LTL Management LLC
FOR PUBLICATION
All Counsel of Record
At a point early in the first chapter 11 filing of LTL Management, LLC (“Debtor” or “LTL“) (Case No. 21-30589, “LTL 1.0“), the Court queried of Debtor‘s counsel the origin of the name given the 2021 Corporate Restructuring Project—Project Plato—which gave rise to the initial bankruptcy filing. The Court was familiar with comparable divisive merger efforts undertaken by other companies in chapter 11 cases pending in North Carolina, which employed project names such as “Project Omega”1 or “Project Horizon”2, but thought there may be other relevance attached to the chosen project name in this matter. While Debtor‘s counsel suggested that the project name was selected randomly, this Court harbors some doubts and imputes far greater significance to the denomination, “Plato“. Indeed, with the long-awaited opportunity to draw finally upon the lessons instilled in my mandatory undergraduate philosophy course,3 the Court perceives a far more relevant—if unintended—meaning.4
So, the ultimate inquiry for this Court would be whether the aptly named Project Plato, with its corporate restructuring in 2021, as modified in 2023, and resulting two chapter 11 filings, could, in fact, produce a just and right result, notwithstanding the highly debatable means undertaken. For the reasons discussed below, and based on the evidence at trial,7 this Court is constrained to bypass this challenging inquiry and dismiss this chapter 11 proceeding, as the evidentiary record fixed at trial does not establish sufficient “imminent” or “immediate” financial distress to satisfy the criteria enunciated by the Third Circuit in In re LTL Mgmt., LLC, 64 F.4th 84, 102, 108 (3d Cir. 2023). Simply put, the Debtor does not meet the more exacting gateway requirement implemented by the Circuit with respect to “good faith” under
The Court has jurisdiction over this contested matter under
II. Background & Procedural History
The parties are familiar with the factual background and procedural history of this case. LTL Management, LLC, which is an indirect subsidiary of Johnson & Johnson (“J&J“), traces its roots back to Johnson & Johnson Baby Products, Company, a New Jersey company incorporated in 1970 as a wholly owned subsidiary of J&J. Declaration of John K. Kim in Support of First Day Pleadings (“Kim First Day Decl.“) ¶¶ 13-15, ECF No. 4 in Case No. 23-12825.10 A thorough discussion of the history of J&J and its talc products can be found in this Court‘s February 25, 2022, Opinion Denying the Motions to Dismiss and the Court will limit its recitation of the factual background here. See In re LTL Mgmt., LLC, 637 B.R. 396 (Bankr. D.N.J. 2022). In relevant part, in 1979, J&J transferred all its assets associated with the Baby Products division to J&J Baby Products Company (the “1979 Agreement“). Thereafter, as the result of intercompany transactions, one of J&J‘s corporate subsidiaries, Johnson & Johnson Consumer Inc. (“Old JJCI“) assumed responsibility for all claims alleging that J&J‘s talc-containing products caused ovarian cancer and mesothelioma. Kim First Day Decl. ¶¶ 16-21, ECF No. 4.
On October 12, 2021, Old JJCI engaged in a series of transactions pursuant to the Texas divisional merger statute, See
On October 14, 2021, LTL filed its initial voluntary petition for chapter 11 relief in the United States Bankruptcy Court for the Western District of North Carolina. Petition, ECF No. 1 in Case No. 21-30589. One week after the chapter 11 filing, Debtor initiated an adversary proceeding (the
Meanwhile, several parties appealed this Court‘s denial of the motions to dismiss and its imposition of a preliminary injunction in the Talc Adversary Proceeding. While the appeals were pending, New JJCI—which had continued consumer health operations—changed its name to Johnson & Johnson HoldCo (NA) Inc. (“HoldCo“) in December 2022. Kim First Day Decl. ¶ 26, ECF No. 4. HoldCo is the direct parent of the Debtor. Id. at ¶ 27. In early January 2023, HoldCo spun off its consumer health business assets to its parent entity, Janssen Pharmaceuticals, Inc. Id. at ¶ 26; see also TCC‘s Proposed Findings of Fact and Conclusions of Law ¶ 121, ECF No. 1075. “The transfer was in connection with the long-contemplated transfer of the [c]onsumer [b]usiness as a new entity, called Kenvue, Inc., which was publicly announced in November 2021.” Lisman Decl. ¶ 21, Trial Ex. D-4. The evidence presented supports Debtor‘s contention that “[t]here was no relationship between the transfer of the [c]onsumer [b]usiness and the filing of either the 2021 or the 2023 Chapter 11 Case.” Id.; see also Debtor‘s Reply in Support of Motion to Extend and Modify Preliminary Injunction 2, ECF No. 185 in Adv. Pro. No. 23-01092; Exhibits C & D to Supplemental Decl. of Amanda Rush in Support of Motion to Extend and Modify Preliminary Injunction, ECF Nos. 185-4 & 185-5 in Adv. Pro. No. 23-01092.
On January 30, 2023, the Third Circuit ruled on the pending appeals and issued an opinion directing this Court to dismiss the 2021 Chapter 11 Case (the “Third Circuit Opinion“). See In re LTL Mgmt., LLC, 58 F.4th 738 (3d Cir. 2023) as amended by 64 F.4th 84 (3d Cir. 2023). Specifically, the Third Circuit determined that the case was not filed in good faith
This Court entered an order dismissing the initial chapter 11 bankruptcy case on April 4, 2023. Dismissal Order, ECF No. 3938 in Case No. 21-30589. Approximately two hours later, Debtor initiated the instant bankruptcy case, the impetus of which was a proposal by law firms representing nearly 60,000 talc claimants for a bankruptcy resolution of the Debtor‘s talc liability. Mikal Watts, a plaintiff lawyer representing over 16,000 talc claimants, had contacted James Murdica of Barnes & Thornburg to discuss a final, global resolution of the talc liability, including all present and future claims, to be efficiently administered through a second bankruptcy by LTL. Murdica Decl. ¶¶ 40-41; Watts Decl. ¶¶ 7, 25-26; June 28, 2023 Hr‘g Tr. (vol. 1) – Murdica Cross, 39:3-9, ECF No. 956. Mr. Murdica, J&J‘s long-time settlement counsel who has worked for over three years to resolve the talc litigation, was authorized by LTL and J&J to negotiate on their behalf. June 27, 2023 Hr‘g Tr. – Kim Cross, 238:8-15, ECF No. 933; June 28, 2023 Hr‘g Tr. (vol. 1) – Murdica Cross, 8:21-9:8. In early 2023, Mr. Watts and other plaintiffs’ lawyers (including Mr. James Onder, who represents over 20,000 talc claimants) negotiated with Mr. Murdica and Erik Haas, J&J‘s Worldwide Head of Litigation, regarding terms of a Plan Support Agreement (“PSA“), pursuant to which the parties agreed to work together to finalize and seek confirmation of a plan of reorganization that, if confirmed and consummated, would fully resolve all current and future talc claims. Murdica Decl. ¶ 43; Watts Decl. ¶¶ 26-27; June 28, 2023 Hr‘g Tr. (vol. 2) – Watts Cross, 32:5-11; Onder Decl. ¶¶ 24-27.
Once the deal terms were agreed upon, LTL, J&J, and 17 law firms executed PSAs that were substantially identical. Murdica Decl. ¶¶ 42-43; Watts Decl. ¶ 28; Onder Decl. ¶ 28; Kim Decl. ¶ 29, Trial Ex. D-1; Kim Decl. Exs. A-V, Trial Ex. D-1; First Supplemental Verified Statement of Paul Hastings LLP, Trial Ex. D-486; Verified Statement of Paul Hastings LLP, Trial Ex. D-563. According to the 2019 statements filed with the Court, these supporting law firms disclosed that they represent approximately 58,392 claimants. See Verified Statement of Paul Hastings LLP, Trial Ex. D-563; First Supplemental Verified Statement of Paul Hastings LLP, Trial Ex. D-486. The 17 firms that signed PSAs formed the Ad Hoc Committee of Supporting Counsel (“AHC“) to advance their common interests in connection with LTL‘s second bankruptcy. Id. The AHC include counsel to members of the mass tort plaintiffs’ bar who have decades of experience in mass tort litigation generally and who have led the talc litigation specifically. Id.; Onder Decl. ¶ 29. Thousands of their clients filed talc lawsuits before LTL commenced the 2021 Chapter 11 Case. Id. Two of the 17 firms that comprise the AHC—Nachawati Law Firm (f/k/a Fears Nachawati) and OnderLaw, LLC—were previously counsel to members of the Official
Thereafter, in conjunction with the Petition, Debtor filed the PSA and term sheet which provided for a plan of reorganization that includes the establishment of a trust funded in the amount of $8.9 billion on a net present value basis. Murdica Decl. ¶ 47; Kim Decl. ¶ 28; id. Exs. A-V. One key issue that was also resolved in principle relates to medical liens on settlement amounts that claimants would be entitled to receive under the Plan. June 28, 2023 Hr‘g Tr. (vol. 2) – Onder Redirect, 120:4-19, ECF No. 957. Additionally, a settlement has been reached with counsel to private lienholders, which hold around 85-90% of the medical liens. Id. at 134:5-135:25. This resolution would allow payments to claimants to be made faster, which is a primary goal of the AHC. Id. Members of the AHC anticipated recommending to their clients that they vote in favor of the plan, once finalized. June 28, 2023 Hr‘g Tr. (vol. 2) – Watts Redirect, 26:12-18, 58:5-11, ECF No. 957; id. – Onder Redirect at 121:14-122:9.
Along with the execution of the PSAs and term sheets, the Debtor also structured new funding arrangements in anticipation of the new chapter 11 filing. Specifically, the Debtor authorized the execution of three agreements to implement the April 4, 2023, changes to its funding arrangements. First, Debtor executed a Termination and Substitution Agreement (the “TSA“) with HoldCo and J&J to terminate the 2021 Funding Agreement. Termination and Substitution Agreement, TCC Trial Ex. 1081. Second, Debtor executed a new 2023 Funding Agreement (“2023 Funding Agreement“) with HoldCo, which obligated HoldCo to provide funding to Debtor for talc liabilities and other costs in the normal course of business. 2023 Funding Agreement, TCC Trial Ex. 1082. Third, Debtor executed a Support Agreement with J&J (“J&J Support Agreement“) and HoldCo, for J&J to provide a funding backstop only upon the confirmation of a Chapter 11 Plan consistent with the PSAs and term sheet. J&J Support Agreement, TCC Trial Ex. 1083. Debtor contends that the substitution of a new funding agreement was necessary to address issues raised by both J&J and the Debtor as to the continuing enforceability of the 2021 Funding Agreement. Under the 2023 Funding Agreement, Debtor (as Payee) has a right to seek from HoldCo (as Payor) a funding request for any permitted funding use, the only restriction being that Debtor may not request more than it needs for permitted funding uses. 2023 Funding Agreement 6-7, TCC Trial Ex. 1082. A “permitted funding use” includes the “payment of any and all costs and expenses of the Payee incurred in the normal course of its business . . . at any time when there is no proceeding under the Bankruptcy Code pending with respect to the Payee,” as well as “the funding of any amounts to satisfy (i) the Payee‘s Talc Related Liabilities . . . at any time when there is no proceeding under the Bankruptcy Code pending with respect to the Payee . . . and (iii) in the case of either (i) or (ii), any ancillary costs and expenses of the Payee associated with such Talc Related Liabilities and any litigation thereof, including the costs of any appeals.” Id. at 4-5. The J&J Support Agreement applies inside bankruptcy only and requires J&J to backstop HoldCo‘s payment obligations under the 2023 Funding Agreement solely to fund plan trusts created in connection with this bankruptcy. J&J Support Agreement 4 (§ 2(a)(i)), TCC Trial Ex. 1083. The J&J Support Agreement also confirms that HoldCo‘s funding obligation to Debtor exists outside of bankruptcy. Id. at 1 (Recital B).
Notably, when the Court issued the Preliminary Injunction, the Court declined to rule at that time on a Motion for Relief from Stay filed in the main case (ECF No. 71) by Joseph Satterley, Esq. on behalf of talc claimant, Anthony Hernandez Valadez. Instead, that matter was carried to May 3, 2023. On that date, the Court granted relief from the automatic stay and from the Preliminary Injunction—permitting the plaintiff to proceed to trial and verdict in the case captioned Anthony Hernandez Valadez v. Johnson & Johnson, et al. (the “Valadez Case“), which was pending in the Superior Court of California, County of Alameda, against the Debtor and certain parties protected by the Preliminary Injunction. Order Granting Movant Anthony Hernandez Valadez Relief from the Automatic Stay and Preliminary Injunction, ECF No. 585. The Valadez Case proceeded to trial before a California court, while the remaining parties proceeded in this Court and—with the Court‘s assistance—established a briefing schedule and selected hearing dates for the Motions to Dismiss.
The Debtor and the AHC filed objections to the Motions (ECF Nos. 614 & 613, respectively), certain Movants filed Replies and Joinders12, and Debtor and the AHC filed sur-replies.13 On June 27, 2023, the Court commenced a four-day evidentiary hearing to address the Motions and the continuation of the Preliminary Injunction in the pending Adversary Proceeding (ECF No. 2 in Adv. Pro. No. 23-01092). Prior to the hearing, the Movants, Debtor and AHC stipulated to the admission of certain evidence. Evidentiary Stipulation, ECF No. 852. Both sides presented oral argument and introduced fact and expert witnesses. Specifically, the Court considered live testimony from the following fact witnesses:
-
Robert O. Wuesthoff, President of LTL Management, LLC and President of Royalty A&M LLC - Richard Dickinson, Chief Financial Officer of LTL Management, LLC and member of Board of Managers
- John H. Kim, Chief Legal Officer of LTL Management, LLC
- James Murdica, Esq., Barnes & Thornburg, LLP, J&J‘s national settlement counsel
- Mikal Watts, Esq., Member of the Ad Hoc Committee of Supporting Counsel (“AHC“)
- James Onder, Esq., Member of the AHC
- Adam Lisman, Vice President and Assistant Corporate Controller of Johnson & Johnson
The Court also heard testimony from five expert witnesses including:
- Charles H. Mullin, PhD, Managing Partner at Bates White Economic Consulting for Debtor
- Sheila Birnbaum, Esq., Co-Chair, Products Liability & Mass Tort Group, Dechert, LLP, for Debtor
- Saul E. Burian, Managing Director at Houlihan Lokey, for Movants
- Hon. Royal Fergeson, U.S.D.J. (ret.), for Movants
- Prof. Theodore Rave, University of Texas School of Law, for Movants
Additionally, the Court has reviewed declarations and/or video deposition testimony for the following witnesses:
- Gregory K. Bell, PhD, Group Vice President of Charles River Associates, for Debtor
- John R. Castellano, Managing Director at Alix Partners, for Debtor
- Matthew Diaz, Senior Managing Director at FTI Consulting, Inc., for Movants
- Majed Nachawati, Esq., Member of the AHC, for Debtor
- Adam Pulaski, Esq., Member of the AHC, for Debtor
- Erik Haas, Esq., Counsel for Johnson & Johnson, for Debtor
On June 30, 2023, the Court heard closing arguments and the parties submitted their electronic slide decks to the Court. At the Court‘s instruction, the parties submitted a stipulation of admitted exhibits. Joint Stipulation and Agreed Order Regarding the Admission of Exhibits and Deposition Designations, ECF No. 1100. The Court also directed the parties to submit proposed findings of fact and conclusions of law no later than July 19, 2023.
III. Discussion
A. Overview
Movants have asked this Court to dismiss Debtor‘s case “for cause” under
B. Financial Distress Requirement of Good Faith
“[A] Chapter 11 petition is subject to dismissal for ‘cause’ under
The Third Circuit has not “set out any specific test to apply rigidly when evaluating financial distress.” In re LTL Mgmt., LLC 64 F.4th at 102. To be sure, the Circuit confirms that it is not possible to “predict all forms of financial difficulties that may in some cases justify a debtor‘s presence in [c]hapter 11.” Id. (“So many spokes can lead to financial distress in the right circumstances that we cannot divine them all.“). Rather, considering “all relevant facts in light of the purposes of the Code,” “the good-faith gateway asks whether the debtor faces the kinds of problems that justify [c]hapter 11 relief.” Id.
Financial distress serves as a gating requirement for relief under chapter 11; in denying the motions to dismiss in LTL 1.0, this Court found LTL to be distressed sufficiently to avail itself of the bankruptcy system. See In re LTL Mgmt., LLC, 637 B.R. at 417-421 (discussing Debtor‘s financial distress). Nevertheless, the Third Circuit reached an opposite conclusion. The chief difference lies in the perceived lack of “immediacy” of such financial distress. See In re LTL Mgmt., LLC, 64 F.4th at 102 (“[f]inancial distress must not only be apparent, but it must be immediate enough to justify a filing.“). The Third Circuit mandated that the Debtor‘s financial distress
The Court of Appeals referred to “businesses teetering on the verge of a fatal financial plummet“, [LTL Mgmt., 64 F.4th] at 103, and drew comparisons to In re Johns-Manville Corp., 36 B.R. 727, 730 (Bankr. S.D.N.Y. 1984), where the debtor faced “urgency,” including “forced liquidation of key business segments,” and In re A.H. Robins Co., Inc., 89 B.R. 555, 558 (E.D. Va. 1988), which “had only $5 million in unrestricted funds” and was unable to borrow. LTL Mgmt., 64 F.4th at 103–04. The Third Circuit did not treat such “urgen[t]” circumstances as merely one illustrative type of financial distress that would warrant bankruptcy. Id. at 104. Rather, it treated them as an essential precondition for a bankruptcy filing, warning that “[r]isks associated with premature filing may be particularly relevant in the context of a mass tort bankruptcy” and explaining that further litigation in the tort system would help, not hinder, LTL‘s reorganization.
TCC‘s Proposed Findings of Fact and Conclusions of Law ¶ 5, ECF No. 1075 (citation omitted) (emphasis in original).
Few will argue that from a financial restructuring perspective, a “wait and see” approach often gives rise to serious risks and increased costs that may threaten the viability of the business. Chapter 11 professionals know all too well that companies which flounder too long without restructuring assistance face increased borrowing costs, diminished goodwill, and a lethal loss of leverage with vendors and lenders. Drawing upon the history of mass tort bankruptcies, most companies fare no better when trying to ride out massive, decades-long litigation firestorms. Here, “LTL inherited massive liabilities,” In re LTL Mgmt., LLC, 64 F.4th at 109, and faces tens of thousands of potential lawsuits involving various types of cancer, id. at 108 (conceding that “the number of talc claims had surged in recent years“). This case involves more than the mere possibility of threatened litigation. In point of fact, the record suggests that there are tens of thousands of additional claims since LTL‘s first filing, and that the Debtor expects to face tens of thousands more in the future. While it is difficult to assess the eventual cost to defend and resolve the talc claims, there is nothing speculative about the fact the Debtor faces substantial liability. It has already incurred billions of dollars in judgments, settlements, and litigation costs. And, due to the backlog that developed during LTL 1.0, the Debtor faces significant increases in the number of individual trials, the dollar-value of settlement demands, and related defense costs. As counsel conceded during the hearing, Movants have already sought—and intend to pursue—consolidated trials (like the one that resulted in the multi-billion-dollar Ingham judgment). These trials pose enhanced verdict risk—both in terms of an increased risk of a verdict for the claimants and an increased risk of larger dollar awards. Kim Decl. at ¶ 36; see also June 27, 2023 Hr‘g Tr. – Kim Redirect, 261:2-262:20.
The $4.5 billion verdict in Ingham has been described as an “outlier” in the few
Unquestionably, the Third Circuit recognizes that “the Code contemplates ‘early access to bankruptcy relief to allow a debtor to rehabilitate its business before it is faced with a hopeless situation;‘” however, the prospect and benefits of an early filing must be balanced against the potential for, and risks of, premature filings. In re LTL Mgmt., LLC, 64 F.4th at 102 (quoting SGL Carbon, 200 F.3d at 163). The Circuit acknowledges that there is often a “fine line” between a proper, early filing and an abusive, premature filing, and reaffirms that bankruptcy courts are “in the best position to draw it.” Id. By way of these Motions, this Court has been asked again to draw such a line. Given the Circuit‘s focus on immediacy and certainty, this Court rules, as discussed in greater detail below, that on the petition date, LTL fell on the wrong side of the line.
It is undisputed that, as of the filing date of LTL 2.0, Debtor was solvent and—with assistance from HoldCo and the 2023 Funding Agreement—was able to satisfy its liabilities. See, e.g. Wuesthoff Decl. ¶ 26; Tr. of June 27, 2023 Hrg. – Wueshoff Cross 71:1-14; Tr. of June 27, 2023 Hrg. – Dickinson Cross 134:19-21. Although “balance-sheet insolvency or insufficient cash flows to pay liabilities (or the future likelihood of these issues occurring) are likely always relevant,” the Third Circuit has been clear in holding that a debtor is not required to be insolvent—either from a balance-sheet or equitable perspective—to file for chapter 11 relief. See In re LTL Mgmt., LLC, 64 F.4th. at 102 (“We recognize as much, as the Code conspicuously does not contain any particular insolvency requirement.“) (citing In re SGL Carbon Corp., 200 F.3d at 163; Integrated Telecom, 384 F.3d at 121). Thus, the threshold issue for a chapter 11 filing is not “insolvency” but “financial distress.” Nevertheless, Debtor‘s solvency as of the petition date provides this Court with a starting point for the financial distress analysis.
With respect to assets available to the Debtor as of its April 4, 2023, filing, the Court looks first to its cash position and future revenues. The Debtor has $14.5 million in cash, annual royalty revenue streams and access to approximately $1.3 billion in cash from HoldCo, the obligor under the 2023 Funding Agreement, including a $912 million dividend that HoldCo received in June 2023. Expert Report of Gregory K. Bell, Ph.D. (“Bell Report“) ¶¶ 39-41, June 7, 2023, Trial Ex. D-66; Supplemental Expert Report of Gregory K. Bell, Ph.D. (“Supp. Bell Report“) ¶ 8, June 20, 2023, Trial Ex. D-67. Specifically, on June 22, 2023, HoldCo received a dividend of $912 million from its indirect subsidiary GH Biotech, through several intermediate subsidiaries. Id. Nothing in the
subsidiaries that also generate hundreds of millions of dollars in annual cash flow. Rebuttal Expert Report of Saul Burian (“Burian Rebuttal Report”) 34, TCC Trial Ex. 1112.
As to other assets—as of the date of the chapter 11 filing—LTL owned the equity interest in Royalty A&M, worth nearly $400 million and, again, has access to the value of HoldCo‘s equity interests, valued at approximately $29.9 billion or, if discounted in a forced liquidation, $22.3 billion. Bell Report ¶¶ 39-41, 58. In this regard, Dr. Bell testified that HoldCo holds 36.1143% minority interests in two J&J affiliates domiciled in Ireland, JSI and Janssen Irish Finance Unlimited Company (“JIFC”). Bell Report ¶ 45. As of April 4, 2023, JSI‘s fair market value was $34,672,900,000, for a HoldCo share of $12,521,875,000, and JIFC‘s fair market value was $26,569,100,000, for a HoldCo share of $9,595,244,000. Bell Report Ex. H; Lisman Decl. ¶ 24, Trial Ex. D-4. HoldCo‘s other major assets are 100% holdings in Janssen-Cilag GmbH, valued at $4,007,900,000, and Janssen France Treasury Unlimited Company valued at $1,778,407,000. Bell Report Ex. H; Lisman Decl. at 9, Figure 1. HoldCo also holds several other interests valued at a total of $1,972,941,000, along with $300 million in cash. Bell Report Ex. H; Lisman Decl. at 9, Figure 1. According to Dr. Bell, if forced to liquidate its equity interests, HoldCo would receive $22.3 billion, after applying a 10% “minority interest discount” to JSI and JIFC and a marketability discount of 20.6%, for sales of restricted stock. Bell Report ¶ 51.
Debtor posits that although it can meet its debts now—its liabilities will increase in both the short and long term. However, LTL‘s Chief Financial Officer, Mr. Wuestoff, did not have any financial flow analysis if the talc claims were returned to the tort system. See, e.g., June 27, 2023 Hr‘g Tr. – Wuestoff Cross, 58:13-16. He knew only what had been historically spent on defense costs. Id. at 137:9. Likewise, in advance of the chapter 11 filing, LTL had not performed any evaluation of how much cash flow it would need in the tort system over the next three or even five years. June 27, 2023 Hr‘g Tr. – Dickinson Cross, 163:17–22. J&J‘s assistant controller testified that outside of bankruptcy, “J&J has no aggregate estimate of talc liability.” June 28, 2023 Hr‘g Tr. (vol. 2) – Lisman Cross, 144:12-15. Without such estimate, Debtor has opted to present expert opinions to buttress its financial distress contentions. Dr. Charles H. Mullin opined that LTL faces a “wave of litigation” in the near future. Mullin Report ¶ 64. Dr. Mullin constructed three hypothetical “cash flow” scenarios and pegs the estimated short-term defense and resolution costs upon a return to the tort system in a range between $3 billion and $7 billion over the next 3 years.14 Id. at
On rebuttal, Movants’ expert, Mr. Burian, questioned Dr. Mullin‘s use of 100 trials in two of his three scenarios (or even 20 trials in his third scenario), noting that Mr. Wuestoff had previously testified that LTL could not realistically try more than 10 cases per year, and even 20 was not possible. Burian Rebuttal Report 12, TCC Trial Ex. 1112; Feb. 14, 2022 Hr‘g Tr. – Wuestoff Cross, 180:7-16, ECF No. 1481 in Case No. 21-30589. Mr. Burian further challenged as inflated Dr. Mullin‘s assumptions with respect to trial and non-trial litigation costs. Burian Rebuttal Report at 12-14. Using Dr. Mullin‘s $40 million quarterly figure for non-trial litigation costs but adjusting other variables (revising per-trial costs to $3.5 million based on the historical average, and assuming an average of ten trials per year, consistent with the historical average and LTL‘s president‘s testimony), Mr. Burian performed a re-analysis of Dr. Mullin‘s short term “cash flow” scenarios. Id. With Mr. Burian‘s adjustments, LTL‘s total costs in the first three years upon return to the tort system would be only $0.6 billion under the first scenario, $2.6 billion under the second scenario, and $4.8 billion under the third scenario. Id. at 15. Ultimately, Mr. Burian‘s re-analysis provides the more credible projections. And although, on paper, there is not enough cash in either LTL‘s or HoldCo‘s coffers to satisfy even the TCC‘s lower numbers, clearly there are resources readily available to LTL to secure satisfaction of these amounts. Given LTL‘s assets—including the 2023 Funding Agreement—the record demonstrates that LTL can satisfy these costs; accordingly, there is no imminent financial distress.
Regarding total talc liabilities facing the Debtor, Dr. Mullin provided at trial an “above-expectation” estimate of LTL‘s total aggregate talc liabilities—which would extend out for “decades” into the future and includes the cost to “defend and resolve” all personal injury talc claims, governmental talc claims, and any indemnification obligations—at approximately $11 billion. Mullin Report ¶¶ 7, 102, 104, 112, Trial Ex. D-65; June 29, 2023 Hr‘g Tr. (vol. 2) – Mullin Cross, 82:7-83:19; 154:13–16.23, ECF No. 1028. Dr. Mullin further performed a “high-end stress test scenario” that estimates a worst-case scenario for talc liability at $21 billion. Mullin Report ¶¶ 19, 105; June 29, 2023 Hr‘g Tr. (vol. 2) – Mullin Cross at 83:3–5. Even assuming total talc liability closer to this worst-case scenario figure, the Debtor still will not have exhausted the total value of the 2023 Funding Agreement. As explained, that asset includes not only LTL‘s cash and equity interests, HoldCo‘s cash, HoldCo‘s anticipated revenue through subsidiaries, and HoldCo‘s expected future dividends with projected values in the billions, but also HoldCo‘s $22.3 billion forced liquidation value—which, alone, could cover the Debtor‘s total estimated worst-case scenario for talc liability.
In sum, given the freeze in litigation arising from the automatic stay and Preliminary Injunction, this Court is presented with nearly the same record with respect to verdicts and costs as in LTL 1.0. In reviewing that record, the Third Circuit found that LTL‘s ability to fund its liabilities “exceeded any reasonable projections available on the record.” In re LTL Mgmt., LLC, 64 F.4th 94, 109 (3d Cir. 2023). While recognizing that the tort landscape may change and that LTL may encounter larger verdicts in the future, the Third Circuit stated that “[t]he ‘attenuated possibility’ that talc litigation may require it to file for bankruptcy in the future does not establish its good faith as of its petition date.” Id. This Court abides by that ruling.
Given the submissions and testimony at trial, this Court concludes that LTL is not sufficiently financially distressed to avail itself of bankruptcy at this time. The weight of the evidence indicates that LTL does “not have any likely need in the present or the near-term . . . to exhaust its funding rights to pay talc liabilities.” In re LTL Mgmt., LLC, 64 F.4th at 108. Consistent with the Third Circuit‘s instructions, courts analyzing financial distress must focus on the financial state of the debtor. In re LTL Mgmt., LLC, 64 F.4th at 105. At the time of filing, LTL had assets valued at approximately $380 million, with approximately $14.5 million in cash. Debtor‘s Proposed Findings of Fact and Conclusions of Law ¶ 61, ECF No. 1079; Lisman Decl ¶¶ 12-13; Bell Report ¶ 55. Most importantly, the Debtor was contractually entitled to a funding backstop—in the form of the 2023 Funding Agreement—that allowed it to access the value of HoldCo‘s significant cash holdings, anticipated annual dividends, and equity interests having a value approaching $30 billion—exceeding the projected near term and aggregate talc liability. This asset—which the Third Circuit previously described as “an ATM disguised as a contract”—is properly considered in LTL‘s financial distress analysis. Thus, “the financial condition of [HoldCo] is relevant only to the extent it informs [this Court‘s] view of the financial condition of LTL itself.” In re LTL Mgmt., LLC, 64 F.4th at 106. In sum, this Court smells smoke, but does not see the fire.15 Therefore, the emphasis on certainty
C. Best Interests of Creditors
Having found cause for dismissal, the Court is compelled to address the possibility of continuing this chapter 11 bankruptcy in the best interests of the creditors. See
There have been no developments since LTL 1.0 that have abated the Court‘s concerns or resolved the problems of the extensive tort-claim backlog, or the incontrovertible fact that many plaintiffs are denied any recovery in the tort system altogether. In opposition to Dr. Mullin‘s report, counsel for Movants repeatedly emphasized that there would be far fewer trials per year than the 100 used by Dr. Mullin in his calculations. Movants—based on historical data and deposition testimony—pegged this number at closer to 10 trials per year. See, e.g., June 29, 2023 Hr‘g Tr. – Mullin Cross, 94:23-100:3, ECF No. 999; June 30, 2023 Hr‘g Tr. – Ruckdeschel Closing 48:19-23, ECF No. 1000. This glacial pace coupled with the undeniable surge in the number of new actions means that the vast majority of claimants will not get the opportunity to seek recovery for years to come, if ever. The sluggish speed of the tort system—which plaintiffs’ attorneys repeatedly acknowledged during trial—continues to trouble this Court. Further, when a claimant
Finally, the Court again emphasizes the need to protect the interests of future claimants—a need that is especially crucial in cases involving diseases with long latency periods, such as the present matter. There are two insurmountable hurdles to globally resolving talc litigation in the tort system—latency periods for injuries and unknown future claimants. Sheila Birnbaum, Esq., who testified for the Debtor, opined that “MDLs are not always a good vehicle to resolve mass personal injury litigation, especially in cases that involve future claims with latent injuries.” June 29, 2023 Hr‘g Tr (vol. 1) – Birnbaum Cross, 59:21-24, ECF No. 968; Expert Report of Sheila L. Birnbaum (“Birnbaum Rebuttal Report”) 1, Trial Ex. D-68. Latent injuries make it “impossible to identify who the plaintiffs are going to eventually be, because they have no injury at the moment, and their injury may manifest years after their exposure to a particular product, substance, or device.” June 29, 2023 Hr‘g Tr. (vol. 1) – Birnbaum Cross, 81:4-11; see also Birnbaum Rebuttal Report at 7, 9-11. She also testified about the due process concerns around providing notice and an opportunity to opt out of a settlement to unknown future claimants: “That‘s a very big problem in the fact of due process. That is one of the reasons that settlements through class actions after Amchem and Ortiz just never continued because of the problems of . . . notice, of due process, of having people understanding the ability to opt out or even know they‘ve been exposed.” Id. at 81:12-19 (citing Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997) (affirming decertification of proposed asbestos class settlement for failure to meet the requirements of Rule 23); Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999) (holding that certification of proposed global asbestos class settlement was impermissible under Rule 23 and that it did not comply with Amchem)).
No party or expert has identified even a single example of a global settlement outside of bankruptcy that has been achieved in circumstances like this case—where both latent injuries and unknown future claimants exist—in the more than 20 years since Amchem and Ortiz were decided. Instead, Movants’ experts have offered examples of distinguishable mass tort settlements achieved in non-bankruptcy situations that—in every case—did not involve the large numbers of unidentified future claimants and long latency periods that are central to this chapter 11 case.17 Far from
During trial, Movant‘s expert, Professor Theodore Rave offered in rebuttal that there are tools available in the tort system, through the MDL process, to address and protect the rights of unidentifiable, future claimants. June 29, 2023 Hr‘g Tr. (vol. 1) – Prof. Rave Re-Direct 26:3-28:6, ECF No. 968. He first explained that there could be a structure in place to create a subclass of future claimants with their own, separate counsel who would have financial incentive to protect the rights of that subclass. Id. at 26:10-27:3. However, Professor Rave viewed the challenge of unidentifiable claimants as a “notice challenge,” as opposed to a “structural” issue within the MDL process. Id. at 26:15-17. To resolve that challenge, Professor Rave explained that courts could “do a multimedia kind of notice” that would include “print ads and TV ads and internet advertising over a long period of time to make sure that the message is getting out there.” Id. at 27:16-20. Given the 60-year latency period and the repeated allegations throughout this litigation that Debtor‘s product is still readily available, the Court is dubious whether multimedia advertising over a long period of time would adequately capture unidentified, future claimants.
In short, the Court remains unconvinced that the procedural mechanisms and notice programs offered in the tort system can protect future claimants’ rights in the same manner as the available tools in the bankruptcy system. Given these concerns, the Court considers the possibility that best interests of the creditors warrants continuation of this chapter 11 case.
(1) 11 U.S.C. § 1112(b)(2)
Under
A) there is a reasonable likelihood that a plan will be confirmed within the timeframes established in sections 1121(e) and 1129(e) of this title, or if such sections do not apply, within a reasonable period of time; and
B) the grounds for converting or dismissing the case include an act or omission of the debtor other than under paragraph (4)(A)--
(i) for which there exists a reasonable justification for the act or omission; and
(ii) that will be cured within a reasonable period of time fixed by the court.
In LTL 1.0, this Court buttressed its ruling on a rationale that employed
Movants contend that, where cause for dismissal is found based on lack of good faith, the exception to dismissal under
In contrast, Debtor submits that the cases on which Movants rely do not involve a finding of bad faith premised specifically on lack of financial distress. Admittedly, those courts rooted their bad faith findings on other grounds. See, e.g. Layman, 2021 WL 6425951 (finding bad faith based on the filing of simultaneous chapter 11 restructuring bankruptcies and making a threatening comment); In re Hinesley, 460 B.R. 547 (finding bad faith based on gross mismanagement of the debtor‘s financial affairs and failure to cooperate/disclose information). As Debtor points out, Movants
In this Court‘s view, Third Circuit dicta can be interpreted to suggest that certain types of “bad faith” may be capable of curing or justification. Lack of good faith can be based on a variety of factors and the appropriateness of a particular filing ranges from the “clearly acceptable to the patently abusive.” In re SGL Carbon Corp., 200 F.3d 154, 162 (3d Cir. 1999). The acknowledgement of a spectrum implies that some petitions are filed with less good faith—or more bad faith—than others. Indeed, a footnote in In re SGL Carbon states in no uncertain terms that, although a debtor may have engaged in some bad conduct, dismissal may not be the appropriate remedy. Id. at 159 n.8 (“[I]n many circumstances, the court might be better advised to address the bad conduct of the debtor (or some other party) in a manner other than through dismissal of the proceedings.”) (quoting 7 Collier on Bankruptcy 1112–70 (15th ed. 1996)). However, the Circuit clarifies that alternatives to dismissal are only appropriate “where the debtor otherwise properly belongs in bankruptcy.” Id.
In bad faith cases involving the filing of a petition that is an abuse of the bankruptcy process, however, § 1112(b)‘s conversion/dismissal choice is inappropriate. The proponent of an abusive petition does not belong in bankruptcy, so it is unnecessary to ask whether dismissal or conversion is in the interest of the creditors.
Id. (emphasis added). Here, the Court is faced with a Debtor who does not belong in bankruptcy under applicable tests. In re LTL Mgmt., LLC, 64 F.4th at 111 (“Chapter 11 is appropriate only for entities facing financial distress.”). Thus, lack of financial distress is not the type of “bad faith” that could be subject to the
Notwithstanding that
(2) 11 U.S.C. § 1112(b)(1) – Appointment of a Trustee or Examiner
As determined, cause for dismissal has been established in the form of lack of imminent financial distress. And, for reasons discussed, LTL cannot establish the requisite elements to avail itself of the exception to dismissal under
The Court takes judicial notice of the approximately 4,900 docket entries that have been filed in these two, chapter 11 cases since their inception, nearly 20 months ago. From the Court‘s vantage point, the docket speaks to the complexities and far-reaching impact of this case on all parties in interest. This Court does not—and cannot—find that the appointment of an examiner and/or chapter 11 trustee will yield results in the best interests of creditors. Rather, the Court urges the parties to build upon the remarkable progress that has been achieved in the past 120 days in reaching a viable global settlement. The foundation for a fair, efficient, and expeditious settlement has been laid by the dogged efforts of the AHC, Debtor and other parties. While the Court is obliged to dismiss this case, the parties should—and are strongly encouraged to—continue to pursue a global resolution. It has been represented that, of the total claimants, approximately 58,000 talc claimants have an “agreement in principle on material financial terms to resolve talc claims through a chapter 11 plan, which, upon final agreement and if confirmed, would constitute the largest settlement in any asbestos bankruptcy case and one of the largest settlements of personal injury claims in U.S. history.” Omnibus Objection of the Ad Hoc Committee of Supporting Counsel Motion to Dismiss ¶¶ 3 & 12, ECF No. 613. This Court sees no reason why this type of settlement cannot be pursued in a context other than this current bankruptcy case, such as part of the pending Imerys chapter 11 bankruptcy proceeding in Delaware. As an initial matter, LTL
IV. Conclusion
For the foregoing reasons, the Court finds cause for dismissal due to LTL‘s lack of imminent and immediate financial distress.22 The Court determines that neither the appointment of a chapter 11 trustee nor an examiner under
Michael B. Kaplan, Chief Judge
U.S. Bankruptcy Court
District of New Jersey
Dated: July 28, 2023
Notes
MRHFM‘s Plaintiffs’ Proposed Findings of Fact and Conclusions of Law 9 n.17, ECF No. 1068.LTL also maintains a $41.5 billion litigation claim for the transfer of the Consumer Business for no considerations. In addition, the assets of the bankruptcy estate (but not of LTL pre-filing) also consist of the debtor-in-possession‘s right to bring a potential fraudulent transfer claim against J&J for abandoning its funding backstop without reasonable exchange in value. Dismissing this case returns the right to bring such cause of action (if any) to the creditors of LTL. See, e.g.,
N.J. Rev. Stat. 25:2-29(a)(1) (Remedies of Creditor) (“In an action for relief against a transfer or obligation under this article, a creditor, subject to the limitations in R.S.25:2-30, may obtain (1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor‘s claim. . . .”).
(b)(1) Except as provided in paragraph (2) of this subsection, subsection (c) of this section, and section 1104(a)(3), on request of a party in interest, and after notice and a hearing, absent unusual circumstances specifically identified by the court that establish that the requested conversion or dismissal is not in the best interests of creditors and the estate, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, if the movant establishes cause.