Johnson & Johnson tries to leverage bankruptcy

Yesterday, Johnson and Johnson made a daring legal move to try to leverage the bankruptcy system to deal with all the lawsuits it’s facing over baby powder.

In case you haven’t been following along, there have been reports and allegations that baby powder, which has been used by households for decades and sold by Johnson and Johnson are cancerous. The talcum powder, as it is more generically known, in fact may have contained asbestos and there are allegations that the company knew about the dangers of the products and did nothing.

In fact, a group of women won an almost $5 billion dollar personal injury class action suit against Johnson and Johnson in Missouri back in 2018, which was a record.

The company continues to face thousands of lawsuits today, so you can imagine if just a few of those cases survive, it could financially destroy the company.

So the company did something called “brazen” by the American Association for Justice, and created a new subsidiary called LTL Management LLC. Roughly, it assigned the talcum (baby powder) assets to LTL, funded it with $2 billion to cover future claims, and promptly put LTL into bankruptcy. (Read more details in this Reuters article.)

Under the Bankruptcy Code, the automatic stay of Section 362 (known as the most power legal device in existence) kicks in and immediately halts all the pending lawsuits (among many other things it does). It doesn’t eliminate the suits, but it does pause them momentarily until a plan can be worked out in bankruptcy court.

J&J will mostly likely attempt to get a reorganization plan approved, arguing the the $2 billion in funding as well as the ongoing overseas operations (they stopped selling baby powder in the US), will be enough to fund the lawsuits if they win.

However, it’s almost certain that there will be some major drama in the bankruptcy court because the plaintiffs and other creditors will seek to dismiss the bankruptcy case on bad faith and other grounds.

Stay tuned–will be interesting to see what happens next.