Many in the plaintiffs bar and its advocates say Johnson & Johnson set up a “stooge” talc subsidiary to serve as a “fall guy” in Chapter 11 and that a New Jersey bankruptcy judge’s decision to greenlight the case deprives claimants of their right to a trial, a situation that can only be remedied with a legislative solution.
U.S. Bankruptcy Judge Michael B. Kaplan denied motions to dismiss the Chapter 11 case of LTL Management on Feb. 25, finding the so-called Texas two-step strategy — where a solvent company undergoes a divisive merger and emerges as two new entities — used by J&J was a valid method to address mass tort liability. The decision has drawn angry responses from those representing talc plaintiffs and spurred renewed interest in legislation to bar the strategy, with Sen. Dick Durbin, D-Ill., saying he is drafting a bill to ban what he called a “shameful” scheme by J&J.
Talc injury attorneys want that legislative fix put in place to stop large, wealthy corporations from taking advantage of the protections of the federal bankruptcy code to shield themselves from the liability they’ve racked up in the tort system.
Jon Ruckdeschel of Ruckdeschel Law Firm has litigated mesothelioma and other asbestos-related disease claims in the tort system for more than 20 years, including cases against J&J.
His frustration comes from the fact that J&J has a $450 billion market cap and is not the type of struggling business looking for a fresh start that he argues Chapter 11 is intended to help. Ruckdeschel said J&J filed the bankruptcy following the completion of a Texas two-step restructuring that created LTL, saddled it with the parent’s billions of dollars in talc liability, and did so as a way to gain negotiating leverage as it seeks to deal with the liability.
At the time of the bankruptcy filing, there were 38,000 claims pending against J&J and subsidiary Johnson & Johnson Consumer Inc. from personal injury claimants alleging the company’s talc was tainted with asbestos that caused ovarian cancer and mesothelioma.
Michelle Parfitt of Ashcraft & Gerel, who serves as co-lead counsel for the plaintiffs steering committee in the J&J talc multidistrict litigation, said legislation is the only way to stop what she called the abuse of the bankruptcy system by large corporations facing mass tort liability.
The American Association for Justice, a lobbying group representing trial lawyers opposed to tort reform, also lamented the New Jersey court’s decision that found J&J’s use of the Texas divisive merger laws an acceptable prepetition maneuver to consolidate the more than 38,000 ovarian cancer and mesothelioma claims in one venue to be dealt with in a more efficient manner than in the nation’s tort system.
Durbin, the chairman of the Senate Judiciary Committee, expressed his desire last month in a floor speech to draft legislation that would block the strategy used by J&J to separate its talc assets and liabilities and then move the liabilities into bankruptcy while getting broad protection for the parent company from the continued prosecution of the talc claims.
Turnaround expert Ted Gavin of Gavin/Solmonese said legislation addressing these issues isn’t likely to make it too far in Congress this year as midterm elections are about eight months away and bankruptcy reform matters don’t usually draw widespread support from the public.
But J&J has drawn a lot of scrutiny since word of its bankruptcy plans first surfaced last year, and this case could be the one that pushes significant bankruptcy reform through the Capitol for the first time since 2005.