On June 25, 2024, the Third Circuit Court of Appeals rendered an opinion affirming the New Jersey Bankruptcy Court’s decision to dismiss LTL Management/Johnson & Johnson’s second bankruptcy case for “want of good faith because it was not in financial distress” in IN RE: LTL Management, LLC.
In 2021, Johnson & Johnson first attempted to use bankruptcy to permanently settle all talc claims after substantial litigation had been initiated. Through a complicated series of corporate transactions, J&J claims to have transferred all talc liability to the newly formed LTL Management, LLC, which received a funding agreement directly obligating J&J to cover LTL’s talc liabilities and bankruptcy expenses up to roughly $61.5 billion. LTL promptly filed for Chapter 11 bankruptcy. A committee of talc claimants – formed under the Bankruptcy Code – moved to dismiss LTL’s bankruptcy for want of good faith. The Bankruptcy Court denied the motion to dismiss. On appeal, the Third Court reversed by finding the funding agreement was “an ATM disguised as a contract,” promised amounts “exceed[ing] any reasonable projections available on the record before us” of LTL’s future talc liability, and there was no other evidence of financial distress. As such, the Third Circuit reversed because well-established case law bars bankruptcy absent financial distress.
LTL amended the funding agreement after its first bankruptcy case was dismissed. The new funding agreement provided LTL with access to around $30 billion to cover talc liabilities and bankruptcy expenses. LTL subsequently filed for Chapter 11 bankruptcy again. The Talc Committee promptly moved to dismiss LTL’s bankruptcy. The Bankruptcy Court held a four-day trial. After applying the Third Circuit’s prior decision, the Bankruptcy Court concluded that, even with the substantially reduced funding agreement, LTL was still not financially distressed and therefore was not eligible for bankruptcy. LTL appealed.
On appeal for LTL’s second Chapter 11 Bankruptcy Petition, the primary argument was LTL was financially distressed since it will be unable to pay its liabilities “in both the long and short term” as the potential liabilities would exceed its assets. The Third Circuit was not persuaded. In the short term, the Third Circuit found LTL’s assumptions were dramatically at odds with the historical run rates as to both trial costs and settlements. As to the long term, it compared LTL’s $21 billion “worst-case” estimate for lifetime talc liabilities – extending far into the future – with the estimated $22.3 billion “forced liquidated value.” As such, there was no apparent financial distress found since LTL’s assets exceeded its potential liabilities. With no apparent financial distress found, then LTL’s second Chapter 11 Bankruptcy Petition was not filed in “good faith” because it would not serve a “valid bankruptcy purpose.” In view of the above, the Third Circuit affirmed the New Jersey Bankruptcy Court’s decision to dismiss LTL’s second Chapter 11 bankruptcy petition for “want of good faith because it was not in financial distress.”
It is now clear that, absent apparent financial distress, there is no good-faith basis for Chapter 11 because it would not serve a valid bankruptcy purpose.
Read the full decision here.
