Justice Craig Whitley’s recent transfer of the LTL Management case will result in a high-profile “Two-Step Texas” Chapter 11 bankruptcy in New Jersey, and it could open a new chapter in how the courts are approaching the news. transaction designed to isolate and deal with certain tort masses.
Debtor LTL Management LLC filed for Chapter 11 protection in the Western District of North Carolina on October 14, 2021 after its parent company, pharmaceutical giant Johnson & Johnson, undertook a corporate restructuring that consolidated certain related tort liabilities. with talc in the debtor. The LTL case was the most recent and high profile example of the combined restructuring and bankruptcy transaction known as the “Texas Two-Step”.
The Texas Two-Step transaction is designed to isolate liability for mass crimes and address them through the Bankruptcy Code. The first step, a corporate restructuring, exploits an unusual provision in Texas corporate law to divide an existing corporation into two successors: one intended to continue in business and the other primarily to house tort liability. Once these liabilities are isolated, the newly created entity holding the tort liability files for bankruptcy.
Cases involving a Texas Two-Step include Bestwall LLC, Pump Aldrich LLC, Murray Chaudière LLC, and DBMP LLC. Each has been filed in the United States Bankruptcy Court for the Western District of North Carolina, a district with experience in handling asbestos claims and related litigation. The LTL Management case was filed in the same district and attributed to Judge Craig Whitley.
But in an order dated November 16, 2021, Justice Whitley elected to transfer the LTL Management case to the United States District Bankruptcy Court for New Jersey. Justice Whitley’s ruling cited the case’s close connection to New Jersey. The debtor maintains key employees and potential witnesses in the state. Thousands of ovarian cancer cases have also been centralized in a pending multidistrict lawsuit in New Jersey against the debtor and J&J. In contrast, Justice Whitley noted that many of the debtor’s North Carolina ties appear to have been fabricated as part of the company’s restructuring on the eve of the bankruptcy filing.
The new location could put the LTL Management case on a different path than previous two-stage filings in North Carolina. For example, on December 1, 2021, the official Talc Claimants Committee decided to dismiss the case as a bad faith bankruptcy filing. The committee argues that the Third Circuit (which includes New Jersey) makes it easier for courts to dismiss cases and applies a less stringent test for bad faith filing than that previously applied in North Carolina and the United States. fourth circuit (which includes North Carolina). The motion to dismiss is set for a hearing before New Jersey Judge Michael B. Kaplan on February 15, 2021.
We will continue to monitor this latest evolution of Texas Two-Step, analyze its implications, and provide updates as appropriate.
