The Latest Bankruptcy Maneuvers in Talc Powder and OxyContin Litigation

Johnson & Johnson (J&J) faces over 50,000 lawsuits alleging its talc powder products contain asbestos and have caused cancer in customers. J&J has already lost a number of talc powder litigation cases, resulting in over $4 billion in judgments. In an effort to protect itself from the potentially astronomical costs of the remaining talc powder lawsuits, J&J has tried twice — and failed both times — to file for bankruptcy in New Jersey. Now, J&J hopes to try again, this time in Texas. Meanwhile, in the OxyContin litigation, the Sackler family has recently learned that its attempt to use the bankruptcy process to protect itself has been rejected by the U.S. Supreme Court.  

What Is Chapter 11, and How Would It Help J&J?

Bankruptcy under Chapter 11 of the US Bankruptcy Code allows a person or company (a “debtor”) to reorganize its debts while still operating and, once its debts are paid, to emerge from Chapter 11 with a clean balance sheet. 

In a Chapter 11 case, the debtor comes up with a reorganization plan, assigns creditors to different “classes” (groups with similar claims), and determines a total dollar amount to be distributed among class members. Put another way, the plan caps the total amount the company has to pay out to all creditors in a class, typically leaving creditors to recover only a fraction of what they’re owed. 

All lawsuits against the debtor are “stayed” (paused) during the Chapter 11 case. Plaintiffs, like other creditors, are assigned to a class and paid only their share of the amount allocated to that class. For a company like J&J, facing a tsunami of litigation, the Chapter 11 payout cap can be company-saving.   

J&J’s Chapter 11 Quest — Starting with the “Texas Two-Step”

In 2021, J&J performed a “divisive merger,” permitted in only four states, including Texas, under which a J&J subsidiary (that had already assumed liability for all J&J talc powder litigation claims) split itself into two new entities. One of these, LTL, was assigned all of the talc powder litigation liabilities, and was also given access to billions of dollars of J&J funding to settle the cases. The other entity was given all other liabilities, plus assets. This was Step 1 in the so-called “Texas Two-Step.” Step 2 was having LTL file a Chapter 11 petition.

Attempt #1 (2021): Dismissed

LTL’s first Chapter 11 petition was dismissed because LTL failed to show good faith. Although Chapter 11 doesn’t require a debtor to be insolvent, it does require that the petition be in good faith — and not simply a litigation tactic. The Third Circuit, which heard the case on appeal, ruled that to show good faith, a debtor must prove imminent financial distress. The court held that because LTL had access to J&J funding, it was not in imminent financial distress; therefore, the filing was simply a bad faith litigation tactic. The New Jersey bankruptcy court dismissed the petition in April 2023.  

Attempt #2 (2023): Dismissed

Mere hours after the dismissal, LTL filed a second petition in the same court, claiming it could now show financial distress because (1) it had given up much of the J&J funding, and (2) given that J&J had recently been ordered to pay enormous judgments in some talc powder cases, the remaining cases would likely cripple the company. However, the bankruptcy court dismissed that petition for bad faith as well, because (1) LTL still had access to some J&J funding, and (2) LTL’s claimed financial distress was speculative, not imminent. J&J appealed the dismissal, but in July 2024, the Third Circuit upheld the decision.

Attempt #3 (2024): TBD

On May 1, 2024, J&J announced a new reorganization plan and said it intended to file a third Chapter 11 petition — this time in debtor-friendly Texas — if it were able to get 75% of talc powder litigation claimants to agree to the plan. J&J secured the requisite votes in late July; however, mere days before that, a bipartisan group introduced a law called the End Corporate Bankruptcy Abuse Act of 2024, which would direct courts to presume a bankruptcy filing is in bad faith if it involves the Texas Two-Step. J&J and the thousands of talc litigation plaintiffs now wait to see what effect the proposed law might have on J&J’s options going forward. The Texas bankruptcy court has said it will decide the case in 2025. 

A Different Chapter 11 Strategy: Purdue Pharma and the Sackler Family

Like J&J, Purdue Pharma (the maker of OxyContin) faces thousands of lawsuits. When the cases began to pile up around 2007, the Sackler family, who owns Purdue Pharma, took $11 billion out of the company. In 2019, Purdue Pharma filed a Chapter 11 petition, and as part of the process, the Sacklers offered to give back $4.3 billion in exchange for their release from all claims against the company. The bankruptcy court approved the deal, but the case was appealed. On June 27, 2024, the U.S. Supreme Court rejected the Sackler family’s proposal, holding that Chapter 11 discharges only the debtor’s prepetition debts, and does not provide relief to non-debtors like the Sacklers. 

Chapter 11’s Allure Isn’t Likely to Fade

Given the significant protections Chapter 11 provides, it’s unlikely there will ever be an end to the creative ways would-be debtors — particularly those facing massive amounts of litigation — come up with to avail themselves of this type of bankruptcy, even if the proposed anti-bankruptcy abuse law passes. Savvy lawyers representing companies, or creditors, will want to keep up in this area of law. 

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