💥Today is Judgment Day for JNJ💥
Today the Bankruptcy Judge will decide two major issues.
Shady bastards.
Callback to this bit from our “Losers” section in October 24th’s paying subscribers’-only briefing:
The Restructuring Industry (Long Feeling the Heat Coming Around the Corner). Maybe it’s just us or maybe this is just another example of fleeting regulatory attention but it is sure starting to feel like the industry is garnering a lot more attention from the sort of people it doesn’t want a lot of attention from. From The Government Accountability Office (an investigative arm of Congress) recommending to Congress that pre-bankruptcy executive bonuses ought to be examined, to Republican representative Greg Steube introducing a bill to ban such bonuses, to the House Judiciary Committee indicating that it would look at exec comp during a more fulsome review of the bankruptcy system, to third-party releases potentially running up the appellate chain, to a lot more people even knowing what the f*ck “equitable mootness” is, to the Texas two-step benefiting multi-billion dollar corporations like Johnson & Johnson ($JNJ), it feels like the winds of change may be brewing.
And that doesn’t include the Senate Banking Committee looking into ways to stop Wall Street from looting, lol.
Senator Elizabeth Warren just reintroduced The “Stop Wall Street Looting Act,” which would purport to make a number of changes to the current bankruptcy system — from extending fraudulent transfer review periods, to providing official committees standing to pursue claims against the debtor, to significantly calling into question the role of the independent director.
In addition to those bankruptcy-specific measures, the proposed bill could also affect bankruptcy in other ways. Indeed, the Act would purport to make private equity funds liable for portfolio company debt and pension obligations. We’ve discussed this before here when, in 2019, Senator Warren set her sights on the PE industry. Any and all measures failed back then and they’re likely to fail again. Still, the fact that this idea is even out there is fascinating, especially when you tack on that the Act would also prevent one of our favorite bits of PE technology — the dividend recap. Not to mention portco monitoring fees. 🍿
Look. We know we rag on the restructuring industry, like, all…of…the…time. Deservedly so. But there is something to be said for stewarding stressed and/or distressed companies out of trouble, whether that is in or out of court. It’s trite AF but true that the industry serves a public good: the work restructuring pros do saves companies from liquidating and disappearing into the history books (like they might in jurisdictions in other parts of the world), which, in turn, saves jobs,* preserves federal, state and local tax revenue and, in the most dire of cases, may even keep communities afloat.** It often takes a meaningful amount of knowledge, expertise and strategy to guide these processes and without such astute guidance, a number of salvageable situations may go by the wayside. Sometimes calamity is or can be avoided through some truly impressive creativity. And the industry has seen some new “technology” in the past several years that has pushed things in the right direction — whether that is the one-day super-prepackaged filing or Zoom hearings that make proceedings not only cheaper (no unnecessary travel at the client’s expense) but also more accessible to various parties in interest.
But sometimes things get a little too cute.
Enter Johnson & Johnson Inc. ($JNJ) and the “Texas Two-Step” (also called “divisive” or “divisional” mergers). The Texas Two-Step is a way of describing when a company with a f*ck ton of potential tort liabilities — in the case of JNJ, liabilities arising out of suits alleging that JNJ’s baby powder caused ovarian cancer — (i) uses obscure Texas corporation law (from the Texas Business Organization Code) to spinout a Sh*tco artificially housing any potential tort liability from a HealthyCo and then (ii) files that Sh*tco for bankruptcy to avail it of the bankruptcy code’s channeling injunction provision and claims management process (which was designed for asbestos cases but has since been used in a variety of cases, including Takata and Purdue Pharma). This has the effect of limiting HealthyCo’s overall liability.
If that sounds shady as f*ck to you … well … you’re not wrong.
Here is Thompson Coburn LLP’s David Warfield breaking down the mechanics of this in the JNJ case:
On October 12, 2021, J&J completed a complex corporate restructuring that included a divisive merger under Texas law. To summarize, Johnson & Johnson Consumer Inc. (“Old JJCI”) merged into a newly formed Texas limited liability company, and the surviving entity (a Texas entity) then engaged in a divisive merger under Texas law. As a result of the divisive merger, (a) Old JJCI ceased to exist, (b) two new Texas limited liability companies were created; (c) Old JJCI allocated its talc-related liabilities and certain assets to one of the new LLCs (the “Debtor LLC”) and the non-talc liabilities and remaining assets to the other LLC (the “Non-Debtor LLC”). The Debtor LLC then converted to a North Carolina limited liability company and changed its name to LTL Management LLC. All of these actions occurred between 9:00 a.m. and 1:00 p.m. on October 12. Two days later, the Debtor LLC filed for Chapter 11 protection in North Carolina. In the meantime, the Non-Debtor LLC merged into a newly created New Jersey corporation and changed its name to Johnson & Johnson Consumer Inc. (“New JJCI”).
When the dust settled, the Debtor LLC was responsible for all talc-related liabilities, and New JJCI owned all non-talc assets and was responsible for non-talc liabilities. To be sure, the divisive merger did not leave the Debtor LLC saddled with all of the talc liabilities without any assets whatsoever. The Debtor LLC estimated in its bankruptcy filing that it holds $373.1 million in assets due to the allocation made in the divisive merger. Moreover, New JJCI has agreed to fund the Debtor LLC’s Chapter 11 case and contribute $2 billion into a settlement trust for the benefit of the talc claimants as part of a Chapter 11 reorganization plan.
Damn.
You have to give whomever figured out that this might be a way to deal with massive tort liabilities some real credit. On its face, this seems genius. Dirty, in some respects. But genius.
Of course, it hasn’t reeeeeeally worked yet — at least from a certain point of view. The other cases — yes, there are other shady aholes out there, not just JNJ — that have deployed this very same strategy are slow-rolling in the Western District of North Carolina as we speak: In re Bestwall LLC (formerly of Georgia Pacific), In re DBMP LLC (formerly of CertainTeed), and In re Aldrich Pump LLC (from Trane Technologies PLC). While they’ve chugged along in bankruptcy court with battles over whether preliminary injunctions ought to bar plaintiffs’ suits against the respective HealthyCos (trials just concluded in DBMP and Aldrich), the fees are churning and the plaintiffs’ lawyers remain active and relevant. No plans of reorganization have been confirmed. Meanwhile claimants all over the place are in an endless state of limbo while the HealthyCos go about their business. This is the kind of thing that restructuring pros — and their clients — could, should, and do take a lot of sh*t for.


Tom Hals @tomhals
Oklahoma court overturns $465 million opioid award vs Johnson & Johnson, finding J&J did not create a public nuisance in the making and selling of addictive painkillers https://t.co/moCS8P5iFGOn October 24th, the St. Louis Post-Dispatch Editorial Board didn’t pull punches; it asserted that “[t]he federal bankruptcy system needs to declare itself morally bankrupt.” They wrote:
The federal bankruptcy system is morally bankrupt. The system has been abused by corporations and rich people to the point that it no longer upholds the mission it was designed for: providing a limited shelter from creditors so financially strapped individuals and companies could either liquidate or reorganize and put their affairs back in order.
The JNJ situation just seems particularly egregious — especially coming on the heals of the settlement in Purdue Pharma. Back to Mr. Warfield who draws a distinction between the two matters, rendering the shamelessness of JNJ’s gambit that much more offensive:
With exceptions not relevant here, it is a bedrock principle of bankruptcy law that all of a bankrupt entity’s assets and liabilities are subject to administration in the bankruptcy case. For example, in the much-publicized Purdue Pharma case, the company's Chapter 11 plan included the profitable non-opioid assets, which will be sold or operated for the benefit of the opioid creditors. As a result, Purdue Pharma, as constituted before the bankruptcy filing, will cease to exist.
Understandably, J&J wanted to avoid Purdue Pharma's fate. But J&J faced a dilemma. While Chapter 11 was a tried and tested strategy to manage mass-tort liabilities, a filing would subject J&J’s non-talc businesses to the risks and uncertainties of the bankruptcy process. J&J’s talc-related product sales were a minuscule portion of J&J's total business, amounting to only one-half of one percent (0.5%) of J&J's total 2020 consumer health product sales.
In “🔥JNJ Doesn’t Get a Southern Welcome🔥,” we highlighted :
The optics looked especially bad considering the timing. Mere days after the filing, JNJ reported Q321 earnings that beat EPS estimates by 10.5%, powered, in part, by the company’s sh*tty COVID vaccine (which generated $502mm). While revenue was up 18.2% YOY, it missed estimates by $0.4b. It only made $23.34b in the quarter (against $3.5b in settlements and verdicts to date). That’s all.
Given all of this, the premise of the filing itself came under scrutiny. We wrote:
Judge J. Craig Whitley of the US Bankruptcy Court in Charlotte, North Carolina, wasn’t an easy sell, it seems. At the debtor’s first day hearing, the Judge questioned whether NC was the proper venue for the case versus, say, Delaware or New Jersey, where JNJ is based and where talc litigation has been transpiring for years. The basis for venue in NC was … wait for it … an opportunistic exercise of corporate formation and a bank account at Bank of America. Yup, the old bank account creates venue ploy. (Shakes heads). The Judge scheduled a hearing for November to determine the venue issue.
But he wasn’t done there. Per Bloomberg:
U.S. Bankruptcy Judge Craig Whitley sided with lawyers for more than 38,000 people who have sued J&J over claims one of the company’s most recognized products caused cancer and other health problems. The ruling, over whether the lawsuits can continue during bankruptcy proceedings, is just the opening move in what is likely to be a long court fight.
Whitley rejected J&J’s request for a temporary pause in the cases. But he will consider giving J&J a longer-term shield early next month when the parties come back for a hearing in which the company may be able to offer more evidence to support its position.
It was an inauspicious start for JNJ, causing this dude to put things a bit more succinctly than we did above:


Things have been active since then. This happened on October 26:

That’s right. Per the Order:
The court, on its own motion, may transfer a case to any other district if the court determines that that the transfer is in the interest of justice or for the convenience of the parties. Fed. R. Bankr. 1014(a)(1). It is unusual for the court to invoke this rule on its own motion; however, this is a highly unusual case. For the reasons set forth below, the Debtor is ordered to appear and show cause why this case should not be transferred to another judicial district where venue is proper.
A government bankruptcy watchdog has also called on the judge to transfer the case to New Jersey. U.S. Bankruptcy Administrator Shelley Abel said J&J should not be permitted to “manufacture” a presence in North Carolina, where other large, asbestos-related bankruptcies have occurred.
The judge and Abel both noted that LTL was only established in North Carolina two days before the bankruptcy was filed.
LOL. BANKRUPTCY VENUE IS SUCH A FRIKKEN JOKE AT THIS POINT.
Interestingly, the Administrator all-but-stipulated venue — however manufactured it may have been here (the formation of an entity mere days prior to the filing and $6mm in a BofA bank account, y’all, c’mon) — on the basis of the United States Code’s much-abused bankruptcy affiliate rule (pursuant to which a debtor may file a case in any district where the bankruptcy case of an affiliate is pending). But it is also arguing that, pursuant to 28 U.S.C. § 1412, a court may transfer a case under title 11 to another district “in the interest of justice OR for the convenience of the parties.” We won’t go into all of the legal elements of each of these two transfer bases but suffice it to say that the Administrator goes to great lengths to underscore how courts have recognized unreasonable forum shopping as an important factor in determining whether venue was so blatantly bullsh*t so as to necessitate transfer.
The Judge acknowledges a lot of this in the Order to Show Cause:
Venue is arguably proper in this judicial district since the Debtor was a North Carolina entity on the filing date, if only for two days. However, nearly all the assets and employees of the Debtor, New JJCI, and the Debtor’s ultimate parent, J&J, are located in New Jersey. The Debtor has a mailing address of 501 George St., New Brunswick, NJ 08933. Moreover, New JJCI and J&J are both headquartered in New Jersey. The only employees of the Debtor are employees of Johnson & Johnson Services, Inc., a New Jersey corporation, that have been seconded to the Debtor. These employees continue to work in New Jersey. The only assets the Debtor owns in North Carolina are a bank account with $6 million in cash and other intangible assets, including membership interests in a North Carolina limited liability company and the rights to a funding agreement. The Debtor, which only existed for two days before filing this case, set up these assets primarily for the purpose of filing bankruptcy in this district. The Debtor conducts no other business in North Carolina.
Furthermore, according to the materials filed by the Debtor in this case and the evidence presented at first day hearings, few, if any, of the talc-related claims against the Debtor are pending in the Western District of North Carolina.
This doesn’t look promising for JNJ.
Meanwhile, the spotlight is getting brighter and brighter. Here is Trevor Noah discussing this on the Daily Show, of all places:
Choice bit:
“This is insane, people. Johnson & Johnson is pretty much trying to do the first thing everyone thinks of when they get caught…blame it on their evil identical twin. I mean, we’ve all tried it. The only difference is it somehow actually works if you’re a powerful corporation. Honestly, I’m almost impressed. I just wish they put as much effort into COVID immunity as they did into their legal immunity.”
💀💀💀💀💀
Noah must be really pissed about this because here he is with a segment with Representative Katie Porter (D., CA).***
And here is House Judiciary Chairman Jerrold Nadler (D., N.Y.) describing proposed legislation that would, among other things, prohibit the application of Bankruptcy Code section 362’s automatic stay against non-debtors and prohibit divisional mergers — naming JNJ by name. The legislation will, thanks to a 23-17 party-line committee vote, go to the full House for consideration.****


At a hearing on November 4, Judge Whitley heard arguments from the debtors on the injunction issue but ultimately continued the hearing to 9:30am ET today, November 10 — the same day that the venue question will be heard. Which makes sense: it stands to reason that the injunction and the venue issues be handled contemporaneously. After all, if the Judge finds venue improper, why would he even bother to rule on the injunction? That can be some other bankruptcy judge’s problem.
Meanwhile, the Judge approved the appointment of an 11-member committee of talc claimants because, regardless of what happens with the other issues, they need to get to work. And get to work they did: on November 8th, the committee submitted a letter to the US Bankruptcy Administrator in the Western District of North Carolina indicating support for the transfer of venue to the District of New Jersey. A Steering Committee of multi-district litigants had already filed a motion joining the Administrator’s motion to transfer venue. As have several plaintiffs’ law firms and a group of firms calling themselves the “Mesothelioma Group.”
The debtor’s objection to the motion to transfer venue is … uh … interesting. They’re basically taking the “you’re goddamn right, I did” stance.
It’s about as circular an argument as you can conjure up. Because the fine folks at Jones Day got away with previous mass tort cases filed in this jurisdiction — regardless of the tedious and dubious connection thereto — the court now has “extensive expertise on numerous issues that will arise in this case,” justifying the debtor’s (manufacturing of) venue here. They’re all but acknowledging that venue selection is a joke in bankruptcy cases, using a bastardized form of the “sophisticated judges in DE” excuse, repurposed for the mass tort context with a kiss-the-NC-judges-a$$ cherry on top:
In the same manner that, for instance, the District of Delaware has become known for its expertise in handling large, complicated chapter 11 business cases, this Court now has become known for its expertise in handling complicated mass tort cases of national significance, including cases involving divisional mergers. It has become routine for national business cases to file in Delaware based solely on state of incorporation, even where the debtor has substantial physical assets elsewhere. For these large cases, there is no nexus of creditors located in one, defined location. Instead, the creditors, as well as the debtor's physical assets, are dispersed throughout the country. As a result, the experience of the Delaware court is the dominant driver of the debtor's decision to file in Delaware, as well as uniform acceptance of that decision.
This case is no different. It is properly venued in this District based on the Debtor's state of incorporation. As the Court is aware, where a case is properly domiciled in a District, the debtor's choice of venue should be afforded "substantial weight and deference." See § I.B., infra. While the Movants argue that the substantial weight and deference typically afforded a debtor's choice of venue should be less in this case, in fact the opposite is true. The experience of the Court is of paramount importance.
The debtor continues:
Because of this Court's invaluable experience gained from its handling of numerous, complicated issues that will be relevant to this case, venue in this Court will benefit all parties in interest. (emphasis in original)
Oh c’mon. Suddenly bankruptcy court judges elsewhere are less sophisticated than…gulp…the judges in North Carolina? Wait. What??
This argument is also a bit of a pump fake. It’s almost as if the debtor is hoping the Judge will be so googly-eyes that he won’t notice that, in the next breadth, the debtor deigns to tell the court what to do with its own schedule:
All of this leaves one key issue for consideration—the resources of the Court. The Debtor is not blind to the fact that the Court has significant responsibilities in managing the other mass tort cases on its docket as well as its other case load. At the same time, there are mitigating factors. For instance, while this case has demanded substantial time in its early days, the Debtor believes that appointment of a statutory claimants' committee and future claimants' representative, along with establishment of omnibus hearings and use of case management procedures, will help streamline future proceedings.
LOL. Seriously?
In addition, the Kaiser Gypsum case is essentially concluded, and the DBMP and Aldrich cases have completed their near-term trials in connection with the preliminary injunction decisions. And, ultimately, the Court's experience with asbestos cases generally, and divisional merger cases in particular, should lead to substantial efficiencies and judicial economies. Finally, the Debtor respectfully submits that a reallocation of judicial resources, including potentially the inclusion of visiting judges into the jurisdiction, could be considered to help the Court with its non-mass tort docket.
Wait. Huh? Visiting judges? Are the fine folks at Jones Day really suggesting that the Judge ought to rearrange his entire docket simply to accommodate them and JNJ? On the basis of BS venue? That’s a bit rich.
There’s a lot of pressure here folks. Media pressure. Legislative pressure. Plantiffs’ pressure. Maybe even a little save-the-bankruptcy-bar-from-itself-pressure? We get the distinct impression that Judge Whitley thinks this is a sham and doesn’t want anything more to do with this theme of cases than he already does. He may very well boot this case and let another judge tackle the stay issue. He may be napalming the possibility of future case flow in his jurisdiction if he does — another consideration. But it may be a sacrifice-yourself-for-the-greater-good kind of moment. Texas judges never had the (insert inappropriate word that Judge Jones would use here) fortitude to do it. Perhaps North Carolina needs to show Texas how it’s done. 🤔
So what if Judge Whitley does agree to transfer? JNJ will likely end up back home in New Jersey (Delaware has been raised as a possibility too). Where it probably belongs. The question is: what happens once it’s in bankruptcy court there? JNJ and NJ are symbiotic — “NJ” is literally in Johnson & Johnson’s ticker. 😜 JNJ probably pays heaps of taxes in NJ (to the extent that big corporations even pay taxes these days).
It’ll be interesting to see what kind of reception JNJ receives there.
Our money is on us all finding out soon enough.
*Though certain economic theories might argue that, in the case of some … shall we say … zombie restructurings … this is an unproductive and inefficient use of labor resources.
**This aspect of the profession might get far more attention if cases weren’t such a frikken feeding frenzy when it comes to fees.
***We should note that one of the judgments rendered against JNJ was in favor of a California woman who got cancer from JNJ’s talc. The judgment amount was in the hundreds of millions of dollars. It’s no wonder, then, that Representative Porter is interested. Not to mention that she does have a background in bankruptcy law.
****Apparently Republicans don’t think there’s much wrong with what happened in Purdue or what’s happening here, 🤷♀️.
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📚Resources📚
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We’ve recently updated the list to include some new releases such as “Damsel in Distressed: My Life in the Golden Age of Hedge Funds” by Dominique Mielle (formerly of Canyon Partners) and “The Platform Delusion: Who Wins and Who Loses in the Age of Tech Titans” by Jonathan Knee. We haven’t read either yet but they both certainly look interesting.
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Nothing new under the sun, unfortunately. I was an editor at one of the nation's biggest and healthiest newspapers. A series of owners who looted the treasury like so many pirates, plus the crash of ad revenue from the rise of the Internet, created a massive amount of debt. Resolution? Create a "new" holding company, transfer all debt and pension liabilities from healthy to "sick," and bankrupt "sick." Result? Debtors lose their shirts. Federal Pension Benefit Guarantee Board stuck paying millions of dollars worth of pensions. Healthy company pays handsome executive bonuses even today. That happened in the 1990s.
Executive salaries and bonuses should be as liable to forfeiture in bankruptcy as every lowly worker's. Instead, this happened at another large newspaper of my acquaintance:
Reporter's union: "Why does the CEO keep his pension in bankruptcy?"
Bankruptcy judge: "Because he has a contract."
Reporter's union: "We also have a contract. Pensions must be paid."
Bankruptcy judge: "Yours doesn't count. His does."
It's time to nuke the bankruptcy system and start over.