The future of talcum powder litigation is at a crucial turning point. LTL Management LLC (the subsidiary J&J created to limit exposure to talcum powder lawsuits by seeking bankruptcy protection in October 2021) shockingly filed for bankruptcy a second time on April 4, 2023. This new filing came after the Third Circuit Court of Appeals dismissed LTL's initial filing on January 30, 2023 as lacking the requisite "good faith" because LTL was clearly not in "financial distress." The primary factor, among others, was that LTL was supported by a J&J-created funding agreement valued at up to $61 billion dollars.
This new filing occurred merely two hours after LTL's additional efforts in the Third Circuit failed. The new effort was premised on ripping up J&J’s previous funding agreement in favor of lower value back-up funding support and a new surprise settlement proposal for victims allegedly worth $8.9 billion dollars in net present value. This proposal negotiated with and supported by several highly reputable law firms representing a a large number of claimants, became embodied in a Chapter 11 plan and touted as a solution for both victims and LTL alike.
Many law firms, which have collectively fought the talcum powder litigation tooth and nail against J&J in the New Jersey MDL and elsewhere for many years, along with the US Trustee's Office, State AGs and others, steadfastly opposed this new LTL filing and underlying plan, arguing that J&J and LTL could not runaway from the fundamental point of the Third Circuit’s ruling because (1) LTL is now even further away from "financial distress" alleged in its April 4, 2023 petition; and (2) the filing was otherwise specious or in bad faith because of the intentional "voiding" of the $61 billion funding agreement, and J&J’s continued backing of LTL only for the purpose of siloing liability away from J&J. In other words, financial hardship “by appointment” is not the type of distress envisioned by the drafters of US Bankruptcy Code or established through the courts.
New Jersey Bankruptcy Court Judge Michael Kaplan (who in February 2022 had previously denied the various motions to dismiss LTL's first bankruptcy filing) heard four days of testimony and contentious arguments from both sides during the final week of June 2023. As promised, Judge Kaplan issued a swift ruling on Friday July 28th, days before his stated August 2nd deadline.
Judge Kaplan, cautiously and with apparent reluctance, dismissed LTL’s April 2023 bankruptcy petition, holding it was not made in "good faith" -- because LTL was not in imminent and apparent "financial distress" at the time of the filing. Despite his expressed concern for how talcum powder victims could be compensated en masse going forward without the benefit of a structured Chapter 11 settlement plan and his clear belief that bankruptcy court was the right venue to resolve their claims, he seemingly felt constrained by the guardrails set by the Third Circuit's opinion and the lack of sufficient evidence of imminent financial distress.
This is a reversal in Kaplan’s approach as he appears to have made his decision despite the stated “keep LTL in bankruptcy” factors strongly affecting him before, during, and after the hearings.
While it is too soon to predict how this fight will proceed , the potential paths forward for talcum powder victims and J&J include the following:
First, J&J said on July 28 that it would promptly appeal to the Third Circuit -- but the chances of a reversal of Judge Kaplan seem slim given the Third Circuit's prior ruling and Kaplan's adherence to the guardrails set forth in that ruling in granting the dismissal motions.
Such an appeal could theoretically give J&J a chance to keep the existing partial stay of trials and non-bankruptcy appellate proceedings in place pending the Third Circuit's ruling on J&J’s appeal -- though LTL's opposing law firms will surely oppose any such J&J request.
The potential downside of an appeal for J&J is that it gives the Third Circuit a new opportunity to issue an even harsher opinion against J&J than its original ruling -- thereby creating an even narrower path to any successful LTL bankruptcy outcome.
Second, J&J could conceivably reach its hand out to opposing law firms and propose a good faith settlement and plan which provides much higher, and specifically disclosed, compensation to ovarian cancer and mesothelioma victims (versus the non-specific "point system" proposed in LTL's current Chapter 11 plan).
The goal would be to persuade present objectors to join in a completely consensual plan, file LTL in bankruptcy one last time, preempt all motions to dismiss because of enough money on the table for all, and allow all claimants’ representatives and the US Trustee to move forward with a completely united front before Kaplan.
This may not be feasible given the extreme rancor exhibited by all sides in the courtroom in recent hearings, but the victory secured in front of Kaplan by the tacl committee, UST and other stakeholders might be enough to give them cushion and comfort to agree -- if the compensation is raised sufficiently for all. The second bankruptcy fight was likely necessitated for reasons going beyond the LTL case and outside Kaplan's courtroom, and an LTL initial win would have heightened the existential risk that other litigation-entangled companies would try to copycat J&J and use the same tactic to gain a litigation advantage in bankruptcy court (as 3M's Aearo subsidiary tried, but failed, to do in July 2022).
Given the stature of the law firms negotiating and supporting LTL's settlement and plan, there is certainly a possibility that negotiations with LTL's opponents could continue and result in a winning settlement for all stakeholders and claimants.
Third, J&J could consider and pursue inventory settlements outside bankruptcy with the lead law firms it fears most in the MDL and state court litigation (which will begin to accelerate again in the wake of Kaplan's ruling), as well as with the law firms which supported the present LTL plan. J&J has already disclosed (during the LTL bankruptcy) that it settled almost 6000 cases with Mark Lanier (and certain other smaller firms) in 2021. Such a divide and conquer strategy could prove perilous for claimants not presently represented by stakeholder firms and lead litigation counsel.
Fourth, J&J could consider a global settlement of all claims but given the uncertainty of the true number of claimants, and the hostility engendered by the second LTL filing, that would also likely be a hard lift.
Fifth and finally, J&J could simply decide that its LTL Texas Two-Step strategy has failed and just revert to defending itself in scorched earth litigation in the MDL and state court with all law firms. This would of course be the least satisfactory outcome for all sides, with few benefits besides an occasional trial victory for some victims, but it cannot be discounted.
If the litigation ends up yielding new large-dollar verdicts which survive appeals, and many new claims, J&J might even try a third LTL bankruptcy down the road and try to persuade Kaplan that now LTL is in imminent and apparent financial distress. The law firms opposing the second LTL bankruptcy raised that concern with Kaplan and asked him to enjoin such a third future filing but he declined to do so at the August 2 hearing in which the issue was raised.
How can law firms potentially benefit from Kaplan's dismissal? Under the proposed plan, LTL would have paid ovarian cancer and mesothelioma claimants a presently unspecified amount (based on a complicated points system). Moreover, the plan proposed a demarcation line wherein anyone diagnosed after June 1, 2023 would be a "future claimant," not a "present" claimant -- and thus subject to a potentially lengthier timeline to payment. That would obviously be an unjustifiable negative to that subset of claimants. These factors raised the risks for law firms' present talc clients and likely hindered the pursuit of new clients.
A new bankruptcy settlement, supported by all stakeholders, would likely increase and make concrete and increase the amounts payable to present clients, while eliminating the capricious June 1, 2023, line drawn between present and future claimants.
An inventory or global settlement outside bankruptcy would also likely benefit many firms' existing and new clients.
Both scenarios warrant a re-examination of, and approach to, the still-viable pool of unrepresented clients.
Watch this space for discussion of future developments.