LTL Management LLC v.
Precedential, Filed: January 30, 2023 (2023)
Rule of Law:
A Chapter 11 bankruptcy petition must be filed in good faith, which requires the debtor to be in actual, immediate financial distress; a substantial funding agreement from a solvent parent company, providing ample resources to meet existing and projected liabilities, negates a finding of such distress for a subsidiary formed to hold mass tort liabilities.
Facts:
- Johnson & Johnson Consumer Inc. ("Old Consumer") sold Johnson's Baby Powder, which contained talc.
- Concerns arose that the talc contained traces of asbestos, leading to a "torrent" of lawsuits alleging that Johnson's Baby Powder caused ovarian cancer and mesothelioma.
- By 2021, over 38,000 ovarian cancer actions and over 400 mesothelioma actions were pending against Old Consumer and J&J.
- Old Consumer had paid approximately $3.5 billion for talc-related verdicts and settlements and nearly $1 billion in defense costs, with ongoing costs of $10-$20 million per month.
- In October 2021, Old Consumer underwent a corporate restructuring via a Texas divisional merger, splitting into two new entities: LTL Management LLC ("LTL") and Johnson & Johnson Consumer Inc. ("New Consumer").
- This restructuring allocated essentially all talc-related liabilities to LTL and virtually all productive business assets (estimated at $61.5 billion) to New Consumer.
- LTL also received a "Funding Agreement" from J&J and New Consumer, obligating them jointly and severally to pay LTL cash up to New Consumer's value to satisfy any talc-related costs and normal course expenses.
- At the time of LTL's filing, J&J, LTL's grandparent, had over $400 billion in equity value, a AAA credit rating, and $31 billion in cash and marketable securities.
Procedural Posture:
- Two days after the divisional merger, LTL Management LLC filed a petition for Chapter 11 relief in the U.S. Bankruptcy Court for the Western District of North Carolina.
- LTL also sought to extend the automatic stay afforded to it under the Bankruptcy Code to hundreds of nondebtors, including J&J and New Consumer (the "Protected Parties").
- The North Carolina Bankruptcy Court issued an order enjoining Third-Party Claims against the Protected Parties for 60 days.
- Following motions from interested parties, the North Carolina Bankruptcy Court transferred LTL's Chapter 11 case to the U.S. Bankruptcy Court for the District of New Jersey.
- The Official Committee of Talc Claimants and other claimant groups (collectively, the "Talc Claimants") moved to dismiss LTL's petition under § 1112(b) of the Bankruptcy Code for lack of good faith.
- LTL urged the New Jersey Bankruptcy Court to extend the expiring order enjoining Third-Party Claims against the Protected Parties.
- The New Jersey Bankruptcy Court held a five-day trial on the motions to dismiss and LTL’s third-party injunction motion.
- The New Jersey Bankruptcy Court denied the motions to dismiss, finding LTL filed its bankruptcy petition in good faith and was in financial distress, and granted the injunction motion extending the stay to nondebtors.
- The Talc Claimants timely appealed the Bankruptcy Court’s order denying the motions to dismiss; the Talc Claimants’ Committee and AWKO also appealed the order enjoining Third-Party Claims against the Protected Parties.
- On request of the Talc Claimants, the Bankruptcy Court certified the challenged orders to the Third Circuit under 28 U.S.C. § 158(d)(2), and the Third Circuit authorized direct appeal of the orders.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a subsidiary (LTL Management LLC) created through a divisional merger to hold mass tort liabilities, but with a substantial funding agreement from its solvent corporate parents, demonstrate the requisite financial distress to satisfy the good faith requirement for a Chapter 11 bankruptcy filing under 11 U.S.C. § 1112(b)?
Opinions:
Majority - Ambro, Circuit Judge
No, LTL Management LLC did not demonstrate the requisite financial distress to satisfy the good faith requirement for a Chapter 11 bankruptcy filing, despite inheriting substantial mass tort liabilities. The court reaffirmed that a Chapter 11 petition must be filed in good faith, which necessitates the debtor being in actual financial distress, as established by Third Circuit precedents like SGL Carbon and Integrated Telecom. The purpose of Chapter 11 is to provide relief to genuinely troubled enterprises, not to allow profitable ones to evade liabilities or gain tactical litigation advantages. The court clarified that LTL's financial condition must be evaluated independently, focusing on its own assets, liabilities, and the strength of its funding backstop. The Funding Agreement, providing LTL with a contractual right to draw up to $61.5 billion from J&J and New Consumer to cover talc-related costs, essentially acts as an "ATM disguised as a contract," offering ample and reliable financial support. The Bankruptcy Court erred by overemphasizing Old Consumer's financial condition and by making speculative projections of future liability that contradicted the record of Old Consumer's past successes in defending and settling claims. Because LTL was "highly solvent with access to cash to meet comfortably its liabilities as they came due for the foreseeable future," it was not in financial distress. The court stated that an "attenuated possibility" of future bankruptcy does not establish good faith. Finally, the court rejected the "unusual circumstances" argument under § 1112(b)(2), finding no "reasonable justification" could validate the missing financial distress requirement.
Analysis:
This decision significantly reinforces the 'financial distress' prerequisite for good faith in Chapter 11 filings, particularly for companies attempting corporate restructurings (the 'Texas Two-Step') to manage mass tort liabilities. It establishes that a robust financial backstop from a solvent parent can negate a subsidiary's claim of financial distress, thereby preventing access to powerful bankruptcy protections like the automatic stay and a § 524(g) trust. The ruling signals heightened judicial scrutiny of 'strategic' bankruptcies where the ultimate corporate structure is designed to isolate liabilities without demonstrating a genuine, immediate threat to the debtor's overall financial viability. This will likely impact how corporations structure future attempts to ring-fence and resolve large-scale liabilities, emphasizing the need for genuine financial peril rather than just litigation management as a basis for Chapter 11.
