Third Circuit Court of Appeals Dismisses Johnson & Johnson Affiliate’s Chapter 11 Bankruptcy Case, Highlights Impact on Future Filings

Philadelphia, PA – The Third Circuit Court of Appeals issued a landmark ruling today, dismissing a Chapter 11 bankruptcy case filed by Johnson & Johnson affiliate LTL Management LLC. This decision is expected to have far-reaching implications for future bankruptcy filings of a similar nature.

The bankruptcy case stemmed from a multi-step divisional merger conducted under Texas law. Following the merger, LTL became responsible for J&J’s talc liabilities, but did not possess any operating assets. In October 2021, LTL filed for Chapter 11 bankruptcy and sought an injunction from the bankruptcy court to protect J&J and its affiliates from ongoing talc litigation. However, an Official Committee of Talc Claimants and other parties opposed the injunction and moved for the dismissal of LTL’s bankruptcy case.

After a five-day trial in February 2022, the bankruptcy court denied the motions to dismiss and granted LTL’s request for a third-party injunction. The court determined that LTL’s bankruptcy filing served a legitimate purpose in managing and resolving its talc liabilities in accordance with the Bankruptcy Code. It also acknowledged LTL’s financial distress caused by the burdensome defense against talc litigation in numerous lawsuits.

On appeal, the Third Circuit overturned the bankruptcy court’s decision to deny the motions to dismiss. The appellate court held that while the factual findings regarding LTL’s financial distress were subject to review, it could independently evaluate whether LTL’s financial situation warranted the protections afforded by Chapter 11. According to the Third Circuit, the test for good faith in bankruptcy filings requires the debtor to face immediate and significant problems justifying Chapter 11 relief. After examining LTL’s financial resources and potential talc-related costs, the court concluded that LTL’s financial distress was not immediate enough to support its bankruptcy filing.

The Third Circuit’s ruling narrows the circumstances under which a company can seek the benefits of Chapter 11 bankruptcy. It highlights that managing litigation risk alone is not a sufficient justification. This decision is expected to have significant implications, particularly for corporate entities previously considering utilizing bankruptcy as a shield through strategies like the “Texas two-step” employed by LTL.

This ruling emphasizes the need for companies to demonstrate immediate and substantial financial distress in order to seek Chapter 11 relief. It curtails the use of bankruptcy filings as a means to manage legal liabilities. As businesses grapple with mounting legal challenges, they will need to explore alternative avenues for resolving their financial burdens. The impact of this ruling may reshape future bankruptcy strategies and alter the landscape of corporate restructuring.