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Will the Texas two-step work the third time? Two sophisticated attempts by Johnson & Johnson in 2021 to use U.S. bankruptcy law to settle billions of dollars in liability over carcinogenic talcum powder are half-way through. It turned out to be too cute. But a third attempt, currently underway, may be about to thread the needle.
The J&J subsidiary, known as Red River Talc (named after a body of water near Dallas), filed for bankruptcy in federal court in Houston in September. This strategy relies on Texas law to create a vehicle to house only talc claims.
The past two attempts have brought down a wrecking ball in bankruptcy court to force thousands of claimants into deals. This time, J&J probably tried a softer approach.
For technical reasons, an earlier attempt at Chapter 11 was thrown out in court. The bankruptcy filing was made after a prior arrangement with the victims, which effectively dares the bankruptcy judge to extract billions of dollars from the victims’ pockets.
J&J has always maintained that its talc is safe and that the lawsuits are pointless. But if the company can shut down permanently and, most importantly, keep its major parent company (worth about $400 billion) as far away from product liability lawsuits as possible and untainted, He said he was prepared to write a check. They are within range of that goal.
J&J will tell anyone that the purpose of the so-called Texas two-step is not to shirk responsibility. Rather, bankruptcy is the cleanest and fairest way to resolve the case, and J&J should have the ability to apply for Chapter 11 without forcing its remaining healthy company into bankruptcy.
To demonstrate good faith, J&J entered into a so-called “funding agreement” in which the entire company agreed to inject tens of billions of dollars into the bankrupt entity if a settlement was reached. J&J and its management had hoped to be released from full liability in exchange for the bond.
The idea that non-bankrupt companies can enjoy the benefits of Chapter 11, including suspensions and discharges, is highly controversial, and Purdue Pharma’s bankruptcy would protect members of the company’s founding Sackler family. It has been a key issue in the recent Supreme Court battle over the plan. It will be exempted from future civil liability in exchange for a $6 billion contribution.
J&J’s gamble on a funding deal was ultimately rejected by a federal court in New Jersey (J&J also initially sought to pursue its original case in North Carolina before being deported to its home state) ). The court ruled that Talc Vehicles did not see a “financial hardship” motive for filing for bankruptcy because J&J’s parent company was backed by billions of dollars.
In the current Texas bankruptcy, J&J has received support from 83 percent of the plaintiffs, enough for the court to approve the settlement and bind it with holdout conditions. The pot is currently set at approximately $8 billion and the criteria are as follows: Bankruptcies in Texas federal courts are confusingly different from those in the Northeast.
The Justice Department’s efforts to move the case back to New Jersey, which calls J&J’s repeated efforts to access bankruptcy court “a textbook example of bad faith,” have so far been fruitless. not present.
One of the final hurdles to closing the deal is the battle between the holdouts and their law firms over how legitimate the 83 percent creditor support is. There have been accusations of “vote buying” against J&J, which J&J denies. J&J, in turn, accused the plaintiffs’ lawyers and litigation funders of ulterior motives. We should know by February whether these objections are accepted by the court.
Many claimants are now happy to settle with J&J and receive their money quickly. But the government and resistance groups believe the company is acting wildly to ease itself out of a court case that could force it to pay more.
This third attempt at two steps is definitely creative. Many large companies like J&J have resigned themselves to the prospect of old legacy products coming back to haunt them with huge debts. They are willing to write big checks to get finality, but they believe they can do it on the terms they dictate.
Congress could clarify the Texas law to make two-step fraud unnecessary, giving victims their day in court, giving companies a fair chance to defend themselves, and ensuring they get the deals they want. You will have the opportunity to negotiate properly. For now, our faith rests on the courts unraveling all the machinations.
sujeet.indap@ft.com
