The Bankruptcy Court for the District of New Jersey denied motions to dismiss the chapter 11 case of the newly created subsidiary of Johnson & Johnson, LTL Management LLC, and granted the debtor’s motion to stay prosecution of actions asserting talc related personal injuries against its J&J affiliates and the products distributors. This is the first opinion outside the North Carolina bankruptcy court approving the use of the so-called Texas Two Step as a bankruptcy execution strategy.
The Motions to Dismiss
The crux of the motions to dismiss was J&J’s and the debtor’s attempt to utilize the bankruptcy system as a litigation strategy to address their talc-related litigation liabilities; that LTL was created within hours before the chapter 11 filing as a special purpose vehicle with the stated purpose of filing chapter 11 to employ the bankruptcy’s automatic stay and asbestos resolution schemes for the benefit of its solvent operating parent and affiliated entities, as well as certain third parties, without such entities filing for chapter 11; that LTL has no business purpose, no employees apart from those seconded by J&J, and that LTL’s board, management and employees all work for J&J; that LTL has no trade creditors, lenders, bondholders, customers, suppliers, vendors, landlords, tax creditors, etc.; that LTL’s creation through the pre-petition restructuring mechanism known as the Texas Two Step was intended to force talc claimants to face delay and to secure a bankruptcy discount.
LTL acknowledged that the Texas Two Step was taken in order to resolve talc liabilities through a chapter 11 filing but that it was designed to produce an equitable resolution of both current and future talc claims by means of a settlement trust, established pursuant to § 105 or § 524(g) of the Bankruptcy Code.
The Decision
First, the Court found that though the objectors take issue with the process leading to the bankruptcy filing, the filing of a chapter 11 case with the expressed aim of addressing present and future liabilities associated with personal injury claims to preserve corporate value, is a proper purpose under the Bankruptcy Code.
Second, the Court expressed its view that the bankruptcy system is far superior to any alternative; continued litigation in state and federal courts cannot serve the best the interests of the inured claimants.
Finally, the Court rejected the argument that the use of the Texas Two Step should be regarded as an abusive or unfair litigation strategy warranting dismissal of the case for bad faith. The Court found nothing inherently unlawful or improper with application of the long existing Texas Two Step scheme in a manner which facilitates a chapter 11 filing for one of the resulting new entities.
Conclusion
The Texas Two Step has been successfully utilized several times in cases filed in North Carolina. Now it has been approved in New Jersey. Time will tell whether other courts across the country will follow suit, whether Courts of Appeals would agree and whether Congress will take legislative action.
The opinion denying the motion to dismiss is here:
https://www.govinfo.gov/content/pkg/USCOURTS-njb-3_21-bk-30589/pdf/USCOURTS-njb-3_21-bk-30589-2.pdf
The opinion staying the actions against non-debtor third parties is here:
https://www.govinfo.gov/content/pkg/USCOURTS-njb-3_21-ap-03032/pdf/USCOURTS-njb-3_21-ap-03032-1.pdf
