Now that the United States Supreme Court has agreed to expeditiously hear the U.S. Trustee’s appeal of the plan confirmation and settlement in Purdue Pharma,2 lawyers following the LTL Management LLC bankruptcy case, version 2, (“LTL2”)3 are discussing possible ramifications for J&J. The issue on appeal in Purdue is whether the bankruptcy court had the authority to release members of the Sackler family from the claims being made by opioid claimants and victims. Over 138,000 individuals filed claims in the Purdue bankruptcy case.4 The Sacklers have agreed to contribute $6 billion of funding in support of Purdue Pharma’s plan. However, it has been alleged that they had taken out substantially more than that as the result of OxyContin sales and the settlement has been criticized as directly distributing only $1.3 billion of the $6 billion to opioid victims. The remaining funds would largely be used toward education and abatement of future opioid addiction while qualified individual victims or families each may be paid between $3,500 and $48,000 depending on the applicability of various factors related to the addiction and opioid use of the claimant. Payment of the $6 billion contribution was conditioned on the Sacklers receiving a complete release of liability for opioid-related claims. Notably, Purdue Pharma’s confirmed plan kept its profitable non-opioid assets, which will be sold or operated for the benefit of the opioid creditors. Interestingly, the appeal was brought by the U.S. Trustee and opposed by victims’ groups which are eager to receive any payments on account of their claims.5
LTL faces a different type of mass tort liability based on claims of personal users of talc products that have been alleged to contain asbestos and cause ovarian cancers and mesothelioma. LTL’s first bankruptcy was dismissed as a bad faith filing and LTL filed its second bankruptcy two hours and eleven minutes after the dismissal order was docketed. Through a series of transactions identified in the second bankruptcy, LTL’s parent agreed to fund payment of those and some other claims related to talc in the amount of $8.9 billion. To the extent that the parent was unable to provide that funding, and assuming a plan satisfactory to J&J was confirmed, J&J would ante up any underfunding of the $8.9 billion, but only if J&J were provided a complete release of all talc and talc-related claims, including those for which LTL would not be liable. Many parties, including talc claimants, certain states, and the U.S. Trustee objected to that structure. The question presented is the same as that in Purdue Pharma: does the bankruptcy court have the authority to grant releases from the claims against a nondebtor, made by tort claimants and other nondebtors, without their consent?
The Supreme Court’s acceptance of the appeal in Purdue Pharma, with expedited briefing and argument due by the end of this year, undoubtedly calls into question the strategy used by J&J and several other companies that employ bankruptcy as a method to relieve non-debtors of liability.
For example, J&J used the “Texas Two-Step” to restructure the subsidiary J&J alleged was facing responsibility for most of the talc claims by moving all of its talc liability into one company (LTL) that was later put into bankruptcy with the goal of obtaining releases for the debtor and affiliates. Meanwhile substantially all the assets were transferred into another company that conducted its business free from any court oversight. The recent dismissal of LTL2 and of Aearo Technologies6 (the 3M company) based on a lack of financial distress that is a precursor to the ability to access bankruptcy relief likewise has added pressure to push forward with a mechanism that will enable non-consensual third-party releases covering both current and future claims.
The problem is exacerbated because the only assured way an entity can achieve this result for both current and future claims is to link those claims to asbestos and go through a bankruptcy process that specifically authorizes an injunction prohibiting claims against the debtor and for derivative liability of certain other parties when they satisfy the strictures of 11 U.S.C. section 524(g). Nothing in the Bankruptcy Code authorizes that form of relief aside from asbestos. And nothing in the Bankruptcy Code authorizes releases for the direct, non-derivative liability of a non-debtor.
Despite the lack of specific authorization, courts have permitted non-debtors to obtain releases when the non-debtor meets certain conditions, including making a substantial contribution to a plan, when a very high percentage of claimants consent to the third party releases. The forced release of claims held by non-consenting claimants has been and continues to be problematic. Whether a bankruptcy court has the authority to approve that forced result has not received a positive answer in all the Courts of Appeals. Now it appears that the Supreme Court will take up the mantle of imposing an outcome that will bind all the courts in all the circuits.
For J&J, the clock is ticking. Considering yet a third bankruptcy filing for LTL should surely demand caution, yet trying to bind future claimants to a traditional non-bankruptcy settlement is unlikely to produce the desired denouement for J&J. Considering non-traditional, non-bankruptcy settlements is certainly an option but any effort at transferring liabilities to another entity without sufficient assets to pay them when J&J currently has the wherewithal to pay is risking lawsuits based on actual or constructive fraud, at least. Settlements through Multi-District Litigation or class actions or even on a plaintiff by plaintiff basis are additional options; each option comes loaded with concerns as to what happens to those who have been exposed to J&J’s talc, are not yet symptomatic, but become so later. A benefit to a bankruptcy was that a tort-feasor’s assets were not all depleted in paying those plaintiffs who filed cases early on while assets were available. Maybe there is a road to resolution through the Imerys bankruptcy,7 in which J&J also faces liability. Whatever path is chosen is rife with problems.
Perhaps J&J is willing to let time pass and wait to see what happens to it and its affiliates’ stock prices and ability to access the capital markets as more and more claims are filed against them. Based on the evidence submitted at the dismissal hearing in LTL2, time is not on J&J’s side in devolving into financial distress sufficient to enable another bankruptcy. The Supreme Court may well resolve the question whether a bankruptcy court has the requisite authority to impose non-consensual releases generally before the issue of whether a company is ineligible to file bankruptcy without recognizable financial distress reaches that Court.
1 The author is a consultant to certain entities that participate in the LTL bankruptcy. The views expressed herein are her own.
2 In re Purdue Pharma L.P., Bkr. Case No. 19-23649, filed in the U.S. Bankruptcy Court for the Southern District of New York.
3 In re LTL Management LLC, Bkr. Case No. 23-12825, filed in the U.S. Bankruptcy Court for the District of New Jersey.
4 The issue that the Supreme Court is taking up is “Whether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.” See Misc. Order granting certiorari, Harrington v. Purdue Pharma, L.P., — U.S. —, Case No. 23-124 (Aug. 10, 2023 (23A87)).
5 The governmental and personal injury claimant classes voted in favor of the plan by margins exceeding 95%.
6 In re Aearo Technologies LLC, Bkr. Case No. 22-02890, filed in the U.S. Bankruptcy Court for the Southern District of Indiana (Indianapolis Division).
7 In re Imerys Talc America, Inc., Bkr. Case No. 19-10289, pending in the U.S. Bankruptcy Court for the District of Delaware.
August 15, 2023
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