By Dietrich Knauth
NEW YORK, July 26 (Reuters) - A U.S. appeals court has affirmed a decision that ended J&J's second attempt to resolve tens of thousands of cancer lawsuits through a shell company's bankruptcy, while J&J pushes ahead with its third bankruptcy gambit.
The 3rd U.S. Circuit Court of Appeals on Thursday ruled that the company's second effort, like its first, had to fail because the shell company that it placed into bankruptcy was not in "financial distress."
The decision was not a surprise to J&J, which is pressing ahead with a revised effort to settle lawsuits alleging that its baby powder and other talc products were contaminated with asbestos and caused ovarian and other cancers.
J&J says that its talc products do not contain asbestos and do not cause cancer, but it is pursuing a third bankruptcy in an effort to end lawsuits from about 61,000 claimants and prevent anyone from bringing similar lawsuits in the future.
J&J is collecting votes from people who allege they have been injured by their talc, and it plans to place a shell company into bankruptcy for a third time if it can get support from 75% of those claimants. Votes on J&J's proposal are due today, and J&J has said it may take a few weeks to count the votes.
The 3rd Circuit decision found that the earlier bankruptcy of J&J subsidiary LTL Management was properly dismissed by a U.S. bankruptcy judge. LTL had presented only "speculative" evidence that the talc lawsuits created sufficient "financial distress" to warrant the protections of bankruptcy.
A three-judge panel of the appeals court rejected LTL's argument that the "financial distress" standard was so restrictive that it would shut off bankruptcy as an option for companies facing large numbers of lawsuits.
"No doubt that solvent companies, confronted by mass-tort litigation, can encounter significant financial distress that warrants bankruptcy," Circuit Judge Thomas Ambro wrote for the panel. "When future insolvency is a realistic possibility based on meaningful evidence - not just the result of a highly speculative 'worst-case' scenario - a mass-tort defendant has a viable case for bankruptcy."
J&J intends to appeal to the U.S. Supreme Court, the company's vice president of litigation Erik Haas said Friday. But, the 3rd Circuit's ruling was expected and it will not impact J&J's ongoing effort to gather support for its revised settlement offer, Haas said.
J&J is confident that it will get votes from over 75% of talc claimants, Haas said.
Andy Birchfield, an attorney representing people who have filed ovarian cancer lawsuits against J&J, said the decision should be a "warning to J&J" that its focus on a bankruptcy settlement "is unlawful and also defies common sense."
J&J’s bankruptcy strategy faces legal hurdles even if it gets the 75% threshold it is seeking in its current voting period.
The U.S. Supreme Court's recent ruling in Purdue Pharma's bankruptcy narrowed courts' ability to stop lawsuits against people and companies, like J&J, who are not bankrupt, without the consent of the people who have sued. And attorneys opposed to J&J's settlement offer will argue that the new deal still fails under the "financial distress" standard articulated by the 3rd U.S. Circuit.
J&J says the Purdue ruling does not impact its settlement proposal, because it qualifies for specific non-debtor protections that U.S. bankruptcy law allows for asbestos defendants.
New legislation proposed this week could also present an obstacle by placing limits on the so-called "Texas two-step" strategy that J&J used to place its talc liabilities into a shell company. A bipartisan trio of Senators said that financially healthy companies like J&J should not be allowed to use bankruptcy courts to evade responsibility for injuries they caused.
The Texas two-step tactic involves first using Texas corporate law to split a business into two separate companies, one that inherits the assets and a shell company which is saddled with liabilities, including lawsuits. The shell company then files for bankruptcy protection, and it uses its bankruptcy to block lawsuits from proceeding against its well-funded affiliates.
The case is In Re: LTL Management, U.S. Court of Appeals for the Third Circuit, Nos. 23-2971 and 23-2972
For LTL: Gregory Gordon, Noel Francisco, and Kevin Marshall of Jones Day
For the official committee of talc claimants: Jeffrey Lamken of MoloLamken, Jonathan Massey of Massey & Gail
Read more:
The battle over J&J’s bankruptcy plan to end talc lawsuit
J&J advances $6.48 billion settlement of talc cancer lawsuits
US Senate bill aims to curb Texas two-step bankruptcies
(Reporting by Dietrich Knauth)
((Dietrich.Knauth@thomsonreuters.com;))
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