Hunton Retail Law Resource

On Monday, January 30, 2023, the Third Circuit in In re LTL Management, LLC¹ ordered debtor LTL Management, LLC’s (“LTL”) chapter 11 petition dismissed for failure to demonstrate that the petition was filed in good faith pursuant to the Bankruptcy Code.² The dismissal of LTL’s bankruptcy will also result in the termination of an injunction staying numerous lawsuits against third-parties—including lawsuits against certain third-party retailers being sued for allegedly having sold certain allegedly contaminated products.

By way of background, the LTL bankruptcy was predicated by numerous products liability lawsuits stemming from allegations that talc used in certain Johnson & Johnson Consumer Inc. (“J&J Subsidiary”) products were contaminated with asbestos (the “Products Liability Claims”).³ J&J Subsidiary was a wholly-owned subsidiary of Johnson & Johnson (“J&J”).  In an effort to cabin the exposure from the Products Liability Claims—damages awarded and costs of which were in the billions—J&J carried out a divisive merger of J&J Subsidiary under Texas law.⁴ This process, colloquially referred to as a “Texas Two-Step,” resulted in the division of J&J Subsidiary into LTL—which inherited all of the Products Liability Claims and certain assets including a funding agreement—and Johnson & Johnson Consumer Inc. (“New J&J Subsidiary”)—which inherited all of the beneficial operating assets minus the liabilities.⁵ Following the divisive merger J&J Subsidiary ceased to exist—and the Texas Two-Step was completed by putting LTL into bankruptcy.⁶

LTL filed for bankruptcy in the United States Bankruptcy Court for the Western District of North Carolina (the “NC Bankruptcy Court”) and sought an extension of the automatic stay, a widespread injunction against any action taken against property of the debtor automatically put in place upon filing for bankruptcy, to various third-parties—including a number of distributors and retailers that had sold the products to consumers.⁷ Specifically, LTL sought to enjoin the Products Liability Claims being asserted against certain specified third-parties.⁸ The NC Bankruptcy Court granted the request extending the automatic stay to the Product Liability Claims being asserted against the specified third-parties (the “Third Party Injunction”) for sixty days.⁹ The NC Bankruptcy Court, however, also transferred LTL’s case to the United States Bankruptcy Court for the District of New Jersey (the “NJ Bankruptcy Court”) due to LTL’s inability to demonstrate that venue was proper in the Western District of North Carolina.¹⁰

Following the venue transfer, numerous talc-claimants, among others, challenged LTL’s bankruptcy and moved to dismiss LTL’s bankruptcy case as not filed in good faith.¹¹ Simultaneously, LTL urged the NJ Bankruptcy Court to extend the soon-to-expire Third Party Injunction, and, after a five-day trial on both issues, the NJ  Bankruptcy Court denied the motion to dismiss and granted LTL’s request to extend the Third Party Injunction.¹²

Both decisions were appealed, and the Third Circuit reversed.¹³ The Third Circuit held that the LTL’s filing was not in good faith because LTL was not in “financial distress."¹⁴ The Third Circuit reasoned that the NJ Bankruptcy Court erred in determining that LTL was in financial distress because it overestimated the liability stemming from the Products Liability Claims and because the NJ Bankruptcy Court erred in disregarding the value of a funding agreement under which both J&J and New J&J Subsidiary, jointly and severally, were required to pay LTL up to the then-established enterprise value of New J&J Subsidiary—over $61 billion.¹⁵ The Third Circuit also rejected the NJ Bankruptcy Court’s “independent basis” for its holding that “unusual circumstances” precluded dismissal—stating that the only unusual circumstance was “that a debtor comes to bankruptcy with the insurance [(the funding agreement)] accorded LTL."¹⁶

The decision likely comes as a surprise to many and, undoubtedly, upends J&J’s strategy for cabining exposure from the Products Liability Claims. Critically, the Third Circuit’s decision will also result in termination of the Third Party Injunction—meaning a number of third-parties, including many retailers, may be forced to resume litigation.¹⁷

[1] In re LTL Management, LLC, Case No. 22-2003 (3rd Cir. Jan. 30, 2023).

[2] Id at 55.

[3] Id. at 18-19.

[4] Id. at 23-24.

[5] Id. at 24-27.

[6] Id.

[7] Id. at 27.

[8] Id.

[9] Id.

[10] Id. at 28.

[11] Id. at 29.

[12] Id.

[13] Id. at 31-32.

[14] Id. at 46-52.

[15] Id.

[16] Id. at 54-55.

[17] Id. at 56.