In Re. LTL Management
In Re. LTL Management
In Re. LTL Management
PRECEDENTIAL
v.
2
Case: 22-2003 Document: 150 Page: 3 Date Filed: 01/30/2023
Brad J. Axelrod
Skadden Arps Slate Meagher & Flom
One Rodney Square
920 North King Street, 7th Floor
Wilmington, DE 19801
Caitlin K. Cahow
Brad B. Erens
Jones Day
110 North Wacker Drive
Suite 4800
Chicago, IL 60606
Paul R. DeFilippo
Wollmuth, Maher & Deutsch
500 Fifth Avenue
12th Floor
New York, NY 10110
Kristen R. Fournier
King & Spalding
1185 Avenue of the Americas
New York, NY 10036
Kathleen A. Frazier
Shook, Hardy & Bacon
600 Travis Street
JP Morgan Chase Tower, Suite 3400
Houston, TX 77002
3
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Gregory M. Gordon
Daniel B. Prieto
Mark W. Rasmussen
Amanda Rush
Jones Day
2727 North Harwood Street
Suite 600
Dallas, TX 75201
Robert W. Hamilton
Jones Day
901 Lakeside Avenue
North Point
Cleveland, OH 44114
James M. Jones
Jones Day
500 Grant Street
Suite 4500
Pittsburgh, PA 15219
4
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Glenn M. Kurtz
Jessica C. Lauria
White & Case
1221 Avenue of the Americas
New York, NY 10020
James N. Lawlor
Joseph F. Pacelli
Wollmuth, Maher & Deutsch
500 Fifth Avenue
12th Floor
New York, NY 10110
C. Kevin Marshall
Jones Day
51 Louisiana Avenue, N. W.
Washington, DC 20001
Matthew L. Tomsic
Rayburn, Cooper, Durham
227 West Trade Street
Suite 1200
Charlotte, NC 28202
5
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Lyndon M. Treeter
Wollmuth, Maher & Deutsch
12th Floor
New York, NY 10110
Melanie L. Cyganowski
Adam C. Silverstein
Otterbourg
230 Park Avenue
29th Floor
New York, NY 10169
Angelo J. Genova
Genova Burns
494 Broad Street
Newark, NJ 07102
Jonathan S. Massey
Massey & Gail
1000 Maine Avenue, S. W.
Suite 450
Washington, DC 20024
6
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David J. Molton
Michael S. Winograd
Brown Rudnick
7 Times Square
47th Floor
New York, NY 10036
Sunni P. Beville
Shari I. Dwoskin
Jeffrey L. Jonas
Brown Rudnick
One Financial Center
Boston, MA 02111
Donald W. Clarke
Wasserman, Jurista & Stolz
110 Allen Road
Suite 304
Basking Ridge, NJ 07920
Daniel Stolz
Genova Burns LLC
110 Allen Road
Suite 304
Basking Ridge, NJ 07920
7
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Jennifer S. Feeney
Otterbourg
230 Park Avenue
29th Floor
New York, NY 10169
Leonard M. Parkins
Charles M. Rubio
Parkins & Rubio
700 Milam Street
Pennzoil Place, Suite 1300
Houston, TX 77002
Robert J. Stark
Brown Rudnick
7 Times Square
47th Floor
New York, New York 10036
Jeffrey M. Dine
Karen B. Dine
Pachulski Stang Ziehl & Jones
780 Third Avenue
34th Floor
New York, NY 10017
8
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Matthew Drecun
David C. Frederick (Argued)
Ariela Migdal
Gregory G. Rapawy
Kellogg Hansen Todd Figel & Frederick
1615 M Street, N.W.
Sumner Square, Suite 400
Washington, DC 20036
Laura D. Jones
Peter J. Keane
Colin R. Robinson
Pachulski Stang Ziehl & Jones
919 North Market Street
P. O. Box 8705, 17th Floor
Wilmington, DE 19801
Isaac M. Pachulski
Pachulski Stang Ziehl & Jones
10100 Santa Monica Boulevard
Suite 2300
Los Angeles, CA 00067
9
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Samuel M. Kidder
Nir Maoz
Robert J. Pfister
Michael L. Tuchin
Klee, Tuchin, Bogdanoff & Stern
1801 Century Park East
26th Floor
Los Angeles, CA 90067
Paul J. Winterhalter
Offit Kurman
99 Wood Avenue South
Suite 302
Iselin, NJ 08830
Allen J. Underwood, II
Lite, DePalma, Greenberg & Afanador
570 Broad Street
Suite 1201
Newark, NJ 07102
Mark Tsukerman
Cole Schotz
1325 Avenue of the Americas
19th Floor
New York, NY 10019
10
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Felice C. Yudkin
Cole Schotz
25 Main Street
Court Plaza North, P.O. Box 800
Hackensack, NJ 07601
Arthur J. Abramowitz
Alan I. Moldoff
Ross J. Switkes
Sherman, Silverstein, Kohl, Rose & Podolsky
308 Harper Drive
Suite 200, Eastgate Corporate Center
Moorestown, NJ 08057
Kevin W. Barrett
Maigreade B. Burrus
Bailey & Glasser
209 Capitol Street
Charleston, WV 25301
Thomas B. Bennett
Brian A. Glasser
Bailey & Glasser
1055 Thomas Jefferson Street, N.W.
Suite 540
Washington, DC 20007
11
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Michael Klein
Evan M. Lazerowitz
Lauren A. Reichardt
Erica J. Richards
Cullen D. Speckhart
Cooley
55 Hudson Yards
New York, NY 10001
James C. Lanik
Jennifer B. Lyday
Thomas W. Waldrep
Waldrep, Wall, Babcock & Bailey
370 Knollwood Street
Suite 600
Winston-Salem, NC 27103
Kevin L. Sink
Waldrep, Wall, Babcock & Bailey
3600 Glenwood Avenue
Suite 210
Raleigh, NC 27612
Lauren Bielskie
Jeffrey M. Sponder
Office of United States Trustee
1085 Raymond Boulevard
One Newark Center, Suite 2100
Newark, NJ 07102
12
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Cory L. Andrews
John M. Masslon, II
Washington Legal Foundation
2009 Massachusetts Avenue, N. W.
Washington, D. C. 20036
R. Craig Martin
DLA Piper
1202 North Market Street
Suite 2100
Wilmington, DE 19801
Ilana H. Eisenstein
DLA Piper
1650 Market Street
One Liberty Place, Suite 5000
Philadelphia, PA 19103
13
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Natalie D. Ramsey
Robinson & Cole
1650 Market Street
One Liberty Place, Suite 3030
Philadelphia, PA 19103
Jaime A. Santos
Benjamin T. Hayes
Goodwin Procter
1900 N. Street, N. W.
Washington, D. C. 20036
Sean E. O’Donnell
Stephen B. Selbst
Steven B. Smith
Herrick Feinstein
2 Park Avenue
New York, NY 10016
14
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Peter M. Friedman
O’Melveny & Myers
1625 Eye Street, N. W.
Washington, D. C. 2006
Emma L. Persson
Laura L. Smith, Esq.
O’Melveny & Myers
2501 North Harwood Street
Suite 1700
Dallas, TX 75201
Daniel S. Shamah
O'Melveny & Myers
7 Times Square
Time Square Tower, 33rd Floor
New York, NY 10036
15
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Glen Chappell
Allison W. Parr
Hassan A. Zavareei
Tycko & Zavareei
2000 Pennsylvania Avenue, N.W.
Suite 1010
Washington, DC 20006
Jeffrey R. White
American Association for Justice
777 6th Street, N.W.
Suite 200
Washington, DC 20001
Thomas A. Pitta
Emmet, Marvin & Martin
120 Broadway
32nd Floor
New York, NY 10005
16
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_________________
17
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I. BACKGROUND
18
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19
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1
The talc litigation also involves claims regarding Shower to
Shower, a different talc-containing product initially produced
by J&J and later by Old Consumer and its predecessors. LTL
maintains intercompany transactions involving J&J and Old
Consumer ultimately made the latter responsible for all claims
stemming from Shower to Shower. Because the talc litigation
concerns mainly Johnson’s Baby Powder, for convenience
references herein to that name may include other talc products.
20
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21
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22
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2
Adam Lisman, assistant controller for J&J, suggested in his
trial testimony that it was J&J’s general policy to consider the
next 24 months when calculating contingent costs under
GAAP.
23
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and liabilities between the two new entities, and terminates the
original entity. While some pejoratively refer to it as the first
step in a “Texas Two-Step” when followed by a bankruptcy
filing, we more benignly call it a “divisional merger.”
3
A slightly abbreviated summary of the many steps is as
follows. Old Consumer merged into Chenango Zero, LLC, a
Texas limited liability company and indirect, wholly owned
subsidiary of J&J (“Chenango Zero”), with Chenango Zero
surviving the merger. Chenango Zero (formerly Old
Consumer) effected a divisional merger under the Texas
Business Organizations Code by which two new Texas limited
liability companies were created, Chenango One LLC
(“Chenango One”) and Chenango Two LLC (“Chenango
Two”), and Chenango Zero ceased to exist. Chenango One
then converted into a North Carolina limited liability company
and changed its name to “LTL Management LLC.” Chenango
Two merged into Curahee Holding Company Inc., the direct
parent company of LTL (“Curahee”). Curahee survived the
merger and changed its name to “Johnson & Johnson
Consumer Inc.” (now New Consumer).
4
On the day of the divisional merger, the Funding Agreement
was executed by Chenango Zero (formerly Old Consumer), as
24
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payee, along with J&J and Curahee, as payors. Then, per the
divisional merger, LTL was allocated rights as payee under the
Funding Agreement, replacing Chenango Zero. Chenango
Two (which assumed Old Consumer’s assets not allocated to
LTL) then merged into Curahee, one of the two original payors,
and became New Consumer.
5
LTL’s liability was for all talc claims except those where the
exclusive remedy existed under a workers’ compensation
statute or similar laws.
25
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6
For LTL to require J&J and New Consumer to fund, certain
customary representations and warranties made by LTL must
be true, such as those addressing its good standing under state
law, the due authorization of the Funding Agreement, and the
absence of any required governmental approval. And LTL
must not have violated its covenants, specifically, that it will
use the funds for only permitted uses and materially perform
its indemnification obligations owed to New Consumer for all
talc liabilities as set out in the plan of divisional merger.
7
In each calculation of New Consumer’s value, its obligation
under the Funding Agreement is not included.
26
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27
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8
In the Fourth Circuit, a court can only dismiss a bankruptcy
petition for lack of good faith on a showing of the debtor’s
“subjective bad faith” and the “objective futility of any
possible reorganization.” Carolin Corp. v. Miller, 886 F.2d
693, 694 (4th Cir. 1989). The Bankruptcy Court in the District
of New Jersey described this as a “much more stringent
standard for dismissal of a case for lacking good faith” than the
Third Circuit’s test. App. 13 (Mot. to Dismiss Op. 13).
Perhaps not by coincidence then, debtors formed by divisional
mergers and bearing substantial asbestos liability seem to
prefer filing in the Fourth Circuit, with four such cases being
filed in the Western District of North Carolina in the years
before LTL’s filing. See In re Bestwall LLC, Case No. 17-
31795 (Bankr. W.D.N.C.); In re DBMP LLC, Case No. 20-
30080 (Bankr. W.D.N.C.); In re Aldrich Pump LLC, Case No.
20-30608 (Bankr. W.D.N.C.); In re Murray Boiler LLC, Case
No. 20-30609 (Bankr. W.D.N.C.).
28
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29
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9
Under certain conditions, the injunction can also channel to
the trust claims against third parties affiliated with the debtor.
11 U.S.C. § 524(g)(4).
30
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10
In the separate opinion explaining its order preserving the
injunction of Third-Party Claims against Protected Parties, the
Court held that “unusual circumstances” warranted extension
of the automatic stay to those claims under Bankruptcy Code
§§ 362(a)(1) and 362(a)(3). It also held that Bankruptcy Code
§ 105(a) provided it independent authority to issue a
preliminary injunction enjoining them. App. 140 (Third-Party
Inj. Op.).
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II. ANALYSIS
A. Standard of Review
11
The parties contest whether the Bankruptcy Court had
jurisdiction to issue the order enjoining the Third-Party Claims
against the Protected Parties. Dismissing LTL’s petition
obviates the need to reach that question.
32
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B. Good Faith
33
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faith constitutes “cause,” though it does not fall into one of the
examples of cause specifically listed in the statute. See In re
SGL Carbon Corp., 200 F.3d 154, 159-62 (3d Cir. 1999).
Because the Code’s text neither sets nor bars explicitly a good-
faith requirement, we have grounded it in the “equitable nature
of bankruptcy” and the “purposes underlying Chapter 11.” Id.
at 161-62 (“A debtor who attempts to garner shelter under the
Bankruptcy Code . . . must act in conformity with the Code’s
underlying principles.”).
34
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35
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36
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37
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38
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12
See Report of the National Bankruptcy Review Commission
343-44 (Oct. 20, 1997) (recognizing claims-estimation
accuracy is an important component of the integrity of the mass
tort bankruptcy process and noting underestimation of claims
occurred in the Johns-Manville case, one of the earliest
asbestos bankruptcy cases, while also pointing to the adequate
funding of trusts in subsequent cases to show those risks are
surmountable).
13
For instance, the A.H. Robins claimants’ trust has been
recognized as one that functioned effectively and remained
solvent for years. There the Court and stakeholders had the
benefit of data from 15 years of tort litigation by A.H. Robins
before its filing. See Report of the National Bankruptcy
Review Commission 328 n.813, 344-45 (Oct. 20, 1997) (citing
Jack B. Weinstein, Individual Justice in Mass Tort Litigation:
The Effect of Class Actions, Consolidations, and other
Multiparty Devices 280 n.88, 326 n.149 (Northwestern Press
1995), and Ralph R. Mabey & Peter A. Zisser, Improving
Treatment of Future Claims: The Unfinished Business Left by
the Manville Amendments, 69 Am. Bankr. L.J. 487, 497 n.45
(1995)).
39
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14
See, e.g., Little Creek Dev. Co. v. Commonw. Mortg. Corp.
(In re Little Creek Dev. Co.), 779 F.2d 1068, 1072 (5th Cir.
1986) (“Determining whether the debtor’s filing for relief is in
good faith depends largely upon the bankruptcy court’s on-the-
spot evaluation of the debtor’s financial condition, motives,
and the local financial realities.”); Cedar Shore Resort, Inc.,
235 F.3d at 379-80 (in evaluating good faith, courts “consider
the totality of the circumstances, including . . . the debtor’s
financial condition, motives, and the local financial realities”;
dismissing petition, in part, because the debtor was “not in dire
financial straits”); In re James Wilson Assocs., 965 F.2d 160,
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170 (7th Cir. 1992) (recognizing that, while the Code permits
a firm to file though it is not insolvent, such filings usually
involve “impending insolvency”); Cohoes Indus. Terminal,
931 F.2d at 228 (in the context of whether a petition was
frivolous under Bankruptcy Rule 9011, stating “[a]lthough a
debtor need not be in extremis in order to file[,] . . . it must, at
least, face such financial difficulty that, if it did not file at that
time, it could anticipate the need to file in the future”); see also,
e.g., Barclays-Am./Bus. Credit, Inc. v. Radio WBHP, Inc. (In
re Dixie Broad., Inc.), 871 F.2d 1023, 1027-28 (11th Cir. 1989)
(stating that whether a debtor is “financially distressed” is one
factor evidencing bad faith and that “the Bankruptcy Code is
not intended to insulate ‘financially secure’ [debtors]”);
Carolin Corp., 886 F.2d at 701 (one prong of the good-faith
inquiry is meant to ensure the petition bears “some relation to
the statutory objective of resuscitating a financially troubled
[debtor]”) (brackets in original) (citing Connell v. Coastal
Cable T.V., Inc. (In re Coastal Cable T.V., Inc.), 709 F.2d 762,
765 (1st Cir. 1983)).
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15
While, as described above, the uses for which LTL may draw
on the payment right change in bankruptcy (i.e., LTL is
permitted to draw on it to fund a claimant trust and satisfy
administrative expenses), we focus on the rights available to it
just prior to its filing for good-faith purposes.
46
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16
Because we arrive at the same result assuming the
Bankruptcy Court was correct to determine LTL was
responsible to indemnify J&J for all talc costs it incurs, we
need not opine on this conclusion. Still, we note certain
pertinent factors lack full discussion in the Court’s analysis of
the indemnity agreement relating to Johnson’s Baby Powder in
the 1979 Spin Off. App. 163-69 (Third-Party Inj. Op. 24-30).
For example, it is not obvious LTL must indemnify J&J for the
latter’s independent, post-1979 conduct that is the basis of a
verdict rendered against it. See App. 4957 (Agreement for
Transfer of Assets and Bill of Sale 5 ¶ 4) (Old Consumer’s
predecessor agrees to assume and indemnify J&J against
“all . . . liabilities and obligations of every kind and description
which are allocated on the books or records of J&J as
pertaining to the BABY Division.”) (emphasis added). It is
also not clear the indemnity should be read to reach punitive
damage verdicts rendered against J&J for its own conduct.
Additionally, the Court never discussed how it reached its
conclusion that Old Consumer assumed responsibility from
J&J for all claims relating to Shower to Shower.
50
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51
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We take J&J and LTL at their word and agree. LTL has
a funding backstop, not unlike an ATM disguised as a contract,
that it can draw on to pay liabilities without any disruption to
its business or threat to its financial viability. It may be that a
draw under the Funding Agreement results in payments by
New Consumer that in theory might someday threaten its
ability to sustain its operational costs. But those risks do not
affect LTL, for J&J remains its ultimate safeguard. And we
cannot say any potential liquidation by LTL of Royalty
A&M—a collection of bare rights to streams of payments
cobbled together on the eve of bankruptcy—to pay talc costs
would amount to financial distress. Plus LTL had no
obligation, outside of bankruptcy, to sell those assets for cash
before drawing on the Funding Agreement.
17
In saying the nature of the payment right and a lack of
meaningful operations show that LTL did not suffer from
sufficient kinds of financial distress, we focus on the special
circumstances here and do not suggest the presence of these
52
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53
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19
Because we conclude LTL’s petition has no valid bankruptcy
purpose, we need not ask whether it was filed “merely to obtain
a tactical litigation advantage.” BEPCO, 589 F.3d at 618. Yet
it is clear LTL’s bankruptcy filing aimed to beat back talc
litigation in trial courts. Still “[i]t is not bad faith to seek to
gain an advantage from declaring bankruptcy—why else
would one declare it?” James Wilson Assoc., 965 F.2d at 170.
While we ultimately leave the question unaddressed, a filing to
change the forum of litigation where there is no financial
distress raises, as it did in SGL Carbon, the specter of “abuse
which must be guarded against to protect the integrity of the
bankruptcy system.” 200 F.3d at 169.
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III. CONCLUSION
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56