LTL Mgmt., LLC v. San Diego Cnty. Emps. Ret. Ass'n (In re LTL Mgmt., LLC)

640 B.R. 322

LTL MANAGEMENT, LLC, Debtor.

LTL Management, LLC, Plaintiff,

v.San Diego County Employees Retirement Association, Individually and on Behalf of All Others Similarly Situated, Defendants.

All Counsel of Record

Case No. 21-30589 (MBK)

Adv. Pro. No. 22-01073 (MBK)

United States Bankruptcy Court, D. New Jersey.

Hearing Date: April 12, 2022

Dated: April 29, 2022

Paul R. DeFilippo, James N. Lawlor, Joseph Francis Pacelli, Lyndon Mitchell Tretter, Wollmuth Maher & Deutsch LLP, New York, NY, for Plaintiff.

James E. Cecchi, Kevin G. Cooper, Carella Byrne Cecchi Olstein Brody & Agnello, Roseland, NJ, for Defendant.

Arthur Abramowitz, Ross J. Switkes, Sherman, Silverstein, Kohl, Rose & Podolsky, P.A., Moorestown, NJ, for Creditor Committee.

MEMORANDUM OPINION

Michael B. Kaplan, Chief Judge

This matter comes before the Court by way Debtor's bankruptcy case (Case No. 21-30589) and subsequent adversary proceeding (Adv. Pro. No. 22-01073) and motion ("Motion") (ECF No. 2 in Adv. Pro. No. 22-01073)¹ filed by Plaintiff LTL Management, LLC ("LTL" or "Debtor") seeking an Order (I) Preliminarily Enjoining the Prosecution of the Securities Class Action and (II) Granting a Temporary Restraining Order Pending a Final Hearing. The Court has fully considered the submissions of the parties and the arguments set forth on the record at a hearing held on April 12, 2022. For the reasons set forth below, the Court grants Debtor's Motion and resolves the adversary proceeding in favor of Debtor without prejudice to revisiting the continuation of the preliminary injunction at a later date as discussed herein. The Court issues the following findings of fact and conclusions of law as required by FED. R. BANKR. P. 7052.²

I. Venue and Jurisdiction

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. As explained in detail below, this matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) and (G). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

II. Background

On October 14, 2021, LTL filed a voluntary petition for chapter 11 relief in the United States Bankruptcy Court for the Western District of North Carolina (the "North Carolina bankruptcy court"). Petition , ECF No. 1 in Case No. 21-30589.

LTL is an indirect subsidiary of Johnson & Johnson ("J&J") and 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 Decl. ") ¶¶ 9-10, ECF No. 5 in Case No. 21-30589. 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 not repeat that information here. See In re LTL Mgmt., LLC , 637 B.R. 396 (Bankr. D.N.J. 2022). In relevant part, 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 Decl. ¶¶ 10-14, 15, 32, ECF No. 5 in Case No. 21-30589.

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"), were formed. Kim Decl. ¶ 16, 22-23, ECF No. 5 in Case No. 21-30589. The alleged 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 restructuring, LTL assumed responsibility for all of 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 are obligated to pay, inter alia , "any and all costs and expenses" LTL incurs during its bankruptcy case, "including the costs of administering the Bankruptcy Case" to the extent necessary. Funding Agreement 6, Annex 2 to Declaration of John K. Kim in Support of First Day Pleadings , ECF No. 5 in Case No. 21-30589.

LTL filed for bankruptcy under chapter 11 in the Western District of North Carolina on October 14, 2021. Decl. of John K. Kim ¶2, ECF No. 4. One week later, Debtor initiated an adversary proceeding (the "Talc Adversary Proceeding"), seeking declaratory and injunctive relief against plaintiffs who had filed federal and state actions against Debtor's affiliates and other entities for talc-related claims. Complaint , ECF No. 1 in Adv. Pro. No. 21-03032. By way of the Talc Adversary Proceeding, the Debtor sought an order declaring that the automatic stay applies to those actions against nondebtors or, in the alternative, to enjoin such actions and grant a temporary restraining order pending a final hearing. Debtor simultaneously filed a motion requesting a preliminary injunction enjoining the prosecution of actions outside of the chapter 11 case on account of the same talc claims that exist against the Debtor in the chapter 11 case. Motion , ECF No. 2 in Adv. Pro. No. 21-03032. Ultimately, the case was transferred to the District of New Jersey, and Debtor supplemented its initial brief and amended and restated its arguments in support of the relief sought to reflect Third Circuit precedent. Several interested parties opposed the motion. Additionally, two separate parties filed motions to dismiss the underlying bankruptcy, alleging it had been filed in bad faith. See ECF Nos. 632 & 766 in Case No. 21-30589. The Court heard arguments on the motion for preliminary injunction in the Talc Adversary Proceeding contemporaneously with arguments on pending motions to dismiss the bankruptcy during evidentiary hearings held on February 14-18, 2022. Shortly thereafter, on February 25, 2022, the Court denied the motions to dismiss in the underlying bankruptcy case and granted the motion for preliminary injunction in the Talc Adversary Proceeding. See In re LTL Mgmt., LLC , 637 B.R. 396 (Bankr. D.N.J. 2022) (denying motions to dismiss); In re LTL Mgmt., LLC , No. 21-30589, ––– B.R. ––––, 2022 WL 586161 (Bankr. D.N.J. Feb. 25, 2022) (granting preliminary injunction).

Debtor then commenced the instant adversary proceeding (the "Adversary Proceeding") on March 7, 2022 against San Diego County Employees Retirement Association ("SDCERA"). Complaint , ECF No. 1. Simultaneously therewith, Debtor filed a motion (the "Motion") (ECF No. 2) requesting injunctive relief. The Adversary Proceeding and Motion seek to enjoin the continued prosecution of a securities action (the "Securities Action") pending in the United States District Court for the District of New Jersey against certain non-debtor individuals and affiliates of the Debtor. See Hall v. Johnson & Johnson , No. 3:18-cv-01833 (D.N.J.). The defendants in the Adversary Proceeding are members of a putative plaintiff class in the Securities Action consisting of individuals who purchased J&J stock during the period from February 22, 2013, through December 13, 2018 (the "Securities Claimants"). SDCERA is the lead plaintiff for that putative plaintiff class. Debtor argues that the claims asserted in the Securities Action overlap with issues at the heart of the claims being resolved in the bankruptcy proceeding (the "Talc Claims"). Accordingly, Debtor asserts that continuation of the Securities Action will impair its ability to resolve the Talc Claims in the chapter 11 bankruptcy case.

The Securities Claimants oppose the Motion and posit that the Debtor relies on a single basis for its motion: "record taint." The Securities Claimants assert that there exists no precedent for an injunction premised solely on the possibility of record taint. Moreover, the Securities Claimants contend that continued litigation does not pose a risk of record taint and that the Debtor has not met its burden of demonstrating that an injunction is warranted.

III. Discussion

A. The Securities Action

Prior to addressing the merits of the Motion, a brief discussion of the Securities Action is warranted to provide context to the parties’ arguments. The Securities Action was filed in 2018 and remains pending against J&J and four former J&J executives (the "Securities Defendants") for alleged violations of § 10(b) of the Securities Exchange Act of 1934. In order to prove their claims in the Securities Action, the Security Claimants must satisfy—among other things—a "falsity" element and demonstrate that the Securities Defendants made material misrepresentations or omissions that concealed material facts from investors. Specifically, the Securities Claimants intend to prove that:

(1) J&J had been repeatedly informed over a span of decades that its talc products had tested positive for asbestos, but engaged in a fraudulent scheme to conceal that from the public and regulators; (2) J&J attempted to find ways to remove asbestos from talc; (3) J&J purposely avoided the use of testing methods that could detect any asbestos present in its talc, and instead used methods that could not detect trace or sub-trace amounts of asbestos in talc; (4) J&J influenced and manipulated regulators and scientists to protect its flagship product, Johnson's Baby Powder, and J&J's reputation; (5) J&J admitted internally that "we cannot say ‘always’ " when it came to its talc being asbestos-free, even while Securities Defendants told investors that J&J's talc was "always" asbestos-free; and (6) J&J admitted internally that cosmetic talc did not actually have a "long history of safe use" "for over 100 years," which Securities Defendants falsely told

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