US appeals court rejects J&J’s Texas two-step bankruptcy

By Julia Wray | Published: 31-Jan-2023

The Third Circuit Court of Appeals in Philadelphia dismissed a Chapter 11 petition by J&J's subsidiary LTL Management, ruling it is not in 'financial distress'

A US appeals court has blocked Johnson & Johnson’s attempt to offload into bankruptcy tens of thousands of lawsuits related to its talc products.

The Third U.S. Circuit Court of Appeals in Philadelphia dismissed a Chapter 11 petition filed by J&J subsidiary LTL Management, recently created to address the 38,000-plus lawsuits from plaintiffs alleging J&J’s talc products caused cancer.

On Monday, it ruled that the healthcare and personal care giant improperly placed a subsidiary into Chapter 11 proceedings even though it did not face financial distress.

The three-judge panel, in a 56-page opinion, wrote: “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 [sic] is to meet its intended purposes.

“Only a putative debtor in financial distress can do so. LTL was not. Thus we dismiss its petition.”

The manoeuvre attempted by J&J is called a Texas two-step, named after a state law used to create a subsidiary that shoulders litigation and then declares bankruptcy.

The Third Circuit’s opinion allows talc litigation to resume against the company; all cosmetic talc cases had been stayed pending the outcome of the Chapter 11 proceedings.

J&J in a statement said it would challenge the ruling.

It added: “We continue to stand behind the safety of Johnson’s Baby Powder, which is safe, does not contain asbestos and does not cause cancer.”

J&J announced its intention in 2022 to stop sales of its talc-based Baby Powder globally this year, following an earlier halt in North America sales.

The personal care goliath will transition to an all cornstarch-based powder portfolio instead.

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