J&J’s Court-Shopping Win Highlights Irresistible Bankruptcy Tool

Johnson & Johnson’s successful use of a “court-shopping” legal tactic to advance its latest plan for resolving thousands of cancer claims spotlights a controversial bankruptcy maneuver corporations have long employed to avoid unfavorable rulings.

A federal bankruptcy judge in Texas said Thursday he’ll keep a J&J subsidiary in his Houston courtroom, dismissing allegations the company improperly skirted a federal appeals court for New Jersey that has twice stopped the health-care giant’s use of insolvency to settle mass lawsuits claiming its famous baby powder products caused cancer. The case is now set to proceed in a court far from the company’s hometown, in a jurisdiction that’s more likely to let J&J’s plan go forward.

Judges for decades have permitted the strategy, also known as forum-shopping, to allow companies to select what they believe will be friendly bankruptcy courts thousands of miles from their headquarters. And while the ruling is a big step forward for J&J, to critics the tactics involved are a gross distortion of the legal system being used to shield a $390 billion company with plenty of money to face legal claims.

“This is not how bankruptcy is supposed to work,” Sunni P. Beville, a lawyer for women opposed to the deal said in court Thursday. “People see this as a manipulation of the bankruptcy system.”

J&J is offering more than $8 billion to settle the litigation, a proposal the company has said is supported by roughly 83% of the women who voted on it. The settlement is being offered through a corporate shell J&J created to absorb the cancer claims and file bankruptcy, a legal strategy known as the Texas Two Step.

‘Strong Disagreements’

US Judge Christopher Lopez said J&J’s new subsidiary, which was created in Texas to ferry cancer claims to bankruptcy, satisfied Chapter 11 requirements to keep the case in his courtroom. The question of whether J&J’s settlement will be approved, or if opponents will succeed in stopping a third bankruptcy, will be left for later court hearings. Questions about whether J&J gained enough votes from women to approve the deal will also be decided later.

“There are certainly strong disagreements in this case,” Lopez said. “The case might ultimately get dismissed. A plan with potential overwhelming creditor support, if that’s what it ends up being, may also get confirmed.”

J&J has said its talc-based products are safe and lawsuits against the company lack merit. The company has said J&J’s new talc subsidiary, Red River Talc LLC, is incorporated in Texas, which is where its assets are located and where women who voted in support of the plan selected as the appropriate legal forum.

J&J’s talc unit “has the right to choose the venue that is the most favorable,” Red River lawyer Greg Gordon said during Thursday’s hearing.

“Today’s decision is another step closer to full and final resolution of the talc litigation for the benefit of all stakeholders,” J&J Worldwide Vice President of Litigation Erik Haas said following the ruling.

Move Disputed

The US Justice Department argued J&J’s maneuvers “are an assault on the very integrity of the bankruptcy system” and said the case should return to New Jersey, where the company is headquartered and the first two bankruptcies were thrown out.

Andy Birchfield, a lawyer for talc victims, also criticized the company’s tactic, saying it “abuses the bankruptcy system.”

“Going forward, we will provide evidence to the court illustrating many examples of deceit, deficiencies, and discrepancies of the vote administered by J&J and the precedent rulings against such a third-party liability release,” he said in an email.

J&J created a corporate shell to absorb the cancer claims and file for bankruptcy, only to have the US Third Circuit Court of Appeals throw the cases out. The appeals court court said bankruptcies weren’t warranted because the units ultimately had the backing of its deep-pocketed parent.

Gordon acknowledged that the company intentionally avoided filing in New Jersey in order to avoid the Third Circuit. But they did that for a legitimate reason, Gordon said. The company’s bankruptcy settlement is overwhelmingly supported by claimants, Gordon said, citing the vote of alleged victims held before the latest insolvency case was filed.

When claimants voted they knew that the case would be in Texas, Gordon said.

The bankruptcy case is Red River Talc LLC, 24-90505, US Bankruptcy Court for the Southern District of Texas (Houston).

(Updates with comment from lawyer for talc victims in fourth paragraph, adds context in third paragraph.)

--With assistance from Jef Feeley.

To contact the reporters on this story:
Jonathan Randles in New York at jrandles5@bloomberg.net;
Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editors responsible for this story:
Natalie Harrison at nharrison73@bloomberg.net

Beth Williams

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