In re LTL Mgmt., LLC

637 B.R. 396

IN RE: LTL MANAGEMENT, LLC, Debtor.

Case No. 21-30589 (MBK)

United States Bankruptcy Court, D. New Jersey.

Signed February 25, 2022

Daniel Stolz, Genova Burns LLC, Basking Ridge, NJ, Arthur Abramowitz, Ross J. Switkes, Sherman, Silverstein, Kohl, Rose & Podolsky, P.A., Moorestown, NJ, Cary Joshi, Bailey & Glasser LLP, Bailey Glasser, Washington, DC, Brown Rudnick Berlack Israels LLP, Seven Times Square, Otterbourg.P.C, New York, NY, Genova Burns LLC, Genova Burns LLC, Basking Ridge, NJ, Evan Lazerowitz, Cooley LLP, David J. Molton, Brown Rudnick LLP, New York, NY, Alan I. Moldoff, Sherman, Silverstein, Kohl, Rose & Podolsky, P.A., Moorestown, NJ, for Creditor Committee.

Brad Jeffrey Axelrod, Paul R. DeFilippo, James N. Lawlor, Joseph Francis Pacelli, Lyndon Mitchell Tretter, Wollmuth Maher & Deutsch LLP, Kristen R. Fournier, King & Spalding LLP, New York, NY, Jessica Lauria, White & Case LLP, New York, NY, Caitlin K. Cahow, Jones Day, Brad B. Erens, Chicago, IL, Kathleen A Frazier, Shook, Hardy & Bacon L.L.P, Houston, TX, Gregory M. Gordon, Daniel B. Prieto, Mark W. Rasmussen, Amanda Rush Jones Day, Dallas, TX, James M. Jones, Jones Day, New York, NY, Robert W. Hamilton, Jones Day, Columbus, OH, John R. Miller, Jr., C. Richard Rayburn, Jr., Rayburn, Cooper & Durham, P.A., The Carillon, Matthew L. Tomsic, Rayburn Cooper & Durham, P.A., Charlotte, NC, for Debtor.

Mitchell Hausman, United States Department of Justice, Newark, NJ, Lauren Bielskie, DOJ-Ust, Jeffrey M. Sponder, Office of U.S. Trustee, Newark, NJ, for U.S. Trustee.

Brett Kahn, Thomas Ladd, McCarter & English, Newark, NJ, for Special Counsel.

MEMORANDUM OPINION

Michael B. Kaplan, Chief Judge

This matter comes before the Court upon motions (collectively, "Motions") filed by the Official Committee of Talc Claimants¹ (ECF No. 632) and the law firm of Arnold & Itkin, LLP, on behalf of certain talc personal injury claimants (ECF No. 766) (together, "Movants" or "Claimants"),² seeking an order of the Court dismissing the within bankruptcy proceeding pursuant to § 1112(b) as not having been filed in good faith. For the reasons expressed below, the Court denies the Motions in their entirety. The Court issues the following findings of fact and conclusions of law as required by FED. R. BANKR. P. 7052.³ The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended September 18, 2012, referring all bankruptcy cases to the Bankruptcy Court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A). Venue is proper in this Court pursuant to 28 U.S.C. § 1408.

I. Background & Procedural History

On October 14, 2021, LTL Management, LLC ("LTL" or "Debtor") filed a voluntary petition for chapter 11 relief (ECF No. 1) in the United States Bankruptcy Court for the Western District of North Carolina (the "North Carolina Bankruptcy Court"). LTL is an indirect subsidiary of Johnson & Johnson ("J&J") and traces its roots back to Johnson & Johnson Baby Products, Company ("J&J Baby Products"), a New Jersey company incorporated in 1970 as a wholly-owned subsidiary of J&J. See Declaration of John K. Kim in Support of First Day Pleadings ("Kim Decl. ") ¶¶ 9-10, ECF No. 5. J&J, a New Jersey company incorporated in 1887, first began selling JOHNSON'S® Baby Powder ("Johnson's Baby Powder") in 1894, launching its baby care line of products. Id . at ¶¶ 10-14. In 1972, J&J established a formal operating division for its baby products business, including Johnson's Baby Powder. Id. In 1979, J&J executed a transaction (the "1979 Agreement") transferring all assets associated with the Baby Products division to J&J Baby Products. Id. In connection with this transfer, J&J Baby Products assumed all liabilities associated with the Baby Products division. Id. J&J no longer manufactured or sold baby products, such as Johnson's Baby Powder after this transaction. Id . Today, J&J is a global company primarily focused on products relating to human health and wellbeing. See Expert Report of Saul E. Burian, Ph.D., ("Burian Report ") at 25. J&J is composed of three business segments, including Consumer Health, Pharmaceutical, and Medical Devices. Id .

Prior or to October 12, 2021, one of J&J's corporate subsidiaries was Johnson & Johnson Consumer Inc. ("Old JJCI"). See Kim Decl. ¶¶ 10-14, ECF No. 5. As the result of a series of intercompany transactions, Old JJCI assumed responsibility for all claims alleging that J&J's talc-containing Johnson's Baby Powder caused ovarian cancer and mesothelioma. Id . at ¶¶ 15, 32. In the talc lawsuits, claimants contend generally that multiple scientific studies have repeatedly found (i) that samples of Johnson's Baby Powder contain amphibole asbestos and fibrous talc; (ii) that perineal or genital application of talcum powder increases the risk of and can cause ovarian cancer ; and (iii) that exposure to asbestos-contaminated talcum powders can cause mesothelioma. Original TCC's Motion to Dismiss ¶ 16, ECF No. 632. Despite this product being sold since 1894, prior to 2010, there were a limited number of isolated cases involving cosmetic talc filed against Old JJCI and J&J, asserting a range of claims including talcosis, mesothelioma, dermatitis, and rashes. Kim Decl. ¶ 34, ECF No. 5. Litigation escalated after the 2013 trial Deane Berg v. J&J , wherein plaintiff alleged she had developed ovarian cancer as a result of genital exposure to Old JJCI's talc-based product. Id . at ¶ 35. The jury found for the plaintiff but awarded no damages. Following that verdict, over thirteen hundred ovarian cancer lawsuits were filed against Old JJCI and J&J by the end of 2015. Id . Since 2016, talc-related lawsuits have grown to over 38,000 cases. Burian Report at 35. In May 2020, Old JJCI announced their discontinuation of talc-based baby powder in the United States and Canada. Expert Report of Gregory K. Bell, Ph.D. ("Bell Report ") ¶ 17. Debtor contends that from January 2020 to today, the company has been served on average with one or more ovarian cancer complaint every hour of every day, every single day of the week. Debtor's Informational Brief 125, ECF No. 3. The $4.69 billion verdict reached in the Ingham case⁴ (the total award was reduced on appeal to $2.25 billion) certainly raised the stakes for all concerned.

The increase in talc-related litigation imposed a financial burden on Old JJCI. In the seven quarters of operations preceding the bankruptcy filing, the talc litigation led to financial statement charges totaling $5.6 billion and cash payments totaling $3.6 billion. Bell Report at ¶ 8. Talc litigation charges—otherwise referred to as "probable costs"—accounted for 51 percent of sales, and the talc litigation payments—or costs previously paid—accounted for 122 percent of the pre-tax cashflows estimated to be generated by operations. Id . Old JJCI's income before tax for the business segment dropped from a $2.1 billion profit in 2019 to a $1.1 billion loss in 2020. Id . Much of the reverse in profits, of course, were attributable to the Ingham charge and payment.

On October 12, 2021, Old JJCI engaged in a series of transactions (the "2021 Corporate Restructuring") through which it ceased to exist, and two new companies, LTL and Johnson & Johnson Consumer Inc. ("New JJCI"), ultimately were formed. Kim Decl. ¶¶ 16, 22-23, ECF No. 5. The labyrinthine progression toward the creation of Debtor is somewhat overwhelming. First, Old JJCI's then-direct parent, Janssen Pharmaceuticals, Inc., organized Currahee Holding Company Inc. ("Currahee") to become the new direct parent of Old JJCI. Currahee organized Chenango Zero LLC, a Texas limited liability company, as its wholly-owned subsidiary. After this, Old JJCI merged with Chenango Zero LLC, leaving Chenango Zero LLC as the surviving entity. A funding agreement, as discussed below, was agreed to by J&J and Currahee as payors and Chenango Zero LLC as payee. Using the Texas Business Organizations Code, Chenango Zero (Old JJCI) effected a divisional merger where Old JJCI was dismantled, leaving two new Texas limited liability companies—Chenango One LLC and Chenango Two LLC—to divide all the assets and liabilities of Old JJCI. Chenango Two LLC merged with and into Currahee. As the surviving entity, Currahee then changed its name to Johnson and Johnson Consumer Inc. ("New JJCI"). Chenango One LLC converted from a Texas limited liability company into a North Carolina limited liability company and changed its name to LTL Management, LLC. Id . at ¶¶ 22-23.

The supposed purpose of this restructuring was to "globally resolve talc-related claims through a chapter 11 reorganization without subjecting the entire Old JJCI enterprise to a bankruptcy proceeding." Id . at ¶ 21. As a result of the 2021 Corporate Restructuring, LTL assumed responsibility for Old JJCI's talc-related liabilities. Id . at ¶¶ 16, 24. Through the restructuring, LTL also received Old JJCI's rights under a funding agreement (the "Funding Agreement"). Id . at ¶ 24. Under the Funding Agreement, J&J and New JJCI, on a joint and several basis, are obligated to pay "any and all costs and expenses" up to the value of New JJCI⁵ excluding the talc liability that LTL incurs during its bankruptcy case, "including the costs of administering the Bankruptcy Case" to the extent necessary. Funding Agreement 6, Annex 2 to Kim Decl. ECF No. 5. In addition, the Funding Agreement obligates New JJCI and J&J to fund amounts necessary:

(a) to satisfy the Debtor's talc-related liabilities at any time when there is no bankruptcy case and (b) in the event of a chapter 11 filing, to provide the funding for a trust, in both situations to the extent that any cash distributions received by the Debtor from Royalty A&M are insufficient to pay such costs and expenses and further, in the case of the funding of a trust, the Debtor's other assets are

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