The US 3rd Circuit Court of Appeals in Philadelphia rules Johnson & Johnson improperly placed its subsidiary into bankruptcy even though it faced no financial distress.
‘s attempt to offload tens of thousands of lawsuits over its talc products into bankruptcy court. The ruling marked the first major repudiation of an emerging legal strategy with the potential to upend US corporate liability law.
Monday’s decision by the US 3rd Circuit Court of Appeals in Philadelphia dismissed the bankruptcy filed by the J&J subsidiary in 2021. Before the filing, J&J had faced costs of $3.5 billion inJ&J shares closed down 3.7% – the biggest one-day percentage decline in two years. The company said in a statement that it would challenge the ruling and that its talc products are safe.
Bankruptcy filings typically suspend litigation in trial courts, forcing plaintiffs into often time-consuming settlement negotiations while leaving them unable to pursue their cases in the courts where they originally sued. The other companies did not comment on the 3rd Circuit ruling or did not immediately respond to inquiries. All have previously defended the two-step bankruptcies as the best way to fairly pay claims. Plaintiffs’ attorneys have countered that the Texas two-step is an improper manipulation of the bankruptcy system. The strategy uses a Texas law to split an existing company in two, creating the new subsidiary meant to shoulder the lawsuits.
A three-judge panel on the appeals court rejected J&J’s argument, finding the company’s subsidiary, LTL Management, was created solely to file for Chapter 11 protection but had no legitimate need for it. Only a debtor in financial distress can seek bankruptcy, the panel ruled. The judges pointed out that J&J assured that it would give LTL plenty of money to pay talc claimants.
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