The LTL Management, LLC (“LTL” or the “Debtor”) bankruptcy saga may be coming to an end for a second time, at least for now. 

On January 30, 2023, the Third Circuit issued its opinion reversing the Bankruptcy Court after finding that the first bankruptcy case (Case No. 21-30589) was filed in bad faith, and remanding it with the instruction to dismiss the case.  In re LTL Mgmt., LLC, 64 F.4th 84, 111 (3d Cir. 2023).  The Third Circuit held that the first bankruptcy case was filed in bad faith.  The Third Circuit announced that there are two inquiries that a debtor must establish to satisfy the good faith requirement: “(1) whether the petition serves a valid bankruptcy purpose and (2) whether [it] is filed merely to obtain a tactical litigation advantage.”  In re LTL Mgmt., LLC, 64 F.4th 84, 100-01 (3d Cir. 2023) (citing In re 15375 Mem’l Corp. v. BEPCO, L.P., 589 F.3d 605, 618 (3d Cir. 2009) and In re Integrated Telecom Express, Inc., 384 F.3d 108, 119-20 (3d Cir. 2004)).  The Third Circuit held that the Debtor did not suffer immediate financial distress, and without financial distress, there is no valid bankruptcy purpose.  Id. at 102.

On April 4, 2023, the Bankruptcy Court entered an order dismissing the first bankruptcy case. Thereafter, approximately two hours after the dismissal of the first LTL bankruptcy case, LTL filed the second Chapter 11 bankruptcy in New Jersey, which proposed a trust funded in the amount of approximately $12.08 billion over 25 years ($8.9 billion on a net present value basis).  Shortly after the second bankruptcy case was filed, various parties, including, the TCC, the U.S. Trustee; the ad hoc committee of states holding consumer protection claims, New Mexico and Mississippi, and other talc claimant representatives filed motions to dismiss the second bankruptcy case. 

After conducting a four-day trial on the motions to dismiss, on July 28, 2023, the Bankruptcy Court granted the motions to dismiss and held that the LTL’s second bankruptcy was filed in bad faith.  [Doc. No. 1127] at p. 3.  In following the Third Circuit’s guidance, the Bankruptcy Court began its analysis by analyzing whether LTL is in “financial distress.”  Id. at p. 15.  The Bankruptcy Court stated that the “threshold issue for a Chapter 11 filing is not ‘insolvency’ but ‘financial distress.’”  Id. at 20.  While recognizing that LTL faces substantial liability due to the countless lawsuits, as well as the billions of dollars incurred as a result of judgments, settlements, and litigation costs, the Bankruptcy Court found that LTL was solvent, with the assistance of its parent, Johnson & Johnson HoldCo (NA) Inc., and the 2023 Funding Agreement.  Id. at pp. 18-20.  Pursuant to the 2023 Funding Agreement, the Debtor “was contractually entitled to a funding backstop that allowed it to access the value of HoldCo’s significant cash holdings, anticipated annual dividends, and equity interests having a value approaching $30 billion—exceeding the projected near term and aggregate talc liability.”  Id. at p. 25.   The Bankruptcy Court also ruled that the Debtor could not satisfy the requirements of section 1112(b)(2) of the Bankruptcy Code, finding that “dismissal under § 1112(b)(2) is intended for use where ‘cause’ for dismissal is based on ‘technical mistakes’ or other procedural and ministerial failings.”  Id. at p. 35.  Finally, the Bankruptcy Court declined to appoint an examiner or Chapter 11 trustee finding that it would not be in the best interests of the creditors.  Id. at pp. 36-38.

It is anticipated that the Bankruptcy Court’s dismissal of the second bankruptcy case will be appealed. Notably, while the Bankruptcy Court’s decision does not strike down the “Texas Two-Step” or eliminate the possibility of resolving mass torts in bankruptcy, it does stress the requirement that the debtor must be in “financial distress” to utilize the protections afforded by the Bankruptcy Code.  If the Bankruptcy Court’s decision is affirmed, the talc claimants will have to rely on litigation that may take decades to resolve, unless, at some point in the future, LTL can demonstrate “financial distress.”