Federal appeals court nixes J&J’s ‘Texas two-step’ effort to sidestep asbestos lawsuits

Pharmaceutical giant Johnson & Johnson faces nearly 40,000 lawsuits from people who say they got mesothelioma or ovarian cancer  after using the company’s talc-based Baby Powder. The plaintiffs claim the talc J&J used was contaminated with asbestos.

Most of these plaintiffs, usually women, say they used J&J’s Baby Powder and other talc products for routine personal hygiene. They say J&J has known for years  its talc-based products contained asbestos.

J&J denies that its talc is tainted with asbestos, although in the past two years it has discontinued its sales of talc-based products worldwide. Now, J&J Baby Powder contains corn starch instead. Corn starch is a safer alternative to talc and has been available to J&J for many years.

In 2021, J&J tried a controversial legal maneuver to try to limit its liability to the talc cancer victims. The maneuver is called the “Texas two-step” of bankruptcy.

J&J isn’t the only multinational company facing large potential legal liabilities to try the “Texas two-step” of bankruptcy. According to NPR, Georgia Pacific (facing asbestos liabilities), 3M (facing Combat Arms earplug liabilities), and Purdue Pharma (facing opioid liabilities) have all attempted to use the bankruptcy system to sharply limit their exposure to liability. Legislators, policymakers, investors, lawyers, and victims have been watching closely.

What is this ‘Texas two-step’?

Basically, J&J tried to set up a spin-off company and stick it with the bill. This strategy was done under a Texas law allowing an existing company to be split in two.

It formed and promptly spun off a subsidiary, LTL Management, LLC, and transferred liabilities for J&J’s talc-based Baby Powder and other talc products to LTL. Doing so meant LTL was a separate legal entity that would be responsible for the talc cancer lawsuits. With limited assets and facing billions in liabilities, LTL then promptly filed for bankruptcy.

J&J gave LTL some money to cover the talc cancer lawsuits, but not nearly as much as many predict the lawsuits would ultimately have cost J&J if it had answered the lawsuits itself.

Since LTL went bankrupt, the lawsuits would have to be handled through a bankruptcy process. A bankruptcy judge approved the plan last February.

By moving its liabilities over to LTL, it looked like J&J had successfully limited how much it would ultimately have to pay for the harm its talc products did. That could have left thousands of people injured by the asbestos-tainted talc with limited recourse.

Appeals court dismisses LTL Management’s bankruptcy petition

Now, the U.S. Court of Appeals for the Third Circuit has breathed life back into those lawsuits. It has dismissed LTL’s bankruptcy petition and the lawsuits can all move forward.

Interestingly, the court ruled that LTL still has legal access to J&J’s assets, beyond the $2 billion J&J initially pledged to fund LTL’s liabilities. Since J&J is worth over $430 billion, the court determined LTL is not in genuine financial distress and therefore cannot file for Chapter 11 bankruptcy. According to the Third Circuit, only a debtor in financial distress can seek bankruptcy.

J&J insists it never meant to game the bankruptcy system to avoid liability.

Does bankruptcy offer a loophole for wealthy wrongdoers?

It remains to be seen whether the “Texas two-step” of bankruptcy will be allowable under federal bankruptcy laws. J&J has vowed to appeal to the U.S. Supreme Court. If J&J doesn’t appeal (which is unlikely), or if the Supreme Court declines to accept the appeal, or if the Supreme Court upholds the Third Circuit’s decision, J&J will face the prospect of years of jury trials in roughly 38,000 ovarian cancer cases and 400 or so mesothelioma cases.

Another, similar case to watch involves Purdue Pharma. In its bankruptcy deal, Purdue sought to limit the money its owners, the Sackler family, would ever have to pay for harm done by its opioid OxyContin. The Sacklers are not in bankruptcy themselves, and many people wonder if that deal was even legal. A different federal appeals court will decide.

When companies harm people, they should have to pay for the cost of that harm. They should not be allowed to decide how much liability they have. That’s what courts are for. Injured people deserve their day in court.

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