(Bloomberg) — Johnson & Johnson is turning to bankruptcy court in a controversial attempt to resolve billions of dollars in legal liabilities tied to its talc products, placing a new subsidiary holding the claims into Chapter 11 protection.
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The unit, LTL Management LLC, filed for bankruptcy in Charlotte, North Carolina, on Thursday, listing as much as $10 billion of assets and up to $10 billion in liabilities, according to court documents. Johnson & Johnson itself did not file for bankruptcy.
“We are taking these actions to bring certainty to all parties involved in the cosmetic talc cases,” Michael Ullmann, executive vice president of Johnson & Johnson, said in a statement. “While we continue to stand firmly behind the safety of our cosmetic talc products, we believe resolving this matter as quickly and efficiently as possible is in the best interests of the Company and all stakeholders.”
J&J is the latest profitable company to try to use bankruptcy court to resolve asbestos-related claims instead of fighting lawsuits one case at a time in courts around the country. Lawyers who represent talc victims have been so concerned about J&J’s legal plans that they tried, unsuccessfully, to have a federal judge in Delaware block any future corporate restructuring.
“Their decision to file this amounts to corporate fraud at its worst,” said Joseph Satterley, a California-based plaintiffs’ lawyer currently in the midst of a talc trial against J&J in Oakland. “This is a company that had a $472 billion market cap as of August of this year. There’s no way this litigation presents a material threat to this company. It’s laughable.”
Under federal law, a company filing for bankruptcy protection can have all litigation against it put on hold while officials come up with a plan to resolve the Chapter 11 case. In asbestos bankruptcies, the goal is to set up a trust fund big enough to pay off all current and future cases. The company then forces all asbestos victims to apply to the trust for compensation instead of fighting in court.
“This stinks,” Andy Birchfield, an Alabama-based plaintiffs’ lawyer representing women who blame J&J’s talc-based powders for their ovarian cancers, said in a statement. “They claim their product is safe and then attempt to hide behind bankruptcy. J&J can run but it can’t hide.”
Texas Two Step
The strategy J&J is using is known in legal circles as the Texas Two Step because under a business-friendly law in that state, a company can conduct a so-called divisive merger to break itself into two parts. One part has nearly all the operations and assets, while the other gets all of the asbestos liabilities. The asbestos company then files for bankruptcy and forces everyone suing to negotiate a settlement.
Lumber giant Georgia-Pacific was one of the first companies to use the strategy when it put its Bestwall unit into bankruptcy in 2017. The company is still fighting asbestos victims in that Chapter 11 case.
Johnson & Johnson is fighting nearly 35,000 suits blaming its iconic baby powder and other talc products for causing cancer, according to a July securities filing. The number of suits increased 28% from last year and the company said in the filing that new lawsuits continue to appear.
Earlier this year, J&J was forced to pay about $2.5 billion to 20 women after the Missouri Supreme Court and U.S. Supreme Court refused to throw out a St. Louis jury’s finding that J&J’s baby powder was contaminated with cancer-causing asbestos.
Nonetheless, J&J executives have said that the company had “strong legal grounds to contest” its losses.
J&J has settled some cases during the more than seven-year litigation over its baby powder, which the company withdrew from the U.S market last year.
To get a handle on the talc litigation, J&J will establish a $2 billion trust to pay amounts the bankruptcy court determines its talc-claim subsidiary owes, and will divert royalty payments worth $350 million to the unit.
The case is LTL Management LLC, 21-30589, U.S. Bankruptcy Court for the Western District of North Carolina (Charlotte).
(Updates to add in 13th paragraph that J&J pulled its baby powder from the market last year. An earlier version of the story corrected the headline and second deck head to specify that the claims are related to talc)
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