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.

Just because you don’t pay ordered attorney fees doesn’t mean you’re in contempt of court, necessarily

New case out of the Central District of California Bankruptcy Court—Judge Robles’s court.

First a little background. For the past two years or so, the parties have been litigating in bankruptcy court. Not sure what the nature of the litigation was, but it doesn’t matter much for this opinion. Back in late 2019 (pre-pandemic era!), plaintiff won a $1.8 million dollar verdict (including attorney fees and costs of $600k). 

Defendant appealed the verdict to the 9th Circuit Bankruptcy Appellate Panel, but lost there too. When the matter came back to to the trial court, as the losing party on appeal, Judge Robles awarded $153k in additional attorneys’ fees (ouch) to be paid within 45 days. Defendant apparently did not make that payment.

The current case. Which brings us to the recent opinion. Because defendant didn’t pay the $153k in fees, plaintiff filed for an application for an order to show cause why the defendant should not be held in contempt and set a hearing on the application. Put a simpler way, the plaintiff wanted the judge to sanction the defendant for not paying the fees by calling it “contempt of court.” And they set a hearing.

Judge Robles, instead of holding the hearing on the application, issued an order denying the application and striking the hearing. He explained that the court would first have to grant the application and issue an order to show cause, which he had not done. He also explained that one cannot have a hearing about sanctions until the court issues that OSC order, which, again, did not happen.

Finally, he explained that using the court’s sanction power to enforce the attorney fee award was inappropriate because the fee award only made the plaintiff a judgment creditor.  Sanctions would only be appropriate if there had been some kind of misconduct, as the opinion reasons. 

For local practitioners, Judge Robles pointed to Local Bankruptcy Rule 9020-1 as the correct procedure to seek an order to show cause.

JL AM Plus v. MBN Real Estate Investments (Oct. 12, 2021).

The third degree of consanguinity

Bankruptcy Judge Kaufman recently dusted off some very old law books to explore both the deep legislative history of the Bankruptcy Code and also ancient English common law to figure out who a “relative” is under the Code.

The facts in Ehrenberg v. Halajyan (published) are not crystal clear but it appears that a Chapter 7 sued the debtor and his first cousin for a using his avoidance powers. The question was whether a first cousin qualifies as an “insider.”

For non bankruptcy practitioners, you may be curious what “avoidance powers” are. It’s a relatively complex topic, but in essence, these powers make it possible for a trustee to recover money if the debtor transfers property to an insider to avoid creditors or the bankruptcy liquidation process. Relatives are considered insiders.

But is a first cousin a “relative?”

It appears this case is the first time the question has come up in the Ninth Circuit. The Bankruptcy Code does not define it. It says that a relative is an “individual related by affinity or consanguinity within the third degree as determined by common law.”

But what does the Code mean by “common law” in this context? Eherenberg analyzed it as follows. First, the courts seem to agree common law refers to state law. But even that is unclear because there are different types of common law within states.

To explore the question further, the court had to explore the legislative history of the old Bankruptcy Act of 1898 (you should see the footnote), which led the court to explore, and apply, very old English common law to conclude that yes, indeed, a first cousin is an insider.

Judge Kaufman listed the case for publication.

Categorized as Bankruptcy