As the number of lawsuits alleging Johnson & Johnson’s talcum powder causes cancer neared 40,000 last fall, the drugmaker opted for a legal strategy known as the Texas Two-Step. He set up a new company, called LTL Management, to hold those liabilities and filed for bankruptcy to protect himself from claims.
Like other companies using this complex legal maneuver, J&J turned to Jones Day, one of America’s strongest law firms and two-time architect in Texas, to help them through the process.
Court documents show some of the company’s partners are earning billing rates of up to $1,450 an hour on the restructuring, which J&J rolled out in response to 38,000 legal claims that its baby powder was sometimes contaminated with carcinogenic asbestos. J&J has denied that its talc contains asbestos and can cause cancer.
Jones Day is charging similar rates to Bestwall, a subsidiary of Georgia-Pacific, which is a subsidiary of Koch Industries, and the first of four companies to roll out the bankruptcy plan since 2017.
Jones Day has claimed nearly $60 million in court-approved bankruptcy costs for its role as a two-step Texas business advisor – which leverages the state’s business-friendly laws to shed debt liabilities. asbestos, but which critics say amounts to fraudulent transactions.
Legal experts said the financial benefits for Jones Day to design and help companies implement Texas Two-Stage is likely worth hundreds of millions of dollars in total, as the court-approved fees are only a fraction of the total remuneration linked to the plan.
But the deployment of the maneuver by J&J – a $450 billion company whose official creed says it puts its customers first – has caused public outcry. Critics have argued that such tactics risk undermining the legitimacy of the US insolvency system and hinder justice for plaintiffs against big business.
There are signs that this lucrative deal flow may soon dry up. Lawmakers have drafted legislation in Congress aimed at stopping the practice, bankruptcy judges are more circumspect in such cases, and some asbestos plaintiffs are filing lawsuits to block bankruptcy claims.
A hearing on a talc plaintiffs’ motion to dismiss LTL’s bankruptcy will begin Feb. 14, setting a key two-step test for Texas.
Alexandra Lahav, a professor at the University of Connecticut School of Law, said the controversy generated by the $4.5 billion opioid settlement with members of the Sackler family – which rolled out a slightly different which was later canceled in December – had piled additional political pressure on the treatment of the courts. bankruptcy schemes.
“It makes me think that these adventurous attempts are going to be stopped and the optics are not good for the bankruptcy system. Judges are likely to step back from the more extreme uses of the system. But they have to borrow a legal way to get there,” she said.
Such a move could prove costly for Jones Day, which is America’s 10th most profitable law firm – it had $2.23 billion in revenue in 2020 according to AmLaw data. , and its funding partners each won an average of $1.3 million.
The Cleveland-based company has successfully marketed two-to-four Texas companies facing asbestos litigation – J&J, Georgia-Pacific, a US unit of Saint-Gobain and France-based Trane Technologies.
J&J paid Jones Day nearly $5 million in fees between March 30 and October 11, 2021 for legal advice on restructuring its business.
The strategy uses a Texas state law that allows companies to split into two separate entities and funnel all legal liabilities into one of them. The so-called “BadCo” entity then files an insolvency file. So far, the favored location has been the Western District of North Carolina — a federal district jurisdiction that sets the bar very high for creditors to reject a Chapter 11 filing.
A key feature of the maneuver is that personal injury claims are halted during the bankruptcy process, which can drag on for years.
Jonathan Ruckdeschel, an attorney who represents victims of asbestos-related disease, said the Texas two-step was an outrageous abuse of the bankruptcy court system by completely solvent companies.
“The strategy of Jones Day and its clients is to use the ‘automatic stay’ of litigation that applies in bankruptcy court as leverage to force Americans suffering and dying from asbestos disease to accept settlements significantly lower or to wait years until the fake ‘bankruptcy case’ is finally resolved,” he said.
Bankruptcy experts said the Texas two-step follows a pattern in which debtors have become much more aggressive in dealing with creditors over the past decade.
“It’s like a hard bankruptcy. We live in a decade where the normal rules are gone,” said Jared Ellias, a professor at the University of California Hastings College of the Law.
He said bankruptcy lawyers have become more creative and laws designed to prevent the ‘fraudulent transfer’ of assets in bankruptcy have not been enforced as rigorously by the courts as they were a decade ago. .
“J&J is a rather conservative company. But once the door opened to moves like Texas Two-Stroke, it was going to inspire other imitators,” Ellias said.
Sensing a change in the political atmosphere, creditors are fighting back.
Last week, asbestos plaintiffs sued Saint-Gobain, accusing the manufacturing giant of fraudulently moving its assets to avoid paying its asbestos-related debts in full.
Saint-Gobain denies the allegation and told the Financial Times that it established a trust as part of the bankruptcy process, which would allow “meritorious claimants” to receive faster payment of their claims.
J&J established a $2 billion trust to pay the talc claims. But critics said it was too little to cover its debts given that a single case involving 22 women with ovarian cancer in Missouri led to a $2.1 billion compensation l ‘last year.
J&J has warned it faces ‘relentless aggression’ from litigators based on false allegations and ‘well-documented abuses’ in the justice system for grand jury judgments in cases of talc. The potential costs of those claims could become “unsustainable,” he said in court papers outlining his reasoning for pursuing Texas’ two-step restructuring.
J&J said its goal is to achieve a fair and equitable resolution for the plaintiffs. He added that courts have “uniformly recognized” that fairly resolving these types of claims through Chapter 11 is a legitimate use of the restructuring process.
Jones Day declined to comment on his role. But court documents show his lawyers played a central role in the bankruptcy process of Trane Technologies subsidiaries Aldrich Pump and Murray Boiler, as they attended board meetings and took minutes.
Carl Tobias, a law professor at the University of Richmond, said Jones Day’s success to date in persuading judges to allow their clients to take advantage of Texas’ two-step to protect their assets illustrates the importance that law firms may have to develop, employ and convince clients. to deploy such legal mechanisms.
Jones Day’s leading role in the bankruptcy of J&J’s talc subsidiary, LTL, drew criticism from the US Trustee, a division of the Justice Department that oversees bankruptcy cases. He objected to Jones Day representing the J&J unit filing for insolvency due to his previous and ongoing work for the pharmaceutical company.
“It appears that Jones Day is not disinterested and holds an adverse interest against the estate,” the trustee said in a court filing, which also noted that the law firm appeared to be the “architect” of the merger. divisional officer who raised questions about the conflicts. of interests.
Courts are now looking closely at both Texas stages. In November, the judge handling J&J’s North Carolina subsidiary bankruptcy case transferred the case to New Jersey — the jurisdiction where it faces most of its talc lawsuits and where the pharmaceutical company is based.
Judge Craig Whitley said J&J’s LTL subsidiary was “manufacturing a forum and creating a place to file for bankruptcy” by filing in North Carolina.
“Even without any evidence of bad faith, courts are not bound to tolerate every strategy devised by clever lawyers to frustrate the legal objective,” he added.
Lawyers representing the talc plaintiffs asked the New Jersey court to dismiss the bankruptcy case filed by the J&J subsidiary. New bankruptcy judge Michael Kaplan said last week he would rule on the application before the end of February.
A rejection of bankruptcy by Kaplan could complicate J&J’s strategy to spin off its consumer business, which could find itself struggling with talc liabilities. It could damage the reputation of a company that prides itself on being “good citizens”, critics said.
Some experts said it also raised questions about legal ethics.
Edward Janger, a professor at Brooklyn Law School, said J&J’s strategy of insulating its assets from talc claims was unlikely to work long term, but it had set them back.
“They are throwing obstacles in the way to increase costs and obscure the path to resolving the case on the merits. It’s a bit depressing,” he said.
“For Jones Day, the question is: what is the limit of zealous representation? Janger said.