J&J, 3M's Chap 11 Play in Talc, Earplug Mass Torts

I'm delighted to be joined today by Negie, the Beluku bankruptcy attorney and litigation analyst with Bloomberg Intelligence. Thanks Nigysa for joining me today. I wanted to talk about J and J. Johnson and Johnson, a company facing tens of thousands of lawsuits against it and its consumer subsidiary over allegations it's calcolm powder causes, ovariant answer and mess Ocailyoma

cases were filed in cederal and state court. Federal cases were consolidated in multi district litigation in New Jersey, and the verdict out of state court have generally been mixed, with one notable verdict outa Missouri for two point one billion dollars. Then in twenty twenty one, Johnson and Johnson filed from bankruptcy for a subsidiary using something called the Texas two step. I was wondering, can you explain what the Texas two step is and how Johnson and Johnson

utilized that process? Sure?

to new subsidiary. It's called that the LTL management. While almost all of the assets were left behind in the new jjcis in this new sub and finally not the simple but LTL was oftim really put into bankruptcy. I do want to know that the Textas two step is controversial obviously in the bankruptcy context, but division merger statues are perfectly good line to access Delaware two for that

matter with some slight differences. At its core, what the statue does it breaks up the company, so it accomplishes the opposite of a merger. It's a corporate structuring statue that doesn't deem sort of the separation to be an assignment or a transfer. That's typically important because companies use it to avoid certain restrictions and contracts for example. But well, I Google be talking to about Jane j and U and beyond sort of in its two bankruptcy attempts, but

that were file based on the statue. But the statue itself, that's still perfectly good law. It's actually it actually hasn't been challenged in any of the bankruptcies in the bankruptcy context when we're using Texas to step. There's a lot of layers to it. In Jane Jay's bankruptcy, as are many of these tour bankruptcies. Are is the company was accompanied by funding agreement, which is truly becomes a cornerstone of this chapter elevens where the parent purports to cover

the tort obligations. Ironically, this spunding agreement also turned out to be its downfall. Ultimately the third circuit and I guess to answer the question why bankruptcy, why all these efforts to be in it? For those that support it, the claim is that all this is done in the name of efficiency. Basically, we know in bankruptcy majority binds hold out also bind's future claimants, so you can set up future claims. Bankruptcy also could ensure a level of

playing field for all present and future victims. And while it may not be great for those few claimants who have secret judgments or those that may end up going to trial, those supportive of it will say that looking at the big picture, bankruptcy here could provide a way to pay all claimants and do so quicker that than the MDL system.

obviously more complex than that. Also, generally speaking, it is harder to dismiss a case in the Fourth Circuit as a bad faith filing. It's also easier to extend the automatic state to non debt are in the Fourth Circuit and sometimes passed from what we know since JJ wasn't wrong. The Fourth Circuit has yet to address some of these issues in the Texas two stepcases, and these cases are

there now are still moving through the appeal process. But the North Carolina bankerancy courts and the higher course, including the Fourth Circuit, have generally been much more accepting of the strategy that the Third Circuit has been. For example, where JANJ ended up going to New Jersey.

it stops collection actions for closures. It may look like or feel like a punishment for certain creditors, but it's not meant to be what it does. It puts all creditors on the same footing. Basically, it creates this level of painful as I said, and the expectation is that will automatically ultimately facilitate or structuring.

could proceed. It's no secret that the goal of the entire bankruptcy was to have LTL, as the debtor, extend the state to the parent jan J. When assess in wanted to extend the state to third parties, the question the bankruptcy court primarily asked is whether suits against this third party are effectively suits against the debtors, because the goal remains to protect the debtor's state and promote restructuring

of whichever entity that filed. After the case were transferred to New Jersey, gan J was able to produce a nineteen seventy nine agreement that showed that old JJCI had assumed all of the vast majority of how related liabilities. So what they were able to accomplish this was convinced the court that to extend the state to JANEJ was because they were able to show this equivalency of liability between jan J and LTL, whereby a suit against Jane

J would have been one against LTL. So that's was the reasoning behind extending the state to JEJ got it.

There were clear reminders that a bankruptcy would be disastrous for Jane J. It was forced to file based on the stack liabilities that we have this company that is basically more than offering to pay these claims in full, and what could claimants possibly ask for more? This is really as good as it's probably going to get outside of the policy reasons. The ruling indicated that LTL was in sufficient financial distress, and that's what you need to show that you have a good faith filing. That was

ultimately reversed. But that's kind of the main reasoning behind the ruling.

If their circuits said a lot more actually clarify this in many ways, it demanded what it called imminent and apparent financial distress, that being a necessary component of a good faith Chapter eleven filing, and that's where the funding

agreement comes into play. So by this funding agreement, upon filing, ALTL had access to over sixty one billion dollars for the payment of talk liabilities by the funding agreements, So I think there was a floor of sixty one point five billion, and just plainly speaking, it just turned out it was ultimately tourist for bankruptcy. People. Many will point

out that there's certainly an irony here. You have those proponents of textis to step will point out that what the Third Circuit basically did is prohibit a bankruptcy or a bank aftentity that clearly had the ability to pay creditors in fall from actually proceeding to pay creditors in fall. And important to know that what the opinion didn't do is that it didn't address the application of the automatics stay to Jane j which was kind of a different finding.

So it really it fell on this good faith standard.

and a half. What did change, though, and this was key, was the support around a global settlement LTL filed to support with support of law firms that represented about sixty thousand claimants and a funding agreement that stood at eight point nine billions set of the original sixty one point five billion, and that funding agreement purported to basically cover global settlement that would cover present and future claims as well as third party pay your type, suppliers, governmental and

so forth. LTL did ask for a stay immediate to extend the state to JJ again immediately after its file, and what was I was able to get this time around was modified stay I guess they called it where discovery related matters were able to proceed, but the court did stay the trials. Also, while new suit I believes could be filed, plaintiffs could elect to defer the filing of new lawsuits. Actually that saved huge expense all obviously trials.

Not being able to proceed the trials saves a lot of expenses, but not needing being able to defer filing of new lawsuits was a huge expense siver also because many, if not all, of the sixty thousand new claimants that were expected to support the plan actually had a file lawsits and now they didn't have to. I believe there was one trial eventually allowed down the line, but that

was decided on a one up basis. Generally speaking, there was a lot of relief afforded the second time round, though not admittedly not as much as the first bankruptcy And what was.

I don't know. I don't think I mentioned that, But it was in front of the same makeruptcy court where the first filing happened, was in front of Judge Kaplan in New Jersey, so same judge it and it was dismissed very much on the same grounds laid out by the Third Circuit just months prior, that there was no on a good faith basis that there was no imminent

and apparent financial distress to this filing. I I think it's worth mentioning that Judge Kaplan didn't hide his displeasure maybe having to reach this ruling, and it did in many ways question whether this standard that the Tir Circuit had articulated of imminent and apparent financial distress made sense. I'd say that the stake isn't uncommon in the bankruptcy

circles today. There is this fear that this standard of imminent and apparent financial distress may look a lot like an insolvency requirement, which we know that there shouldn't be. We don't expect that to be. So this concern that this wag and see approach to the bankruptcy filing will

keep out of bankruptcy companies that would really benefit from it. Obviously, this change is not a good case that illustrates that because it's clearly not near insolvency, but there is concern as to how the standard may affect other companies.

I mean bankruptcy is expensive, generally speaking, but so our trials. Ultimately, I think it's not an n reasonable price to pay for a chance of concluding these suits. And these are both present and futurized it will conclude them for good. Were successful. Also, I mean this was meant, I think, to be a long term appeal process. This was a daring strategy when it started. I think the failures along the way couldn't have been a major surprise to the company,

especially the second filing. So and maybe it did create this creating slementum from a global settlement. I mean there's three M on the other side too, right, do you think bankruptcy helped three M reach its settlement? Like, what does that? What does that look like for three AM? It did. It's not a Texas two step, but it did follow a very similar approach to resolving it's towards liabilities.

that THREEM acquired. So in twenty twenty two, three M tried to put its subsidiary Arrow in bankruptcy during this mass wort litigation and get a stay of that litigation as to both itself and its subsidiary. Three M ultimately didn't get to stay and Arrows bankruptcy finaling was eventually dismissed. But in two each of this year, it was announced that three M agreed to pay six billion dollars to

resolve over two hundred and forty thousand claims. Under the settlement agreement at three, a M has a walk away right if less than ninety eight percent of eligible PLANEIFS degree. I don't think bankruptcy helped them settle the case, other than to know that it wasn't an option. Unlike Jane J. Threem didn't get us today, which if granted, could have

lowered settlement value due to delay and potential payoffs. But I think really simulated talks were their mixed trial outcome, their mistrial record, as well as the fact that it seemed pretty clear that they were going to lose the Eleventh Circuit appeal of the first bell Weather verdict, and just by way of background on that, a potentially this positive issue in all these like hundreds of thousands of cases was whether Threem had what's called a government contractor immunity,

which is the defense that exists if a contractor supplies goods to the military to the military specification and if the contractor has worn the government of the risks. The lower court found Threem didn't have government contract or immunity, and that issue was appealed to the Eleventh Circuit. The Eleventh Circuit heard oral argument and it seemed somewhat clear during the hearing that the panel was a client inclined to affirm the lower court. So three M entered into

this settlement. There was a separate settlement agreement for cases that went to verdict and WAD cases which were closer to trial because they were identified for pre trial discovery work up prior to the settlement date. And there will be a fairness hearing in December because part of the settlement is being paid in stock, so the court will consider whether the proposed transfer stock by three AM as partial consideration in the settlement is fair and that's happening

on December eleventh. So I think those catalysts were really what stimulated the settlement as opposed to a bankruptcy filing.

Johnson and Johnson pulled the product in twenty twenty. The statue and the statue limitations generally runs from the date of injuries, so theoretically a person that used the product in twenty twenty could perhaps get cancer in twenty forty and say that it was caused by TALC and file their lawsuit in twenty forty. So the universal cases for

Johnson and Johnson is still unknown. Whereas I don't expect there to be a significant number of new year Plug cases filed because sales ceased from twenty fifteen and the alleged injury manifests itself relatively quickly, so I think there was more visibility as to the number of claimants with three a M, which potentially could have made settlement a little easier. So we talked about why Johnson Johnson may have received the benefit. There's murmuring from filing for bankruptcy.

There's murmurings that Jane j will attempt to file a third bankruptcy proceeding given the prior failures, do you think this case would stand a better chance of success?

Something does need to change, obviously, and whether that's the entity that files, or the conditions of the LTL or maybe a much wider settlement. I mean, they said they had about sixty percent of claimants on board last time, with very strong opposition by the Tap Committee. Obviously, I mean, a different circuit help in the third Circuit be a good phase. Standard for filing will continue to be an

impediment as it was the first two times. I mean, unless it's often reversed by the Supreme court, so it's really hard to know what the third filing may look like. What I mean, since the case was dismissed. Can you catch us up this? So, what's what's been happening with Jane Jay? What number of losses have been I mean, I know we've all seen a ton of losses filed after the dismissile.

for next year. So do you think it's fair to say or safe to say that the whole if they try to file a third bankruptcy it will be in a different.

And there weren't just rumors. The Torts Committee implied that during the dismissal hearing, the hearing to kind of decide what dismissal or it would look like. So the expectation for a third filing has always been there, but by choosing to appeal the second dismissal, and as that appeal is still pending and it would likely to continue to be pending well into twenty twenty four, some there needs to be some change in circumstance that probably goes beyond switching circuits.

between the good faith inquiry and automatic stay inquiry. The Fourth Circuit ruling doesn't actually conflict with the Third Circuit to JJ decision, and it doesn't impact the appeal in any way because the JJ decision was based on a good faith standard. The good faith question actually may make its way to the Fourth Circuit as well, but it's

not what we have here yet. What the Fourth Circuit ruling could have done and probably would have done, was likely conflict with the Seventh Circuit ruling in three M that you were just mentioning, because that core didn't as you mentioned, the losses against the parent three M were impaused, so oral argument had already taken place in the Seventh Circuit seven Circuit because aerofile than Indiana, and I do think that the Service circuits have likely prohibited the extension

of the state to three M as well, just like the Indiana Bankruptcy Court did. The decision was state pending approval of three M settlements, so we would won't get an answer as to whether there would have been a clear circus split between the Fourth and the Seventh Circuit, but there was a very good chance of that. The automatic state question and best Wall Georgia Pacific may get appealed in November to the U. S. Supreme Court. All this case, I think I said before they they likely

all expect a long appeal process. I don't think dismissal of the second bankrupciver surprise, and I don't think it would be a surprised either one A third Circuit most likely uphold the second dismissal again, and I think that's in a third filing or something to that effect. Like LTL would probably also look for Supreme Court review of this strategy after the next Third Circuit decision.

depend on which circuit it files and whatnot. But the good faith ruling that will probably come out of the Fourth Circuit that may be more relevant to change because it may actually conflict with a third circuit, and that may also position both of those cases perhaps for better

chances for Supreme Court review. But it's sort of like amaze like they I mean, both the automatic stay and the good faith standards both accomplish the same thing, obviously, except that the automatic stay, even if it's not applied to the parent, like was a case on three AM, it doesn't actually dismiss the bankruptcy as opposed to a good faith bad faith finding, which is an automatic dismissal

of the bankruptcy. But they do comflisen the same thing, as you said, if the state doesn't get extended to the parent then the major reason why for filing this bankruptcy sort of falls apart and.