Third Circuit says J&J can’t create a subsidiary to unload its liabilities

Also: States aggressively push to limit corporate liability for causing harm

2023 March

Washington Update

I have great news to share. In In re LTL Mgt, LLC, the Third Circuit, in a unanimous decision on Jan 30, reversed the bankruptcy court’s rejection of claimants’ motion to dismiss the petition and automatic stay of litigation against non-debtor Johnson & Johnson. AAJ filed an amicus brief in the case, which was authored by AAJ Senior Associate General Counsel Jeffrey White.

As many of you know, Johnson & Johnson has been strongly criticized for using the “Texas Two-Step” to create a subsidiary to take on J&J’s liabilities. The subsidiary, LTL Management, then filed for Chapter 11 protection against the claims of thousands of women who have developed mesothelioma, ovarian cancer, and other diseases due to their use of Johnson’s Baby Powder.

The court concluded that the bankruptcy court erred in determining that LTL’s Chapter 11 petition was filed in good faith. The court stated that good intentions are not the test. It concluded, “What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not.”

The court stated that the bankruptcy court all but ignored the Funding Agreement, which obligated the parent company to provide “a funding backstop, not unlike an ATM disguised as a contract, that [LTL] can draw on to pay liabilities,” up to a limit of $61.5 billion. The court also indicated that the anticipated liabilities LTL would face were overstated “back-of-the-envelope forecasts of hypothetical worst-case scenarios.”

Because Congress intended the Bankruptcy Code to provide protections for companies in actual financial distress, and because LTL could not be deemed in danger of exhausting its resources, the Chapter 11 filing did not serve a bankruptcy purpose. The court therefore ordered the petition to be dismissed.

The disgraceful corporate abuse of bankruptcy laws represents the new face of tort reform and an existential threat to the average American’s right to pursue justice. AAJ will continue the fight to end this shameful practice and keep the courthouse doors open for everyone.

Volunteer for AAJ’s Student Trial Advocacy Competition

AAJ is seeking judges for our annual Student Trial Advocacy Competition, which will be hybrid this year. We have 160 teams competing from around the country, and over 650 new law student members will experience AAJ for the first time. Sign up to volunteer for the regional rounds at https://www.justice.org/judgeforstac or email This email address is being protected from spambots. You need JavaScript enabled to view it.. The regional rounds will take place via Zoom March 2-March 5, 2023, and the national finals will take place in New Orleans March 30-April 2, 2023. Thank you so much to our members who have helped coordinate this year’s event.

AAJ state affairs update

Nearly every state legislature is currently in session, and AAJ State Affairs and the state trial lawyer associations have already seen aggressive pushes to limit the ability of Americans to hold corporations accountable when they cause harm.

One of the early trends that we’ve observed is a series of “special pleading” or “heightened pleading” requirements in state legislation. If these bills were enacted, they would establish a procedural barrier to court access by placing draconian evidentiary requirements on plaintiffs before they even have the opportunity to engage in discovery – essentially, moving up summary judgment for defendants. These heightened pleading standards are most prominently part of the American Legislative Exchange Council’s (ALEC) and the U.S. Chamber’s model legislation targeting asbestos litigation, which has been filed in a handful of states. It has also appeared in legislation filed in Texas that would enact special pleading requirements for certain transportation network companies (TNC)-related cases.

We are keeping an eye on many other bills, including legislation that would make it harder to hold trucking companies accountable following crashes, that would enact caps on damages, and that would give insurance companies an unfair advantage in litigation by imposing onerous, one-sided disclosures of litigation financing. AAJ State Affairs is working closely with your state TLA to fight back against legislation that would make it harder for your clients to find justice.

Fighting for you and your clients

Thank you for your ongoing support. AAJ will continue to fight for access to justice for your clients. We will keep you informed about important developments and welcome your input. You can reach me at This email address is being protected from spambots. You need JavaScript enabled to view it..