In a decision likely to have significant impact on certain types of bankruptcy filings going forward, this morning, the Third Circuit Court of Appeals ordered the dismissal of the Chapter 11 bankruptcy case filed by Johnson & Johnson affiliate LTL Management LLC.
After completing a multi-step divisional merger under Texas law (which led to LTL holding J&J's legacy talc liabilities along with certain funding arrangements, but no operating assets), LTL filed a chapter 11 bankruptcy petition in October 2021. Concurrent with its filing, LTL asked the bankruptcy court to issue an injunction shielding J&J and its other affiliates from continued talc litigation. An Official Committee of Talc Claimants and other parties moved to dismiss LTL's bankruptcy case and opposed the issuance of a third-party injunction.
Following a five-day trial held in February 2022, the bankruptcy court denied the motions to dismiss and, in addition, granted LTL's request for a third-party injunction. With respect to the motion to dismiss, the court held that LTL's bankruptcy wasfiled in good faith because it served the valid purpose of managing and resolving LTL's talc liabilities through a means consistent with the Bankruptcy Code. The court also held that LTL was in financial distress given the significant burdens of defending against talc litigation in thousands of separate lawsuits, notwithstanding that LTL had access to cash held by a J&J affiliate pursuant to a funding agreement.
On appeal, the Third Circuit reversed the bankruptcy court's denial of the motions to dismiss. The court first stated that, while the bankruptcy court's factual findings of financial distress were subject to highly-deferential clear error review, the court's ultimate finding of good faith could be reviewed de novo and the Third Circuit therefore could evaluate whether it believed LTL's financial distress was sufficient to entitle it to the protections of the Bankruptcy Code. The Third Circuit held that the good faith test "asks whether the debtor faces the kinds of problems that justify Chapter 11 relief" and in that regard, a debtor's financial distress "must not only be apparent, but it must be immediate enough to justify a filing." In applying this test, the court concluded that only the financial condition of LTL, and not of J&J and its other affiliates, was relevant to the analysis. The Third Circuit then compared the significant financial resources available to LTL (including up to $61.5 billion potentially available to it under the funding agreement) against the potential scope of talc-related costs and liabilities, particularly in light of LTL's apparent successes at avoiding sizeable judgments and settlements, and held that LTL was not in the kind of immediate financial distress that could support a bankruptcy filing.
In holding that LTL's bankruptcy case was not filed in good faith, the Third Circuit appears to have narrowed the justifications that permit a company to utilize the benefits of Chapter 11, emphasizing that merely managing litigation risk is not necessarily sufficient. The decision is likely to have a significant impact, particularly with respect to corporate entities previously considering using bankruptcy as a shield by implementing a "Texas two-step" made popular by LTL, among others.
More to come...
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe - Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
© Copyright 2020. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.
