On August 22, 2022, the NAM filed an amicus brief in the Third Circuit arguing that bankruptcy provides an important and legitimate mechanism for financially distressed manufacturers to efficiently resolve liabilities and obtain a fresh start. The entity seeking chapter 11 protection in this case—In re: LTL Management, LLC—was created through corporate restructuring to take on Johnson & Johnson’s talc liabilities. With nearly 40,000 lawsuits alleging injury from J&J’s Baby Powder, and thousands of additional claims expected for decades to come, LTL sought to resolve the claims through bankruptcy, just as numerous manufacturers have done before. The claimants moved to dismiss LTL’s chapter 11 petition as a bad-faith abuse of the bankruptcy system. After a five-day evidentiary hearing, and several months of discovery, the bankruptcy court found that the restructuring and bankruptcy would not prejudice creditors and would maximize value for all talc claimants. The instant appeal followed.
The NAM’s brief explained that bankruptcy, unlike multi-district litigation (MDL), is well equipped to resolve mass-tort lawsuits of this magnitude in an efficient manner. Bankruptcy channels all claimants into a single forum so that the company’s liabilities can be addressed in a coordinated manner. This channeling function preserves the company’s value against a rush-to-the-courthouse frenzy of creditors that will deplete the company’s remaining assets to the detriment of its employees, shareholders, and other creditors. Further, bankruptcy promotes global resolution of a company’s liabilities, by sweeping in even future claims based on injuries that have not yet manifested. By contrast, MDL, which claimants here have argued is the better alternative, cannot reliably achieve global resolution as it lacks a mechanism to address state court actions and future claimants and is notorious for inefficiency and attracting meritless claims.
Unfortunately, on January 30, 2023, the Third Circuit reversed the bankruptcy court's decision and remanded the case with the instruction that the bankruptcy court dismiss the bankruptcy petition. The Third Circuit concluded that "[o]nly a putative debtor in financial distress can" "acesses the Bankruptcy Code's safe habor" and that "LTL was not."
On February 22, 2023, the NAM filed an amicus brief supporting a petition for rehearing en banc.In our brief, we argue that bankruptcy provides a crucial tool for a financially distressed manufacturer to obtain a fresh start and that the panel’s approach for determining financial distress creates uncertainty for manufacturers because it provides no meaningful guidance for debtors seeking to determine whether their financial predicament will qualify for Chapter 11 relief. The panel concluded that J&J’s payment obligation under a funding agreement rendered LTL insufficiently financially distressed but also opined that other entities operating under the same type of funding agreement could qualify for bankruptcy. If allowed to stand, the panel’s decision will cause businesses to expend enormous sums litigating their own financial distress, leading many to forgo bankruptcy until it is too late.
Unfortunately, on March 22, 2023, the Third Circuit denied the petition for rehearing.