J&J Spurs DOJ Venue Fight Over Third Bankruptcy Filing in Texas

Johnson & Johnson’s third bankruptcy filing to resolve tens of thousands of suits alleging its talc-based baby powder caused cancer is poised to face a slew of familiar challenges by opposing lawyers, including to its new choice of venue—Texas.

The Chapter 11 case of J&J unit Red River Talc LLC was filed in Houston unit on Sept. 20 with a proposal to resolve the litigation with a roughly $8 billion deal. Though it touts the support of 83% of talc claimants for the settlement, the company is already facing a motion by the Justice Department’s bankruptcy monitor, the US Trustee’s office, to be transferred to New Jersey where the health-care giant’s previous two talc unit bankruptcies were heard.

Lawyers representing talc claimants who oppose J&J’s latest talc litigation settlement proposal also asked the Houston court to transfer the case to New Jersey.

The fight highlights the ongoing battle in bankruptcy courts over venue shopping, and will test whether a well-heeled, persistent corporation—which has long maintained that its products are safe—can get the results it wants in one court after waging a losing battle in a different court.

Judge Christopher M. Lopez, who is handling the Red River case in Houston, said at a Monday hearing he’s concerned about confusion among creditors and others as venue is nailed down.

“We’re going to find a home for this bankruptcy case,” Lopez said.

Relitigating Venue

The subsidiary the company previously used to store its talc liabilities, LTL Management LLC, filed Chapter 11 in October 2021 in the US Bankruptcy Court for the Western District of North Carolina. Then it was swiftly moved to New Jersey, where J&J’s headquarters are and talc baby powder multidistrict litigation was occurring.

The US Court of Appeals for the Third Circuit ultimately nixed the bankruptcy because it found LTL wasn’t in financial distress and that the case was filed in bad faith. A second bankruptcy was dismissed by the New Jersey court under that Third Circuit reasoning. The third effort came in the form of a prepackaged deal in US Bankruptcy Court for the Southern District of Texas.

Clifford J. White, a former director of the US Trustee’s office, called the Houston filing a “clear case of venue shopping and judge-shopping.”

“It is pretty bold to refile a case in the Fifth Circuit to evade the Third Circuit case law on ‘financial distress’ which led to two prior dismissals,” White said in an email. “That is especially true because the issue of proper venue in New Jersey (in the Third Circuit) has already been litigated by the same parties.”

But White said he had doubts that the case will be transferred given how venue laws are frequently applied by judges in favor of bankrupt companies.

The US Trustee told the New Jersey bankruptcy court that oversaw the prior J&J talc bankruptcies on Sept. 20 that J&J should be barred from relitigating venue issues because they were already decided in its first bankruptcy. Moving the case to New Jersey would prevent J&J from evading the court’s prior rulings, the US Trustee argued.

Proskauer Rose LLP bankruptcy attorney Martin Bienenstock said it’s a “travesty” for any court to impose a “financial distress” requirement to replace an insolvency standard. There is no lack of good faith in providing victims an option for quick cash, as is offered in the Red River proposal, he said.

“Even if venue is moved to New Jersey, the court will hopefully recognize the Third Circuit’s imposition of a financial distress requirement is now satisfied or should be tested in the Supreme Court,” Bienenstock said.

Anthony Casey, a business and corporate bankruptcy professor at the University of Chicago Law School, said he thinks any motion to change venue will fail.

J&J’s second Chapter 11 in New Jersey didn’t involve the same bankrupt entity or partnership as the current case, Casey said. And since the second bankruptcy was dismissed, it’s unclear why the New Jersey court would want to pick up an affiliate case, he said.

In addition, the US Trustee’s decision to bring its venue transfer motion in New Jersey, rather than the Houston court controlling the current bankruptcy, could create “a huge and unnecessary conflict” between co-equal courts that will have to answer complicated statutory questions, he said.

“There are no winning arguments there,” Casey said.

More Hurdles

Red River and J&J are likely to face other challenges that could add roadblocks to a speedy bankruptcy plan confirmation.

Creditors may challenge a customary preliminary injunction that would block thousands of asbestos exposure lawsuits from moving forward.

They could also propose a process to estimate how much the company actually owes to those who say the talc made them ill. That process, which can sometimes take years, is one LTL proposed itself in its first bankruptcy.

Dissidents may also challenge whether creditors entitled to vote on the plan were provided sufficient information about the deal, said Charles Tatelbaum, a Tripp Scott PA lawyer who specializes in business restructuring cases.

An inquiry into the adequacy of the disclosures to creditors could get into larger questions about J&J’s divisional merger, or “Texas Two-Step,” and whether its assets should be counted as the assets of Red River, Tatelbaum said. That would connect back to the “financial distress” issue the Third Circuit raised.

Bankruptcy judges often look at how detailed the information is, and the level of sophistication of voters, Tatelbaum said.

“That’s always the rub, because the bankruptcy code says: ‘Well we’ll allow this to be carried over but we’re not going to short-change the rights of creditors to adequate information,’” Tatelbaum said.

The case is Red River Talc LLC, Bankr. S.D. Tex., No. 24-90505, hearing 9/23/24.