J&J’s Failed Bid to End Talc Suits Is Bankruptcy Voting Lesson

A Johnson & Johnson unit’s latest dismissal from the bankruptcy court system shows how complex voting issues and overly broad litigation shields can derail momentum when trying to resolve mass tort liability.

US Bankruptcy Judge Christopher Lopez’s March 31 ruling that cancer victims’ vote on a $9 billion talc litigation settlement was flawed highlights the limits on companies’ use of a specific asbestos-related bankruptcy statute to divert liability. But it also offers a potential road map for businesses and practitioners of what to avoid with a mass tort bankruptcy.

The issues Lopez pinpointed will “reverberate throughout the aggregate litigation ecosystem,” said Samir Parikh, a bankruptcy law professor at Wake Forest University.

J&J was trying for the third time to use a subsidiary, Red River Talc LLC, to resolve tens of thousands of lawsuits brought by women who say the company’s talc-based products, including baby powder, contained asbestos that caused cancer. J&J has maintained its products are safe and said it will return to the tort system to litigate and defeat “meritless talc claims.”

“This ruling recognizes that the plan put forth by Red River and J&J was fundamentally flawed, from the irregular and rushed voting procedures to the impermissible nonconsensual third-party releases,” said Otterbourg PC attorney and former bankruptcy judge Melanie Cyganowski. She represents a group of law firms for claimants who opposed Red River Talc’s bankruptcy proposal.

“The Court rightly concluded that the process was driven more by a desire to meet an arbitrary threshold than by a commitment to ensuring claimants’ rights,” she said in an email.

Voting Issues

Lopez took issue with attorneys who voted on behalf of clients, a switch of how a significant number of votes were recorded, and a short voting timeline for thousands of creditors. He also rejected nonconsensual liability releases for related nonbankrupt entities and an overbroad injunction against other units.

Bankruptcy law requires 75% approval from a voting class of asbestos-related claimants to resolve a company’s asbestos liabilities.

“The biggest thing I took away from his opinion is that the voting process in mass tort cases can be extremely flawed,” Parikh said. “This case reveals that dirty secret and is arguably emblematic of a much larger process concern.”

J&J defended its voting process and said lawyers opposing the deal were motivated by their own financial interests.

Securing votes is challenging in cases with thousands of claimants, years-long proceedings, and a lack of communication with clients, Parikh said.

“The timeline can be rushed and the 75% voting bar is quite high,” he said. “These pressures seem to push some attorneys to delude themselves into thinking they have the authority to vote on behalf of their clients. But the error is obvious once the process is spotlighted.”

Lopez’s opinion shows that vote calculation must be done with “special care,” said Melissa Jacoby, a University of North Carolina law professor and author of “Unjust Debts: How Our Bankruptcy System Makes America More Unequal.”

“I hope that this analysis invites lawyers to rethink additional issues around mass tort voting, including classification and giving more severe claims their weighted voting rights that the Bankruptcy Code requires,” Jacoby said.

Brian Glasser of Bailey & Glasser LLP, co-counsel for the coalition of plaintiffs’ firms that opposed the plan, said the ruling shows that mass tort vote solicitation should be supervised by a court so it has the highest standards of transparency and legitimacy.

“If you want to do a pre-packaged mass tort bankruptcy, you need to vote as clean as Caesar’s wife,” Glasser said.

Asbestos-Related Rules

Lopez’s ruling also shows the 1994 law permitting certain litigation protections in asbestos-related bankruptcies isn’t “a blank check for widespread nonconsensual releases of third parties,” Jacoby said.

Section 524(g) of the bankruptcy code enables a debtor to channel all current and future asbestos claims into a trust for compensation.

Some argue last year’s US Supreme Court decision in Harrington v. Purdue Pharma LP, which barred nonconsensual liability releases for nonbankrupt entities, didn’t apply to cases that invoked section 524(g), but that’s too simplistic a reading, Jacoby said.

“The provision is not all or nothing, but requires careful application of the elements in 524(g) to the facts of particular releases,” she added. “That’s what the court did here.”

Lopez’s decision will have “implications for the arguments and analysis in other pending and future cases that include asbestos claims,” Jacoby said.

No Two-Step Finding

Lopez’s ruling contrasts with that of the US Court of Appeals for the Third Circuit, which in 2023 ruled that J&J unit LTL Management LLC wasn’t in financial distress when it filed for bankruptcy. The appeals court rejected LTL’s bankruptcy because of a funding agreement it had with J&J that allowed it payment rights to the tune of $61.5 billion.

Lopez, who dismissed the bankruptcy March 31 instead of allowing for a new plan and vote, took a different approach. He focused on the facts of the case, including a potentially long wait for claimants if the voting process restarts, rather than the validity of the controversial legal strategy that J&J was trying to implement, colloquially called the Texas Two-Step.

The judge didn’t find Red River Talc filed bankruptcy in bad faith and didn’t rule out the use of divisional mergers, which are key to the Two-Step, Emory University bankruptcy professor Lindsey Simon said in an email.

He made clear there’s nothing wrong with that type of bankruptcy, she noted.

“Bankruptcy can be used to settle mass torts,” Simon said. “He doesn’t go through the financial distress standard. He doesn’t issue a sweeping ruling that the case ‘must be dismissed as a bad faith filing.’ It’s much more pragmatic and tied to the specific facts.”