Hot off the presses today, in a case that bankruptcy practitioners have been watching since it was filed in October of 2021, a panel of the Court of Appeals for the Third Circuit announced an opinion dismissing the bankruptcy of LTL Management, LLC. See LTL Management, LLC v. Those Parties Listed On Appendix A To Complaint, et al., Doc. 50, Case Nos. 22-2003 – 22-2011. Judges Ambro, joined by Judges Restrepo and Fuentes, dismissed the bankruptcy of the Johnson & Johnson subsidiary, LTL Management, LLC on the basis that there was no immediate need for LTL’s bankruptcy.
LTL was formed in a divisive merger process known as a “Texas Two-Step” for the purpose of taking on liability for talc claims against another J&J subsidiary, “Old” JJCI. “Old” JJCI went out of business when LTL and another entity, “New” JJCI were formed. “New” JJCI took on the bulk of the assets of “Old” JJCI. Then “New” JJCI and J&J entered into a funding agreement with LTL as a back stop so that LTL had the ability to pay for the talc liabilities assigned to it. The funding agreement was worth an estimated $61.5 billion, enough to convince the Court of Appeals that there was no urgency to LTL’s bankruptcy.
Relying, inter alia, on prior precedent from another decision the Court of Appeals issued over two decades ago, In re SGL Carbon Corp., 200 F.3d 154, 159-62 (3d Cir. 1999), Judge Ambro noted that demonstrating need for financial reorganization is a bed rock principle for entities who choose to pursue bankruptcy relief. Although a debtor need not be insolvent, it must demonstrate a valid bankruptcy purpose such as preserving a going concern or maximizing the value of the debtor’s estate. The Court stated that a valid bankruptcy purpose “assumes a debtor in financial distress.” (citing NMSBPCSLDHB, L.P. v. Integrated Telecom Express, Inc. (In re Integrated Telecom Express, Inc.), 384 F.3d 108, 128 (3d Cir. 2004)). Thus, a debtor must face some financial trouble that requires invocation of bankruptcy in order to take advantage of the many benefits which bankruptcy can provide to debtors while it may impose significant hardships on particular creditors.
The Court noted that “[f]inancial distress must not only be apparent, but it must be immediate enough to justify a filing.” LTL Mgmt, Doc. 50 at 38. Because there was no evidence to support a current need for LTL to utilize the provisions of Chapter 11 to reorganize its financial affairs, the bankruptcy was not filed in good faith and was dismissed.
