The companies’ prior agreement was a USD 2bn advance from J&J to the debtor to establish a settlement fund. The statement claims that plaintiff law firms representing more than 60,000 current claimants have committed to support the new proposal.
This case has been assigned to Judge Michael Kaplan of the US Bankruptcy Court for the District of New Jersey, as was the prior one. He has not yet scheduled a first-day hearing.
Debtwire Dockets: LTL Management (2023)
The company
New Jersey-headquartered pharmaceutical and healthcare giant J&J has faced myriad baby powder liabilities over the years, both before and after the formation of a dedicated baby products business in 1972. Over the decades, it eventually created Johnson & Johnson Consumer Inc, or Old JJCI, which was ultimately responsible for the talc-related claims.
In October 2021, J&J took the final step in a corporate maneuver called the “Texas two-step” in which Old JJCI ceased to exist and was replaced by LTL Management and New JJCI. LTL held all the talc liabilities, certain assets, USD 6m in cash, and was lined up for USD 2bn from J&J and affiliates to pay off talc litigation claims. Its asset tranches included a portfolio of revenue streams estimated at USD 367.1m, according to court documents in its first Chapter 11 filing. New JJCI holds all the other assets formerly held by Old JJCI including baby care, beauty, and other products. LTL was, by the company’s own description, created to “manage and defend thousands of talc-related claims” along with overseeing those specific assets it was given from Old JJCI.
The debt
The descent, the funding agreement, and the first filing
According to court filings from the 2021 Chapter 11 case, the company only faced a small number of isolated talc cases before 2010. Chief Legal Officer John Kim, the declarant for both bankruptcy cases, wrote in his original first-day declaration that those claims “began to skyrocket” in recent years leading to over USD 300m in verdicts in the mid-2010s all overturned on appeal. It was then hit with a USD 2.24bn ovarian cancer verdict by the Missouri Supreme Court, upholding a lower court’s order. J&J announced in mid-2020 it would permanently discontinue its talc products, and as of its original petition date – 14 October 2023 -- it faced approximately 38,000 ovarian cancer claims and 430 mesothelioma claims.
LTL filed its first bankruptcy petition in the Western District of North Carolina, aiming to consolidate and settle those claims. It entered Chapter 11 with a funding agreement by which J&J agreed to handle its court expenses along with advancing USD 2bn to pay talc-related claims.
The case quickly became a multi-front war, and faced complications at virtually every stage. The company immediately sought a preliminary injunction extending to non-debtor J&J that would halt all talc actions against the companies, which the North Carolina court granted. However, the bankruptcy administrator in that jurisdiction – which serves a similar purpose to the US Trustee in others – moved to transfer the case to New Jersey arguing that the companies’ primary operations, witnesses, and businesses were located there. It was shifted to the new location on 16 November 2021.
Meanwhile, an unsecured creditors committee (UCC) and an official talc claimants committee (TCC) were formed. The latter was split into two separate committees with one for mesothelioma cases and the other for ovarian cancer claims after the transfer to New Jersey, but that reconstitution was later ruled invalid.
The dismissal
Both of the TCCs quickly moved for dismissal of the case, arguing that it was filed in bad faith in an attempt to insulate a “supersolvent” J&J from liability, railroading victims and reaping the benefits of bankruptcy without bearing any of the costs. LTL, meanwhile, insisted that it properly filed in the face of litigation that posed an existential threat, and that the management of massive litigation burdens was a legitimate use of the Chapter 11 system.
The dismissal fight culminated in a February 2022 trial before Judge Kaplan. He denied dismissal alongside a ruling granting the request to extend the preliminary injunction to non-debtor J&J. In his ruling, the judge said he was unwilling to dismiss the bankruptcy as a bad faith filing based upon standards in the Third Circuit. He found nothing inherently unlawful about the Texas two-step process that spawned LTL and the Chapter 11 case, nor the eligibility of the spinoff entity as a debtor. He also wrote that he had little trouble finding that the bankruptcy served to maximize property available for creditors by using available tools in the Bankruptcy Code. He also called the consolidation of litigation claims “unquestionably a proper purpose” for a filing.
Proponents of dismissal quickly appealed that ruling, and argued before the Third Circuit appellate panel in September 2022. That court struck down Kaplan’s order in a ruling in January 2023, largely premised upon the funding agreement between J&J and LTL. More specifically, they found that by virtue of backing from a perfectly solvent J&J, LTL faced no financial distress making it ineligible for Chapter 11. That requirement for debtors, they reasoned, ensures that claimants’ pre-bankruptcy remedies such as a jury trial are disrupted only when necessary. The ensuing order from Judge Kaplan dismissing the case hit earlier today.
The new plan
Just before the dismissal order came about, LTL’s TCC filed a letter alleging that J&J had “threatened” to file a second bankruptcy. In that document, it said that “constructing yet another bankruptcy, on behalf of a solvent nearly half-trillion-dollar company, is solely intended to coerce and foist further delay on victims who continue to suffer and die from diseases caused by Johnson & Johnson’s talc products.” Notably, the dismissal order discharged most of the officials appointed in the prior case like co-mediators, the future claimants representative, and others but left the TCC intact to pursue or defend appeals. Soon after, LTL filed its new case.
Kim’s declaration supporting the new bankruptcy case says it carries the support of “thousands of claimants” who have signed onto the PSA echoing the refiling statement referenced prior. LTL entered into new financing arrangements with J&J as well, aiming to consummate a plan of reorganization constructed around the upsized talc claims contribution.
The statement makes specific attempts to address the Third Circuit’s ruling on financial distress with respect to the new funding arrangements, a pair of contracts called the “2023 Funding Agreement” and “J&J Support Agreement.” The prior is between the debtor and its direct parent Johnson & Johnson Holdco (NA) Inc – a successor entity to Old JJCI -- and resembles the prior funding agreement, with the exception that J&J itself is not a co-obligor or party. The support agreement with J&J, meanwhile obligates the ultimate parent to produce the trust funding Holdco is required to provide, but only if Holdco itself fails to do so. Holdco is required to reimburse J&J for those amounts. The debtor’s re-filing statement argues that these arrangements “resolve” the Third Circuit’s concerns because Old JJCI was already found to be in distress when the bankruptcy court declined to dismiss the 2021 bankruptcy. It also notes that in the new contracts, J&J’s support is only available in bankruptcy and only if approved by that court.
As noted above, the new plan support agreement contemplates a USD 8.9bn trust paid over 25 years for the benefit of talc claimants. It would also issue an injunction to permanently protect LTL from further claims arising from Old JJCI’s products. Kim’s declaration includes the PSA as an annex. According to the debtor’s statement, the new deal has the support of over 60,000 talc claimants, including three firms representing members of the 2021 case’s TCC, though it does not name them. The company aims to file a plan by 14 May. In a press release, J&J said that neither of the two bankruptcy filings are an admission of wrongdoing, and that the company maintains that talc products do not cause cancer and are generally safe to use.
“Notwithstanding the lack of scientific validity to these claims, plaintiff trial lawyers continue to relentlessly advertise for talc claims, supported by millions of dollars of litigation financing, all in the hopes of a massive return on investment. LTL’s goal has always been to resolve these claims quickly, efficiently, and fairly for the claimants, both pending and future, and not incentivize abuse of the legal system. We filed the original action in good faith, and, heeding the Third Circuit’s guidance, have filed this new case to effectuate that intent,” Kim wrote in his new declaration.
The debtor also moved for an order suspending entry and service of standard commencement notices for the case.
The advisors
