Talcum Powder Summary Update February 2022
The U.S. Bankruptcy Court of New Jersey extended an automatic stay that prevents talcum claimants from collecting against non-debtors at the request of LTL Management. LTL is an indirect subsidiary of Johnson & Johnson that traces its roots to Johnson & Johnson Baby Products. It is also the subsidiary liable for paying claims arising out of the use of talcum in its baby powder.
The court encouraged the parties to move toward mediation and said it would revisit continuation on June 29, 2022, or 120 days after the opinion. The ruling has the effect of halting lawsuits against J&J and retailers who sold the powder.
On Oct. 14, 2021, LTL filed a petition for relief under Chapter 11 in the U.S. Bankruptcy Court in the Western District of North Carolina.
Johnson & Johnson (J&J) began selling baby powder in 1894. In 1972, J&J established a formal operating division for its baby products, including the powder, and transferred all assets associated with the division to J&J Baby Products. J&J Baby Products assumed all liabilities related to the baby products.
Over the next several decades, all the assets associated with J&J Baby Products were transferred and ultimately rested with one of J&J’s subsidiaries, Johnson & Johnson Consumer Inc. (Old JJCI.) After these transactions, Old JJCI assumed responsibility for all claims alleging that J&J’s baby powder, which contained talcum, caused mesothelioma and ovarian cancer.
On Oct. 12, 2021, the Old JJCI shut down and formed two new companies — LTL and Johnson and Johnson Consumer Inc (new JJCI). The restructuring’s purpose was said to resolve all talc-related claims through Chapter 11 without affecting the entire Old JJCI enterprise.
Soon after filing the bankruptcy petition, LTL initiated a proceeding seeking an order that the automatic stay applied to claims against non-debtors (Protected Parties) such as J&J. The North Carolina Court granted a preliminary stay for 60 days and transferred the case to the New Jersey bankruptcy court.
When the case came before the N.J. court, LTL restated and amplified its two-fold argument. Citing 11 U.S.C. § 362, it contended that the automatic stay prohibits prosecution of talc claims against the Protected Parties. It also asserted that the court should exercise its authority under 11 U.S.C. § 105(a) to prevent these claims from beginning or continuing.
The court said that the Third Circuit had previously established a two-fold purpose for automatic stays. The first is to protect the debtor, give them a respite, and allow them to attempt a repayment plan. The second also is to protect creditors and prevent one group from acting unilaterally to obtain payment to the detriment of others. The stay originally was aimed at debtors, but LTL’s action sought to apply it to Protected Parties, too.
The Bankruptcy Court held that ample authority “exists to conclude that § 362(a), § 105(a), or a court’s inherent powers can each serve as independent bases for extension of a stay to non-debtor third parties (A.H. Robins Co. v. Piccinin), 788 F.2d 994, 1001-1003 (4th Cir. 1986). It also cited McCartney v. Integra Nat. Bank N., which recognized cases where courts applied the automatic stay protection to non-debtor third parties.
The court also discussed a three-step inquiry process to determine if the extension of the stay to non-debtors was reasonable. That process came out of several cases in the Eastern District of Pennsylvania. The three steps are:
- whether the Bankruptcy Court had jurisdiction to issue the injunction
- whether the Bankruptcy Court properly extended the automatic stay under section 362(a) to the non-debtors; and
- whether the Bankruptcy Court properly exercised its discretion in issuing the injunction.”
Subject Matter Jurisdiction
The court held that it did have subject matter jurisdiction, rejecting arguments from the Official Committee of Talc Claimants (Original T.C.C.) that the proceeding was not a “core proceeding.” It also held that it had “related to” jurisdiction.
The court also held that the continued litigation of talc claims against the Protected Parties has a “conceivable effect” on the bankruptcy estate because it effectively seeks to collect and liquidate claims against the debtor and could deplete available insurance coverage.” In this holding, it cited In re Union Tr. Philadelphia, L.L.C., 460 B.R. 644, 657 (E.D. Pa. 2011).
The court rejected arguments that permitting non-debtors to “avail themselves of the automatic stay simply by unilaterally allocating to LTL indemnity and other obligations on the eve of the bankruptcy filing” would be absurd and inequitable. Instead, it said it found “no impropriety” in J&J’s creation of the special vehicle to address the talc claims. It also said no evidence exists that the creation of LTL was done to hinder the paying of claims.
The court also said that achieving a successful reorganization would be difficult if the stay did not extend to Protected Parties. It also held that a lawsuit asserting talc-related claims against the Protected Parties is essentially a suit against LTL.
Further, the court held that continued litigation against the protected parties would liquidate pending tort claims against LTL outside of Chapter 11 and potentially deplete insurance coverage, further frustrating the purpose of the stay. (In re Dow Corning Corp., 86 F.3d 482, 494 (6th Cir. 1996), as amended on denial of reh’g and reh’g en banc (June 3, 1996).)
Challenge to the 1979 Agreement
The Original T.C.C. also disputed LTL’s talc liability and challenged the 1979 transaction which created it. However, the court held that the agreement clearly indemnified J&J, and J&J Baby Products assumed all liability. Original T.C.C. had cited Deutsche Bank Nat’l Tr. Co. v. Fed. Deposit Ins. Corp., 109 F. Supp. 3d 179 (D.D.C. 2015) in support of its position; however, the court held that the contract clause in Deutsche Bank and this case were different. The court also said that both parties understood the liability to transfer to Old JJCI. Under the 2021 restructuring, LTL assumed the liabilities of Old JJCI.
Because any lawsuit against retailers who sold the baby powder also would likely include LTL, the court held that the “unusual circumstances” existed to justify extending the stay.
The court said “unpersuaded” that absolute indemnity was a prerequisite for extending the stay. It cited several cases in which courts authorized a stay if indemnity was a possibility. The court also noted that LTL had said its indemnity obligation was automatic.
The court also accepted LTL’s contention that allowing litigation against the Protected Parties might taint the record against LTL.
§ 105(a) Injunction
Under Section 105 of the Bankruptcy Code, the defendant (LTL) must meet two standards to qualify for an injunction. The first is that it demonstrate the likelihood its case will succeed on its merits. The second is that the defendant would suffer irreparable harm if the injunction is denied. The court held that LTL had met both criteria. It also held that the talc claimants would not suffer harm, and might even benefit, from the extension of the stay.