DOJ Sides With Talcum Powder Plaintiffs in Appeal of Johnson & Johnson Bankruptcy Filing

A U.S. Trustee representing the Justice Department says Johnson & Johnson’s talcum powder bankruptcy filing was not done in good faith.

The U.S. Department of Justice has filed a brief supporting plaintiffs pursuing talcum powder lawsuits, who are asking a federal appeals court to rule that Johnson & Johnson is trying to abuse the U.S. bankruptcy process to avoid compensating thousands of women diagnosed with ovarian cancer and other injuries.

Johnson & Johnson has been pursuing a controversial “Texas Two-Step” bankruptcy plan since February, as part of an attempt to break off the massive liability it faces for failing to warn consumers about the cancer risks from talcum powder into a separate company, LTL Management, LLC, which critics have argued was created solely for the purpose of placing it into bankruptcy and delaying justice for plaintiffs seeking compensation through the U.S. Court system.

For months, U.S. Bankruptcy Judge Michael Kaplan has agreed to continue a stay on all proceedings in more than 38,000 Baby Powder lawsuits and Shower-to-Shower lawsuits filed by women diagnosed with ovarian cancer, mesothelioma and other injuries, while the parties attempt to establish a settlement program through the bankruptcy process.

The Official Committee of Talc Claimants has filed an appeal with the U.S. Court of Appeals for the Third Circuit, arguing that the bankruptcy lacks a valid purpose, and seeking to have Judge Kaplan’s approval of the process overturned, so that the stay can be lifted in the litigation.

In an amicus brief (PDF) filed on June 30, U.S. Trustee Andrew Vara, on behalf of the Justice Department, supported the talcum powder plaintiffs’ request, indicating that the “misuse of the bankruptcy system is an issue of substantial importance” to his office.

U.S. Trustees are appointed by the Attorney General specifically to deal with bankruptcy issues. In the brief, Vara pointed out that law requires a bankruptcy filing to be in good faith, and not simply to obtain a tactical litigation advantage.

“During its brief existence, LTL has had no substantial ongoing business operations, no employees other than those seconded from other J&J affiliates, and no reason for existing other than to file for bankruptcy. And indeed, two days after its creation, LTL did exactly that, filing a voluntary petition for chapter 11 bankruptcy relief,” Vara wrote in the brief. “LTL’s bankruptcy filing was not in good faith and should be dismissed for cause under 11 U.S.C. § 1112(b).”

Vara indicates that the filing “fails the good faith test in all respects” and urged the appeals court to dismiss the petition.

The Johnson & Johnson talc powder bankruptcy has been widely criticized by plaintiffs lawyers, as well as bankruptcy experts, as an abuse of the legal process and effort to delay a series of trials that were expected to go before juries this year.

Talcum powder plaintiffs say Johnson & Johnson, which has billions in cash reserves, has no financial distress that would merit a bankruptcy filing. However, since the bankruptcy is being allowed to move forward, settlements for talcum powder cancer and asbestos lawsuits may be artificially capped.

Defending against the talc ovarian cancer claims has already cost Johnson & Johnson $1 billion, on top of Baby Powder settlements and verdicts that have amounted to another $3.5 billion, according to the bankruptcy filing.

In May, Judge Kaplan informed the parties that talcum powder settlement negotiations are not as far along as the mediators had hoped. As a result, he suggested that it may be necessary for the court to hold some bellwether trials to get a sense of where juries might land on issues in the talc ovarian cancer claims.