By Mike Spector
(Reuters) -The bankruptcy case filed by Johnson & Johnson (NYSE:JNJ)'s subsidiary shouldering talc-related lawsuits will soon be dismissed unless a U.S appeals court agrees to reconsider its decision to nix the company's attempt to offload the litigation into Chapter 11 proceedings, a federal judge said on Tuesday.
U.S. Bankruptcy Judge Michael Kaplan said during a hearing in Trenton, New Jersey that he intends to toss the Chapter 11 case once the Philadelphia-based 3rd U.S. Circuit Court of Appeals issues a formal mandate to carry out a Jan. 30 ruling by a three-judge panel to dismiss the matter.
The 3rd Circuit panel ruled that the J&J subsidiary, called LTL Management, had no legitimate claim to Chapter 11 protection because it did not face financial distress.
The dismissal is on hold since LTL asked the full 3rd Circuit late on Monday to reconsider the panel's decision. Should the 3rd Circuit deny that request, Kaplan could dismiss the case within days.
"It is my intent, when the mandate is issued, to issue an order dismissing the case," Kaplan said during Tuesday's hearing.
Should the 3rd Circuit refuse a rehearing, LTL could seek to further delay the bankruptcy's dismissal, including potentially at the U.S. Supreme Court, a lawyer for the J&J subsidiary, Greg Gordon, told the hearing.
Absent a reversal, the 3rd Circuit's decision would force J&J back into trial courts to battle nearly 40,000 lawsuits alleging the company's Baby Powder and other cosmetic products containing talc cause cancer. Gordon told the judge that LTL was engaged in a "Herculean effort to get the defense team back in place" to manage cases in trial courts should Kaplan ultimately dismiss the bankruptcy.
J&J maintains its talc products are safe.
LTL's bankruptcy had put the deluge of talc cases on hold. Kaplan on Tuesday granted a 24-year-old plaintiff's request to allow his case to proceed in California in the wake of the 3rd Circuit's decision.
"The pendulum has swung," Kaplan said, ruling that a trial for the terminally ill plaintiff should no longer be indefinitely halted on grounds that it could threaten LTL's bankruptcy reorganization.
Kaplan said other cases would remain paused in the short term while LTL's appeals process unfolds.
The 3rd Circuit decision more broadly cast a cloud over J&J's use of a maneuver known as the Texas two-step, named for a Texas law the company employed to carve its consumer business into two new subsidiaries.
In October 2021, J&J offloaded the tidal wave of talc lawsuits it faced onto one of its newly created units, LTL, which then declared bankruptcy. Reuters last year detailed the secret planning of Texas two-steps by Johnson & Johnson and other major firms in a series of reports exploring corporate attempts to evade lawsuits through bankruptcies.
J&J, with a market capitalization of more than $400 billion, has argued that the avalanche of lawsuits posed a serious financial threat. The company's costs of verdicts, settlements and legal fees soared to about $4.5 billion, with no end in sight, according to bankruptcy-court filings.
The 3rd Circuit's reasoning underscored what some legal experts call an inherent contradiction: bankruptcies being executed by multinational firms worth billions of dollars that were in little danger of running out of money to pay plaintiff-creditors.
LTL declared bankruptcy while J&J avoided seeking Chapter 11 protection, with all its inherent financial and reputational wreckage.
J&J said it generously financed LTL to ensure a fair settlement - better, the company and its subsidiary argued, than trial courts where some plaintiffs receive outsized payments while others receive little or nothing.
The 3rd Circuit found that J&J's funding of the subsidiary, initially $2 billion and perhaps eventually more, undercut any claim of financial peril necessary to justify LTL's bankruptcy filing. In a petition seeking a rehearing filed Monday, a lawyer for LTL, Neal Katyal, called that reasoning "upside-down."
A 2018 Reuters investigation found that J&J knew for decades that asbestos, a known carcinogen, was present in its Baby Powder and other cosmetic talc products. The company said in May 2020 it would stop selling talc-based Baby Powder in the United States and Canada, in part due to what it called "misinformation" and "unfounded allegations" about the product. The company later decided to stop selling talc-based Baby Powder globally starting this year. J&J has denied its talc contains asbestos.