[co-author: Adam Levitin]

Here we go again. Precisely one hour and thirty-nine minutes after the dismissal of the bankruptcy filing of LTL, Johnson & Johnson’s artificially created talc-liability subsidiary, the company was right back at it again with the filing of a new chapter 11 case in New Jersey, again assigned to Judge Kaplan.

It took some fast work to get a second complex chapter 11 case out the door, albeit without any schedules! With the filing came, inter alia, a declaration, a statement by the Debtor regarding its second filing, and a new Adversary Proceeding that seeks the same preliminary injunctive relief for the benefit of some 700 J&J affiliates and favored customers that was achieved in the first LTL case.

The new case is supposedly engineered to comply with the strictures of the Third Circuit’s decision dismissing the original filing for not being in good faith on account of the debtor not being in financial distress. To recall, LTL found itself hoist on its own petard before the Third Circuit, which noted that its assets included a $62 billion funding agreement, vitiating any claim of financial distress.

To this end, what has changed in LTL 2.0 is the design of the funding agreement. The funding agreement in LTL 1.0 was for up to $62 billion, and the funding was to come from both LTL’s HoldCo (New JJCI) and J&J. Now in LTL 2.0, the funding agreement is just from HoldCo, and it is for only $8.9 billion. There is a proposed backstop from J&J, but that will require bankruptcy court approval, so LTL claims that it is not part of the good faith analysis. LTL’s thinking is that Judge Kaplan previously found that the HoldCo (or at least its predecessor) was in financial distress, so it must be so now, particularly because in January of this year it transferred most of its assets—the entire J&J consumer business!—to the J&J parent. The idea is that the new funding agreement isn’t really so valuable, so LTL must be in financial distress.

There are (at least) three flies in this ointment, namely two transactions that sure look like fraudulent transfers. First, LTL gave up its rights to at least $62 billion under the 2021 Funding Agreement in exchange for up to $8.9 billion in backing under the 2023 Funding Agreement. Counting on fingers and toes indicates that $8.9 billion is not reasonably equivalent value to $62 billion. Given the debtor’s admission that LTL is insolvent, it’s hard to see how this isn’t the mother of all constructive fraudulent transfers. (And frankly, given its purpose of hindering, delaying, or defrauding creditors, the mother of all actual fraudulent transfers as well.)

The shifting nature of which entity is contributing to the funding agreement also underscores the manufactured boundaries of the debtor and the manipulation of those boundaries in an attempt to satisfy the financial distress requirement. If the case ends up before the Third Circuit again, this sort of structuring—and the general use of bankruptcy as a means of obtaining a litigation advantage—will be an impossible issue to side-step.

Second, the transfer from the HoldCo to J&J parent of the consumer business also looks like a fraudulent transfer. And indeed, it’s pretty brazen; but for the Texas Two-Step, the HoldCo would have been the debtor entity, and such an asset transfer would have required bankruptcy court approval. What we are see, then, is exactly what the critics of the Texas Two-Step complained about: J&J got the benefits of bankruptcy (e.g., the automatic stay and preliminary injunctive relief) without paying the bankruptcy price (e.g., court scrutiny and approval of transactions outside the ordinary course of business).

The third problem is that the bankruptcy court might not have subject matter jurisdiction. The Third Circuit’s decision in LTL tells us that the good faith filing doctrine—which requires that the debtor entity be in financial distress to get the bankruptcy door open—is a subject matter jurisdiction requirement. Absent financial distress, there’s no matter for bankruptcy courts to address.

None of the first eight filings currently on the docket explain how LTL is in financial distress, a strange omission given the Third Circuit’s emphasis on financial distress of the debtor being part of the good faith filing analysis. Instead, as before, LTL focuses on the financial situation of its HoldCo. To be sure, LTL lauds its own good faith in the declaration and tries to justify its second—shall we call it “brisk”? —filing on the ground that, with the bankruptcy court’s encouragement to continue mediation, it has received support from 60,000 talc claimants to accept an $8.9 billion trust. Missing, however, is an allegation or averment that it already has the 75% vote needed to receive a section 524(g) channeling injunction.

Apparently LTL believes this settlement (absent any inquiry into imminent financial distress) is more than enough to invoke the bankruptcy court’s subject matter jurisdiction. Query, can LTL “settle” itself into bankruptcy jurisdiction? Can it “settle” away the subject matter jurisdiction requirement that it demonstrate imminent financial distress?

Settlements are generally favored over litigation but the Third Circuit has articulated quite clearly that bankruptcy is available only to entities facing financial difficulties. Absent that, parties are left to their settlements outside bankruptcy. Otherwise, bankruptcy would be the panacea to the problems with compelling acceptance of settlements outside of bankruptcy that the Supreme Court highlighted in Amchem Products v. Windsor, 521 U.S. 591 (1997)and Ortiz v. Fibreboard, 527 U.S. 815 (1999).

So . . . where is the real financial distress that LTL is suffering or will soon suffer? To the extent there is distress this go around, it appears to be only by virtue of LTL’s fraudulent transfers—swapping out the $62 billion of funding for $8.9 billion and the transfer of the consumer business assets.

A key part of LTL 1.0’s strategy was to rely on the first crack doctrine to stave off any sort of fraudulent transfer attack on the Texas Two-Step transactions. Will it be able to do so this time? There’s an even stronger case for giving an Official Committee (yet to be formed) derivative status or appointing a Chapter 11 trustee given LTL management’s acquiescence to these transactions.

As with the original bankruptcy, there are a lot of ways that things could go sideways for LTL. What is clear is that J&J running full speed once more unto the bankruptcy breach is a sign of how desperate it is to resolve its talc liabilities.