LTL MANAGEMENT LLC
The ‘attenuated possibility of insolvency’ in the future does not establish ‘financial distress,’ Circuit Judge Ambro said, interpreting his own prior opinion.
- Rochelle Quick Take
View Rochelle Summary- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- 23-2971 and 23-2972 (3rd Circuit, Jul 25,2024) Not Published
- Tag(s):
- Ruling:
- A debtor is ineligible for bankruptcy in the Third Circuit if it cannot show that it is in financial distress. A debtor's mere forecast of blockbuster verdicts against it, or the "attenuated" possibility of future insolvency, are insufficient to show financial distress. Instead, the debtor must show "reasonable projections" of future liability that result in insolvency.
- Procedural context:
- The bankruptcy court dismissed LTL's bankruptcy case because the debtor did not meet its obligation of showing financial distress. The Third Circuit authorized a direct appeal.
- Facts:
- Johnson & Johnson faced numerous lawsuits over damages allegedly linked to asbestos in baby powder and other talc-based products sold by certain subsidiaries (Johnson & Johnson and its subsidiaries are "J&J"). In 2021, J&J engaged in pre-bankruptcy restructuring, so that all talc liability, known and unknown, were assigned to LTL Managment, LLC ("LTL"). LTL received a funding agreement that obligated J&J to cover LTL's tax liabilities and bankruptcy expenses. The funding agreement capped J&J's exposure at $61,5 billion. LTL then filed a Chapter 11 petition. The creditor's committee moved to dismiss for lack of good faith, and the bankruptcy court denied the motion. On appeal, the Third Circuit reversed because "well-established Third Circuit caselaw bars a bankruptcy absent financial distress." Hours after the bankruptcy case was dismissed, LTL amended the funding agreement, reducing J&J's obligation to $30 billion. LTL then filed a second bankruptcy petition. After a four day trial, the bankruptcy court dismissed LTL's second petition.
- Judge(s):
- RESTREPO, FREEMAN, and AMBRO, Circuit Judges
