Q: You recently worked with a group of bankruptcy scholars who filed an amicus brief in the J&J “LTL Management” bankruptcy. What made you interested in getting involved?
A: So, some background: J&J is facing a ton of lawsuits arising out of allegations that its talc-based baby powder caused harms to a lot of people. As a litigation strategy, they executed a transaction that is essentially contrary to how I teach debtor-creditor law to work: they used a Texas “divisive merger” statute to essentially put the talc-related liability in a special purpose vehicle (“SPV”). The SPV then moved to North Carolina and filed for bankruptcy there.
My general view is that bankruptcy is a great tool for managing mass torts litigation, but you shouldn’t access the bankruptcy system by creating an SPV and filing the liabilities alone for bankruptcy.
Q: How did J&J justify just spinning off its liabilities? Didn’t that leave the talc victims with no assets to pay them?
A: J&J created a “contribution agreement” where the corporate entity that got the “assets” from the divisive merger agreed to pay the liability SPV all of the value of the “asset” entity. They claim that this means that the talc victims are not prejudiced in any way, but obviously there are questions about assets that won’t be under court protection and we all know contracts are never airtight.
Q: So what did your amicus brief say?
A: We argued that this strategy – putting your liabilities into an SPV and filing that for bankruptcy to get an injunction stopping all litigation against the assets, which remain outside of bankruptcy – is not a valid use of the bankruptcy system and that the bankruptcy filing should be dismissed as a bad faith bankruptcy.
Q: Did the judge agree?
A: No, the judge strongly disagreed. The judge held that the tort system is essentially broken and that bankruptcy law is a good alternative and that the series of “moves” that J&J made were savvy and smart.