Bankruptcy Court Remains Open as a Venue to Resolve Mass Tort Litigation
Reprinted with permission from the March 10, 2022 issue of The Legal Intelligencer. © 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
How does an otherwise healthy company that is facing mass tort litigation manage thousands of claims while preserving the enterprise as a going concern? History has shown that some companies choose to litigate each claim on a case-by-case basis hoping that its insurance does not run out, while others attempt to negotiate mass settlements utilizing insurance as well as company assets to strike a deal. When neither approach works, many companies turn to Chapter 11 as a last resort hoping it can use the bankruptcy process to avoid liquidation. Recently, however, some companies have attempted to utilize Chapter 11 even when it may not be the last resort, but rather a more efficient means to liquidate and pay claims without the attendant cost and delay of defending each claim on an individual basis. In a recent decision from the U.S. Bankruptcy Court for the District of New Jersey, Chief Judge Michael Kaplan refused to dismiss a Chapter 11 petition as a bad-faith filing even though the reason for filing the Chapter 11 petition was to fully resolve talc-related personal injury claims as opposed to reorganizing the defendant company. See In re LTL Management, Debtor, (Bankr. D.N.J. 2022).
Johnson and Johnson Consumer, Inc., a subsidiary of Johnson and Johnson, Inc., (JJCI) was faced with thousands of claims for alleged talc liability, and potentially billions of dollars in defense costs. Therefore, in October 2021, JJCI engaged in a restructuring transaction under Texas law through which it ceased to exist and out of which LTL Management, LLC and a new Johnson and Johnson Consumer, Inc. were created. LTL Management assumed all talc-related liabilities while Johnson and Johnson Consumer Inc. continued the business of JJCI. Hours after the restructuring, LTL filed Chapter 11 for the purpose of resolving the talc-related claims without subjecting the operating company to a bankruptcy proceeding. Subsequently, the Official Committee of Talc Claimants along with a law firm (together, movants) moved to dismiss the LTL case alleging that the filing was made in bad faith.
A Chapter 11 petition is subject to dismissal for cause unless it is filed in good faith. A determination of "good faith" is based on an examination as to "the totality of facts and circumstances," which requires a court to employ a "fact intensive inquiry." Once a movant establishes that a real issue of good faith exists, the burden of proof shifts to the debtor who must then prove, through a preponderance of the evidence, that the filing was undertaken in good faith. Judge Kaplan employed a two-prong test to analyze the "good faith" issue. First, the court looked to whether the petition served a valid bankruptcy purpose. Second, he examined whether the petition was filed merely to obtain a tactical litigation advantage.
To find a valid bankruptcy purpose, the debtor must be in financial distress. However, Kaplan also recognized that you must also take into consideration the two main purposes of bankruptcy which are to preserve going concerns and/or maximize property available to satisfy creditors. Regarding financial distress, the court emphasized that there does not have to be a particular degree of financial stress nor does the debtor need be at the breaking point. Here, the court reviewed the financial situation of both LTL and JJCI and found that LTL was facing years of potential liability. Thus, absent a global settlement, it would be unable to defend or resolve current and future liability. LTL had contingent liabilities in the billions of dollars and annual defense costs in the hundreds of millions of dollars. In Kaplan's view, LTL was in financial distress because it would not be viable in the long term. Next, the court noted that while the issue related to "preserving going concerns" by LTL remains contested, only one of the two elements need be satisfied. Thus, the court moved onto determining whether a bankruptcy proceeding would maximize the property available to creditors. In addressing this issue, the court first looked to current litigation surrounding talc-related liability claims. The court pointed out that, at the time of filing, 40,000 claims already existed with thousands more expected in the coming decades. As a result, the financial exposure could exceed $15 billion. Furthermore, the court pointed out that most claims in state and federal court have been pending for a half dozen or more years with only a few successful recoveries by victims. The tort system, in the court's view, is uneven, slow-paced, and at times denies plaintiff recovery. On the other hand, the court found that not only would bankruptcy proceedings dramatically reduce costs for the debtor, such proceedings also present the optimal venue for redressing the harms of both present and future talc claimants because it ensures that they have a meaningful, equitable and timely recovery. The establishment of a settlement trust would meet the needs of claimants in a consistent, reliable and fair manner in a way that the tort system cannot.
Having satisfied the first prong of the "good faith" test, the court next sought to determine whether the debtor filed the Chapter 11 petition to secure an unfair tactical advantage. The court noted that LTL intended to employ the tools provided by the Bankruptcy Code to resolve its mass tort liabilities which does not constitute an improper litigation tactic. The court further pointed out that LTL is in the same position as JJCI was before the reorganization. LTL still maintained all the liability of JJCI. Further, the court illustrated the externalities that LTL faces because of its Chapter 11 filing. Through its filing, LTL has drawn the attention of the public, media, government regulators, policy makers, etc. On the other hand, the court held that claimants are in a better position because they would receive timely, meaningful, and reliable compensation as opposed to slow and uneven recoveries from the tort system. Therefore, the court held that since LTL is in a similar position and claimants are in a better position, the Chapter 11 petition was not filed to secure an unfair litigation advantage.
Movants also argued that the bankruptcy proceedings triggered Seventh Amendment concerns, inasmuch as a subsequent settlement trust could rob claimants of their right to a jury trial. The court acknowledged the issue, but held that a trust could be structured to provide claimants a choice between receiving guaranteed compensation or proceeding to jury trials.
This LTL decision confirms the role that the Bankruptcy Code can and should play in helping resolve complex mass tort cases. Kaplan acknowledges the cost, delay and often inconsistent results claimants face in the tort system. With that said, by no means is the bankruptcy process perfect, but it at least provides a potential venue to deal with mass tort claims in a single venue while ideally reducing defense costs that can otherwise be used to pay claimants.