The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
Consistent with prior similar rulings, the United State Bankruptcy Court for the District of New Jersey (the Court) extended the automatic stay in a chapter 11 case dealing with talc-related claims to state court litigation against the debtor’s nondebtor affiliates brought by the States of New Mexico and Mississippi for alleged consumer protection violations arising from the sale of talc-containing products. LTL Management, LLC v State of New Mexico, 2022 Bankr. LEXIS 2825, 2022 WL 5219589 (Bankr. D. N.J. Oct. 4, 2022).
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LTL Management (the “debtor”) is an indirect subsidiary of Johnson and Johnson (J & J) which was formed by J & J as a result of a series of transactions pursuant to the Texas divisional merger statute which allowed earlier companies (including LTL’s predecessors J & J Baby Products Company and Johnson & Johnson Consumer Inc. (“Old JJCL”)) to cease to exist and two new companies, LTL and new Johnson & Johnson Consumer Inc (“New JJCL”), to emerge. The stated purpose of this restructuring was to “globally resolve talc-related claims though a chapter 11 reorganization without subjecting the entire Old JJCL enterprise to a bankruptcy proceeding.” As a result of the restructuring, LTL assumed responsibility for all of Old JJCL’s talc-related liabilities and was also was to receive Old JJCl’s rights under a funding agreement (“the Funding Agreement). Under the Funding Agreement, J&J and New JJCL were obligated to pay the talc-related liabilities and the costs of the LTL bankruptcy proceeding.
LTL filed its chapter 11 petition on October 14, 2021. Through motions, the LTL case was transferred to New Jersey. Prior to the instant action against New Mexico and Mississippi (the “States”), LTL had filed adversaries against plaintiffs who had pending federal and state actions against the debtor’s affiliates for talc-related claims (the “Talc Actions”) and also against actions based on securities violations (the “Securities Adversary Proceeding”). In both adversaries the debtor sought to extend the automatic stay provided by § 362 of the Bankruptcy Code to its affiliates, including J & J and New JJCL. And in both cases, the Court had granted preliminary injunctions which extended the automatic stay to prevent litigation against the affiliates from proceeding while a plan of reorganization was being formulated.
The debtor then commenced a similar adversary (the “Consumer Protection Action”) against the States, which had sued the affiliates on a variety of theories arising from each state’s consumer protection laws. Those state suits sought injunctive relief and civil penalties against J & J and other nondebtor affiliates. In the Consumer Protection Action, the debtor asserted that the claims in the State actions were “inherently intertwined” with the claims being resolved in the bankruptcy proceeding and that the continuation of those actions would impair the debtor’s efforts to resolve globally all talc-related claims by way of reorganization.
After extensive briefing and argument, the Court granted the requested preliminary injunction, extending the automatic stay to prevent the State consumer protection cases from proceeding pending confirmation of a chapter 11 plan.
Because of the prior two adversaries with issued preliminary injunctions, the Court here was not writing on a clean slate. It first determined that although § 105 of the Bankruptcy Code provided the procedural basis for issuance of injunctive relief, a substantive basis for jurisdiction was required. Here, that jurisdiction existed because the matter was core, a proceeding arising under Title 11, because the automatic stay’s existence and application were critical elements in any bankruptcy case and deemed core under 28 U.S. C. § 157(b)(2)(G). In addition, the debtor’s assertion that the relief requested was essential to its proposed plan of reorganization also sounded as a core matter, plan confirmation, under 28 U.S.C. § 157(b)(2)(L). In apparent dicta, the Court also determined it had “related to” jurisdiction.
Turning to the merits of granting injunctive relief, the Court analyzed the need for such relief under the usual four prongs for granting a preliminary injunction: (1) whether the movant has shown a reasonable probability of success on the merits (here the confirmation of an effective plan of reorganization); (2) whether the movant will be irreparably injured by denial of the relief; (3) whether granting preliminary relief will result in even greater harm to the nonmoving party; and (4) whether granting the preliminary relief will be in the public interest. United States v Bell, 414 F 3d 474, 478 (3rd Cir. 2005). In weighing all four prongs, the Court focused on the fact that the debtor and the affiliates shared insurance policies which could provide substantial funding to pay talc-related claims, policies which could be dissipated if non-bankruptcy litigation were allowed to continue. In addition, as a result of the Funding Agreement and other provisions arising from the manner by which LTL was created, the debtor and affiliates had reciprocal indemnification exposure if judgments were entered against the affiliates. The intertwining of the relief sought in the Consumer Protection Actions with the global resolution of talc-related claims – which was the purpose behind the chapter 11 – made the relative harm factors ((2) and (3) above) weigh heavily in favor of granting the relief. The debtor’s assertion that keeping the insurance proceeds available and avoiding complex indemnification issues would allow it to successfully propose a plan satisfied prong (1). Finally, public policy strongly favored a global resolution.
The novel twist here, not raised in the earlier adversaries, was the States’ assertion that § 362(b)(4), a statutory exception to the automatic stay, should allow their actions to go forward. Section 362(b)(4) says the filing of a petition does not operate as a stay – “(4) … of the commencement or continuation of an action or proceeding by a governmental unit… to enforce such governmental unit’s…police and regulatory power…” The States argued that they were exercising their police powers to prevent harm to the public that arose from deceptive marketing which touted talc as safe, among other threats to public safety. Even though a monetary remedy was sought, the primary focus of their litigation was to prevent J & J from continuing the harmful marketing. The Court acknowledged this goal of the States’ actions but found that “the exercise of the States’ police power seriously conflicts with the policies underlying the Bankruptcy Code.” It gave greater weight to the bankruptcy policies, overriding the exception to the stay provided by § 362(b)(4). The Court granted the requested injunctive relief.
Section 105 has been used extensively by bankruptcy courts to grant injunctive relief against related nondebtor parties pending plan confirmation in chapter 11’s for decades. Decisions to extend the stay to these third parties are generally reviewed for abuse of discretion and rarely does the bankruptcy court fail to make necessary factual findings to justify such relief. Here, the overlapping insurance policies and indemnification exposure of the debtor were sufficient to uphold the balance of harms in favor of issuing the injunctions. The one open issue is whether bankruptcy policies should override the public safety concerns of the States. However, the record here implied that J & J and others were no longer engaged in the behaviors which were perceived to threaten public health and safety. In light of those facts, this is the correct ruling.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.