Talc Lawsuits: Congress Begins Hearings on Corporate Abuses of Chapter 11 After J&J Bankruptcy
The U.S. House Committee on the Judiciary began hearing testimony to consider possible bankruptcy law reforms regarding corporate abuses of Chapter 11. The February 8, 2022, meeting marks the first in a series of hearings following Johnson & Johnson’s bankruptcy filing, which many senators decried as a means of evading responsibility for pending talc litigation.
Congressional leaders will consider measures for reform that will protect plaintiffs’ rights to due process. Meanwhile, Johnson & Johnson (J&J) is still receiving standard Chapter 11 protection from litigation as its bankruptcy case proceeds. In the current talc lawsuits, Johnson & Johnson is facing liability for thousands of claims alleging that its baby powder product was contaminated with asbestos and caused cancer.
Background on the Johnson & Johnson Talc Lawsuits and Bankruptcy Filing
As one of the world’s wealthiest corporations, many questioned how Johnson & Johnson could file for bankruptcy. The answer begins with a Texas law known as the “two-step” statute, which grants companies the potential to split into two entities through a complex divisional merger process. When Johnson & Johnson completed this maneuver, it became two companies: J&J and a new entity known as LTL Management. Then, it transferred to LTL its liabilities, over $350 million in assets, and $2 billion in trust for potential talc lawsuit payouts.
Two days after executing the divisional merger, LTL Management filed for bankruptcy.
Johnson & Johnson strategically planned the move throughout 2021, according to a Reuters report. The strategy, referred to internally as Project Pluto, was aimed at helping J&J work out its talc liability through the bankruptcy process-and avoid a jury trial. Many have argued that the strategy strips plaintiffs of their rights to seek damages in the courtroom and may substantially limit their potential for fair financial recovery for their losses.
Congressional Committee Reviews Bankruptcy Abuses and Texas Two-Step Law
The Committee on the Judiciary heard testimony from corporate scholars, bankruptcy experts, and other experts to understand how bankruptcy laws could be reformed to prevent corporate abuses. Additionally, Congress sought to understand how Johnson & Johnson’s divisional merger was used to file for bankruptcy and take advantage of bankruptcy protections.
To clarify the intentions of U.S. bankruptcy law, former U.S. Bankruptcy Judge Judith Klaswick Fitzgerald noted that bankruptcy is:
- Designed to offer solutions for indebted businesses to stay afloat during financial distress
- Notintended to be used to protect a non-debtor’s assets “under the guise of a legitimate plan of reorganization” (per the Committee on the Judiciary)
Fitzgerald then noted several concerns related to a bankruptcy filing following a divisional merger, such as in the J&J case.
When a parent company splits and the subsidiary files for bankruptcy, the parent company is not required to make normal bankruptcy disclosures, nor can it face collections related to the debtor company’s bankruptcy. In J&J’s case, this means the larger legacy company responsible for the talc lawsuits, Johnson & Johnson, could be free of liability and evade the bankruptcy process-since it was LTL that filed for bankruptcy. Fitzgerald and other experts at the hearing recommended that reforms could be important for this and related reasons.
Senators present at the hearing, including Senator Sheldon Whitehouse (D-Rhode Island) and Senator Mazie Hirono (D-Hawaii), suggested that measures should be taken to prevent bankruptcy filings from offering unfair advantages in the litigation process (Committee on the Judiciary hearing). However, senators are not certain as to how to best enact reforms-whether through the discretion of the U.S. Bankruptcy Courts or by Congressional law restricting the combination of divisional mergers and bankruptcy filings.
You Can Still Get Legal Help if Baby Powder Products Harmed You
Even though talc litigation is currently paused, you could still seek compensation if you were harmed after using a Johnson & Johnson’s baby powder or a dangerous product. Fill out our online form for a consultation from a mass tort lawyer’s team.