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Summarizing by Amir Shachmurove


Circuit Judge Thomas Ambro prohibits big companies from filing chapter 11 cases absent ‘financial distress.’

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Case Type:
Case Status:
Reversed and Remanded
22-2003, 22-2004, 22-2005, 22-2006, 22-2007, 22-2008, 22-2009, 22-2010, 22-2011 (3rd Circuit, Jan 30,2023) Published
The bankruptcy case must be dismissed because the debtor is not in imminent financial distress. In determining whether a case was filed in good faith, bankruptcy courts can look at the financial condition and motivation of only the debtor. Good faith requires that the debtor must be in imminent financial distress (financial distress can exist without insolvency). Financial distress must be evaluated on a case-by-case basis to ensure that the case will fulfill a valid bankruptcy goal, such as preserving a going concern or maximizing the value of the estate's assets.
Procedural context:
The bankruptcy court entered an order denying § 1112(b) motions to dismiss the debtor’s bankruptcy case. The bankruptcy court certified the decision for direct appeal to the Third Circuit under 28 U.S.C. § 158(d)(2). The Third Circuit then authorized the direct appeal.
Johnson & Johnson (“J&J”) is a highly valuable, profitable, and well-known company. It has sold Johnson’s Baby Powder since 1984. Johnson’s Baby Powder became the subject of mass tort litigation due to the presence of asbestos in the talc in the powder. In 2021, most of the litigation was consolidated in federal multidistrict litigation in New Jersey. In 1979, J&J transferred all assets of its Baby Products division to a wholly-owned subsidiary. As part of the transaction, J&J allegedly agreed to indemnify the subsidiary for all past, present and future liabilities stemming from Johnson’s Baby Powder. The subsidiary ultimately transferred Johnson’s Baby Powder and the indemnification agreement to Johnson & Johnson Consumer Inc. (“Oldco”). In October 2021, Oldco entered into a series of corporate transactions under Texas corporate law that wound up in the creation of two new entities and the termination of the separate existence of Oldco (a process commonly called the "Texas Two=Step"). The two new entities were new Johnson & Johnson Consumer Inc. (“Newco”) and LTL Management LLC, a North Carolina limited liability company that became the debtor in the bankruptcy case (“LTL”). Put simply, Newco got all of the operating businesses and assets of Oldco. The evidence showed that Newco had a market value of $61.5 billion. LTL got all of the litigation liabilities from Johnson’s Baby Powder. However, LTL was a party to and the beneficiary of a funding agreement that required Newco and J&J to pay LTL for LTL’s legal fees and its litigation and settlement obligations, up to a minimum of at least $61.5 billion. LTL promptly filed a Chapter 11 petition in the Western District of North Carolina bankruptcy court. The North Carolina bankruptcy court transferred venue of the case to the United States Bankruptcy Court for the District of New Jersey, where the multi district litigation was pending. The New Jersey bankruptcy court held an evidentiary hearing on motions to dismiss the LTL bankruptcy case under 11 U.S.C. § 1112(b). The bankruptcy court denied the § 1112(b) dismissal motions, finding that the LTL chapter 11 petition was filed in good faith, even though Newco had a value of $61.5 billion and J&J had $31 billion in cash and marketable securities and had distributed over $13 billion to shareholders in each of 2020 and 2021, which facts provided assurance that LTL would be able to pay all judgments and settlements related to Johnson's Baby Powder liabilities.

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