Johnson & Johnson's third talc bankruptcy raises renewed dispute over location

Johnson & Johnson The third bankruptcy filing seeks to settle tens of thousands of lawsuits alleging that its talc-based baby powder causes cancer. The company now faces a number of familiar objections from opposing lawyers, including the new Texas venue.

The U.S. Chapter 11 case of J&J subsidiary Red River Talc LLC was filed in Houston on September 20. The lawsuit is proposed to be settled with a roughly $8 billion settlement. Although the company touts that 83 percent of plaintiffs support the settlement, the company is already facing a request from the Justice Department's bankruptcy trustee, the U.S. Trustee's Office, to move its bankruptcy to New Jersey, where the health giant's talc subsidiary's two previous bankruptcy cases were heard.

Lawyers for plaintiffs who oppose J&J's recent settlement proposal in the talc lawsuit have also asked the Houston court to transfer the case to New Jersey.

The dispute highlights the ongoing battle in the bankruptcy courts over the choice of location and will test whether a deep-pocketed, stubborn company – which has long claimed its products are safe – can get the results it wants in one court after fighting a losing battle in another.

Judge Christopher M. Lopez, who is presiding over the Red River case in Houston, expressed concern at a hearing Monday that there could be confusion among creditors and others while venue is being determined.

“We will find a home for this bankruptcy case,” Lopez said.

Renegotiation of jurisdiction

The subsidiary the company had previously used to hold its talc liabilities, LTL Management LLC, filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Western District of North Carolina in October 2021. It was then quickly relocated to New Jersey, home of J&J's headquarters and a class action litigation over talc baby powder.

The U.S. Court of Appeals for the Third Circuit ultimately dismissed the bankruptcy, finding that LTL was not in financial trouble and that the case had been filed in bad faith. A second bankruptcy was dismissed by the New Jersey court on the same Third Circuit reasoning. The third attempt came in the form of a pre-packaged deal in the U.S. Bankruptcy Court for the Southern District of Texas.

Clifford J. White, a former director of the U.S. Trustee's Office, called the Houston filing a “clear case of jurisdiction shopping and judge shopping.”

“It is quite brazen to refile a case in the Fifth Circuit to circumvent the Third Circuit's 'financial hardship' jurisprudence that led to two previous dismissals,” White said in an email. “This is especially true because the issue of proper venue in New Jersey (in the Third Circuit) has already been litigated by the same parties.”

However, White expressed doubts about the case being referred because judges often apply jurisdictional laws in favor of insolvent companies.

The U.S. trustee told the New Jersey bankruptcy court that oversaw J&J's previous talc bankruptcies on Friday that J&J should be prevented from re-litigating jurisdictional issues because they had already been decided in the first bankruptcy case. Moving the case to New Jersey would prevent J&J from circumventing the court's previous decisions, the U.S. trustee argued.

Proskauer Rose LLP bankruptcy attorney Martin Bienenstock said it would be a “travesty” for a court to create a “financial distress” requirement instead of a bankruptcy standard. There is no lack of goodwill in offering victims a way to get money quickly, as offered in the Red River proposal, he said.

“Even if venue is moved to New Jersey, hopefully the court will recognize that the financial hardship requirement imposed by the Third Circuit is now met or should be considered before the Supreme Court,” Bienenstock said.

Anthony Casey, a professor of business and corporate bankruptcy at the University of Chicago Law School, said any request to change venue would fail.

Casey said J&J's second Chapter 11 case in New Jersey did not involve the same insolvent company or partnership as the current case. And since the second bankruptcy was dismissed, it's unclear why the New Jersey court wanted to take on a subsidiary's case, he said.

In addition, the U.S. trustee's decision to file its motion to change venue in New Jersey rather than in the Houston court that has jurisdiction over the current bankruptcy could trigger “a huge and unnecessary conflict” between peer courts that would have to answer complicated legal questions, he said.

“There are no convincing arguments,” Casey said.

Further hurdles

Red River and J&J will likely face additional challenges that could pose further obstacles to a quick confirmation of the bankruptcy plan.

Creditors can challenge a temporary injunction that would stop thousands of asbestos exposure lawsuits.
They could also propose a process to determine how much the company actually owes to those who claim to have been sickened by talc. This process, which can sometimes take years, was proposed by LTL itself in its first bankruptcy.

Opponents may also question whether voting creditors were adequately informed about the deal, says Charles Tatelbaum, a Tripp Scott, Pennsylvania-based lawyer specializing in corporate restructurings.

An investigation into the adequacy of the disclosures to creditors could raise larger questions about the J&J merger, known as the Texas Two-Step, and whether the company's assets should be counted as Red River assets, Tatelbaum said, which would tie into the “financial distress” issue raised by the Third Circuit.

Bankruptcy judges often look at how detailed the information is and how experienced the voters are, Tatelbaum says.

“That's always the problem, because the bankruptcy law says, 'We will allow the postponement, but we will not neglect the creditors' right to adequate information,'” Tatelbaum said.

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