Federal Court Dismisses Chapter 11 Bankruptcy Petition Linked To Product Liability Lawsuits
When a business is facing lawsuits that could result in a judgment costing significant amounts of money, or that could result in settlement and other substantial costs, can that business file for bankruptcy and include the lawsuits in its repayment plan? In large part, that is a question that a federal court had to consider recently after Johnson & Johnson filed for Chapter 11 bankruptcy. According to a report from Reuters, the company developed a “strategy to use bankruptcy to resolve multibillion-dollar litigation over claims its talk products cause cancer.” The case went to a federal appeals court, and the court dismissed the bankruptcy petition.
This particular case was heard in the U.S. Third Circuit Court of Appeals — outside the Eleventh District where Florida cases would be heard on federal appeal. As such, the decision is not binding for similar bankruptcy cases that could arise in South Florida, but the decision ultimately may be persuasive for other courts considering similar questions. Indeed, if other courts find the Third Circuit’s decision persuasive, other businesses could be prevented from going through a reorganization bankruptcy in connection with legal claims the business is facing. Our West Palm Beach bankruptcy attorneys can provide you with more information about the case and its potential implications.
Why Did Johnson & Johnson File for Bankruptcy?
Johnson & Johnson is facing tens of thousands of lawsuits related to its talc products like Johnson’s Baby Powder, which allege that the products caused cancer. Before Johnson & Johnson filed for Chapter 11 bankruptcy — a type of reorganization bankruptcy commonly used by businesses — the company was facing costs of approximately “$3.5 billion in verdicts and settlements, including one in which 22 women were awarded a judgment of more than $2 billion, according to bankruptcy court records,” CNBC reported.
Johnson & Johnson created its LTL Management unit, which is the unit facing the lawsuits, and LTL is the party that filed for Chapter 11 bankruptcy. According to the Third Circuit decision to dismiss the bankruptcy case, the court “dismissed the LTL Chapter 11 petition because the unit was created solely to access the bankruptcy system.” The opinion from the court reasoned that, “while LTL faces substantial future talc liability, its funding backstop plainly mitigates any financial distress on its petition plate.” In other words, the court suggested, LTL does not need bankruptcy protection and filed only as a way of handling the costly claims it is facing.
The CNBC article explains that Johnson & Johnson has been accused of using a legal move known commonly as the “Texas Two-Step,” in which a company establishes a new legal entity and transfers its liability to that company along with some of the business’s assets. Then, in the Texas Two-Step, the new entity is responsible for the lawsuits and files for bankruptcy, protecting the original company. In this case, Johnson & Johnson created LTL, protecting Johnson & Johnson from liability.
Contact a Bankruptcy Attorney in West Palm Beach
This recent decision ultimately could impact the ability for other businesses to engage in the “Texas Two-Step” and to file for bankruptcy in connection with liability from lawsuits. If you have questions, you should get in touch with one of the bankruptcy attorneys in West Palm Beach at Kelley, Fulton, Kaplan & Eller today.