Houston — A recent ruling by U.S. Bankruptcy Judge Christopher Lopez on March 31 has underscored the complexities faced by companies attempting to manage mass tort liabilities through bankruptcy, particularly under asbestos-related legal frameworks. The decision, which struck down a $9 billion talc litigation settlement proposal by Johnson & Johnson’s subsidiary, Red River Talc LLC, due to defective voting processes, has raised significant questions about the strategy companies employ to handle large-scale liability claims.
Judge Lopez identified core issues in the voting process organized by Red River Talc and its parent company, Johnson & Johnson (J&J), which attempted for the third time to resolve tens of thousands of lawsuits. These lawsuits claim that the company’s talc-based products, such as baby powder, contain asbestos and have caused cancer — allegations J&J denies, asserting the safety of its products. In response to the ruling, J&J stated its intent to continue fighting what it regards as “meritless talc claims” within the traditional tort system.
The judge’s criticism specifically targeted how the subsidiary conducted votes, critiquing the hurried manner in which attorneys recorded votes for clients and the imposition of an excessively short timeline for the vote, drawing the process into question. The ruling also called into question the admissibility of releases of liability for nonbankrupt related entities that were initially included in the settlement proposal.
Bankruptcy law states that obtaining a 75% approval from a class of asbestos-related claimants is necessary to resolve a company’s asbestos liabilities. The complexities highlighted by Lopez’s decision demonstrate typical procedural challenges, especially in cases involving thousands of claims which may take years to process and often suffer from inadequate communication with clients.
Legal experts have shed light on the broader implications of the ruling. Samir Parikh, a professor of bankruptcy law at Wake Forest University, remarked that the decision could substantially impact the strategy surrounding aggregate litigation, especially concerning how votes are solicited and counted in massive tort cases. Additionally, Melissa Jacoby, a law professor at the University of North Carolina and author of “Unjust Debts”, underlined the need for rigorous scrutiny during vote calculation and prudent application of legal provisions like Section 524(g) of the bankruptcy code, which allows for the channeling of asbestos claims into a compensation trust.
Contrasting this case with another recent appraisal by the U.S. Court of Appeals for the Third Circuit, one observes differing judicial approaches to company liabilities in asbestos-related matters. The Appeals Court had earlier rejected a bankruptcy filing by J&J’s another subsidiary, LTL Management LLC, on grounds unrelated to voting irregularities, instead focusing on a financial arrangement with J&J warranting the subsidiary unnecessary protections.
The ruling also non-conclusively touched upon the controversial “Texas Two-Step” bankruptcy strategy, a method involving corporate restructuring and bankruptcy filings simultaneously used to manage extensive liability claims. While the judge highlighted no inherent fault with divisional mergers, essential to this strategy, the dismissal was strictly tethered to the mishandling of the voting process and related procedural flaws.
Brian Glasser from Bailey & Glasser LLP, representing plaintiffs opposed to the settlement plan, emphasized that any future mass tort bankruptcy attempts should ensure the utmost transparency and fairness in vote solicitation, supervised by court authorities to maintain legitimacy.
As this case continues to attract attention, it reaffirms the intricate balance between corporate attempts to restrict liability through bankruptcy and the legal framework designed to ensure fair treatment and adequate compensation for claimants.
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