Healthcare giant Johnson & Johnson has used a controversial legal maneuver known as the Texas two-step to shield the company from 40,000 lawsuits from cancer patients who link their condition to talc in J&J’s baby powder.
In October 2021, New Jersey-based J&J used a wrinkle in Texas state law to spin off a new subsidiary that it named LTL. The company moved all baby powder-related liabilities onto the new firm’s books. Within a matter of days, LTL then relocated from Texas to North Carolina and filed for bankruptcy, effectively halting the baby powder lawsuits.
The 3rd U.S. Circuit Court of Appeals will eventually rule on whether LTL’s bankruptcy was filed in good faith and if it should shield J&J from baby powder-related lawsuits.
Attorneys representing women with claims against J&J have slammed the healthcare giant’s legal strategy. Attorney Jeffrey Lamken noted during a recent court appearance that during the LTL bankruptcy process, J&J has paid out billions of dollars to shareholders and for stock buy-backs – a practice not allowed for firms that are actually bankrupt.
Those who filed cancer lawsuits against the corporation have been forced to wait and “can only get more desperate as they face medical expenses and come closer to their own deaths,” Lamken argued in court.
Attorneys representing cancer patients say the civil court system, not the bankruptcy court, is the proper venue for establishing the corporation’s liability. The cases involve mesothelioma and ovarian cancer in women who used the baby powder for personal hygiene. The company has denied any wrongdoing.
Formally called a divisional merger, the bankruptcy tactic is better known as the Texas two-step. Greg Gordon, a partner at Jones Day, the law firm that has represented every company that has attempted the move so far, has observed that some portray it as “the greatest innovation in the history of bankruptcy,” though the two-step is more than 30 years old. The Texas legislature amended its Business Corporation Act in 1989, permitting a single corporation to divide into two or more entities, including when facing extremely expensive litigation.
According to The New Yorker, no corporation was daring enough to try the Texas two-step until 2017, when Koch Industries used it to shield subsidiary Georgia-Pacific from asbestos claims related to its paper and building products.
The parent company formed a Texas corporation called Bestwall, which declared bankruptcy in North Carolina three months later, spinning off all the asbestos-related liabilities while allowing Georgia-Pacific to continue making billions of dollars in profits through its other products such as Brawny paper towels, Quilted Northern toilet paper, and Dixie cups.
J&J is the fourth company to attempt the two-step; according to a recent Reuters investigation, the two-step plan was known internally as Project Plato. Project Plato has succeeded in pausing the lawsuits, and the company will be protected in perpetuity if it is granted a non-debtor release, which extends the shield of bankruptcy to non-bankrupt parties.
Non-debtor releases were used in the Purdue Pharma bankruptcy when members of the Sackler family sought to be spared future liability by contributing to the company’s opioid settlement fund. According to The New Yorker, these releases were also part of the bankruptcies that followed sexual-abuse cases against USA Gymnastics, the Boy Scouts of America, and Catholic dioceses around the country.
In all the cases, the bankruptcy of one entity was used by others to try to minimize financial liability.
J&J is seeking protection from both current suits and future talc litigation. Lindsey Simon, a professor at the University of Georgia School of Law, calls such corporate actors “bankruptcy grifters,” since they enjoy the benefits of bankruptcy but don’t suffer any of its burdens, such as transparency requirements, and they do so without going bankrupt. “They want the good parts of bankruptcy,” she told The New Yorker, “without any of the bad parts.”
Critics say that the point of Project Plato was to try to create an entity with limited assets: specifically, $2 billion to settle current and future claims – far less than the company’s assets. J&J has already spent nearly a billion dollars on its own legal defense.
Speaking late last year, Hanna Wilt who was sick with mesothelioma voiced fury over the delay in her baby powder lawsuit against the company.
“What I see is who can play the game best,” Wilt told NPR. “Big corporations trying to work the system in a way they don’t have to take full responsibility is not something new.”
Wilt died in February of this year at age 27.
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