A group of cancer victims is asking a federal judge in New Jersey to throw out, for the second time in less than two years, the insolvency case of LTL Management, a unit that J&J created to settle lawsuits over talc-based baby powder for $8.9 billion. Tuesday marks the start of a trial in which US Bankruptcy Judge Michael Kaplan will again decide whether J&J is wrongly using bankruptcy laws to force a settlement.The bankruptcy court strategy has split lawyers suing J&J into two camps: those who back the settlement and are ready to drop their lawsuits, and holdouts who want to take their claims to juries around the country instead. Last year Kaplan sided with J&J against a unified band of the top plaintiff’s law firms in the US, but was overruled by a federal appeals court in Philadelphia, which ordered the judge to dismiss LTL Management’s first Chapter 11 bankruptcy petition. 

J&J responded by tweaking its legal strategy and raising its settlement offer to $8.9 billion in order to attract support from cancer victims. LTL returned to bankruptcy in April and Kaplan agreed to hold a hearing to decide if the new case fixed the legal flaws that doomed the first effort.

Opposing Views

Lawyers for the cancer victims who reject the settlement argue that the motive for the new bankruptcy is the same as the first: to protect J&J.“LTL was created, and this bankruptcy was filed to benefit J&J – not to preserve LTL, which has no operations, or to help sick-and-dying claimants,” the official committee representing cancer victims said in a June 22 court filing.J&J’s latest effort is backed by lawyers who represent about 60,000 alleged victims. It is opposed by the official committee of cancer victims and lawyers who say they also represent tens of thousands of clients.The holdouts argue that the new case, like the old one, is not a valid use of bankruptcy. The appeals court previously ruled that LTL — the bankrupt unit — was never in financial distress because it had an agreement with J&J to backstop any settlement funding shortfall. The court found the backstop agreement meant LTL could pay claimants as much as $61.5 billion outside of bankruptcy and therefore the Chapter 11 filing was not made in good faith.In response, J&J and LTL agreed to cancel that funding agreement and replace it with one backed by a J&J holding company worth about $30 billion. J&J also said it would only provide LTL money to pay the cancer victims as part of a bankruptcy case. Lawyers for LTL say all of the changes mean the new case meets the appeals court test. Kaplan has ordered the two sides into mediation, but any breakthrough is unlikely to come before the judge decides whether the bankruptcy case can continue. “The firms that appear to be leading the opposition effort have no interest in negotiation or proposing a workable alternative plan, but rather have repeatedly represented to the Court that they will never agree to any settlement,” LTL said in a court filing.

Expensive Fights

Jury verdicts and settlements have cost J&J billions of dollars in recent years, including one case that the company appealed all the way to the US Supreme Court. It lost that case and was forced to pay out $2.5 billion to about 20 women. LTL’s proposal would cap its exposure and limit compensation to individuals.The US Trustee, an arm of the US Justice Department that monitors corporate bankruptcy cases, has joined J&J’s critics, arguing the LTL insolvency proceeding was filed in bad faith. The holdouts contend LTL’s decision to take a less lucrative funding agreement with J&J is evidence the bankruptcy is manufactured and doesn’t serve a legitimate purpose. Still, the events that lead to LTL’s second bankruptcy may not be enough to sway Judge Kaplan, who has touted Chapter 11 as a better alternative for plaintiffs than waging costly and time-consuming litigation.“The draw of settling this case is going to be very strong,” said Samir Parikh, a professor at Lewis & Clark Law School who studies the use of Chapter 11 to resolve mass injury litigation.