By Candice L. Kline, Esq.
Partner
SAUL EWING LLP
Chicago, Illinois
This post is an excerpt from the forthcoming fifth
installment in the Mass
Tort/Third-Party Releases Series in the upcoming CLW
magazine.
The
recent Third Circuit opinion in In re LTL
Management, LLC [1] focuses
on when debtors may qualify for bankruptcy protection. The appeal came from the bankruptcy
court’s denial of motions to dismiss the
LTL bankruptcy
case based
on allegations
the filing lacked good faith.[2]
The Third Circuit examines the parameters of good faith and
avoids other key techniques to access bankruptcy, isolate
liabilities, and cap the liabilities in mass tort cases such as the legality
of nonconsensual third-party releases (not yet ripe in LTL) and the propriety
of the
“Texas
Two-Step” divisive merger and other affiliated-filing practices used in the service of protecting
a financially healthy parent company without the hassle of filing bankruptcy
itself.
If
viewed narrowly, the precedential opinion merely requires debtors to show some
“financial distress” to establish good faith and avoid dismissal. That requirement could be satisfied by adding
a new section to a first-day affidavit, or perhaps more keenly, not waiting
until the last minute to hive off the liabilities or to create a new affiliate only
for bankruptcy purposes. If considered
more broadly, the Third Circuit may have opened the door to major rethinking in
this area of “creative” practice.[3]
On
direct appeal of consolidated appeals by many parties, the Third Circuit
reversed the bankruptcy court’s order denying the motions to dismiss and
remanded the case to the bankruptcy court with instructions to dismiss LTL’s
chapter 11 case.[4]
The
dismissal lifts a litigation stay on talc liability lawsuits and permits
plaintiffs to resume their litigation as if the bankruptcy had not occurred.[5]
Although J&J promised an appeal, and
has filed a petition for en banc review discussed below, success seems
unlikely. Few arguments seem
likely to challenge Judge Ambro’s common sense premise: only debtors experiencing
actual financial distress may seek bankruptcy protection.
Judge
Ambro clarifies lofty goals and good intentions “do not suffice alone.”[6]
He emphasizes the intended purpose of bankruptcy
protection and limits its access to debtors “in financial distress.”[7]
After concluding that LTL was not in
financial distress, the Third Circuit dismissed LTL’s chapter 11 petition, ending
the bankruptcy. A petition for rehearing is pending.
Judge Ambro emphasized that Third Circuit precedent seems to require proof
of financial
distress to establish a valid bankruptcy purpose and defeat a good
faith challenge.[8] An impaired or
deteriorating financial condition, actual and not speculative, is a critical prerequisite
for a good faith filing. Reading Third Circuit cases, the opinion
states “the
theme is clear: absent financial distress, there is no reason for Chapter 11
and no valid bankruptcy purpose.”[9]
Financial distress is determined
case-by-case.[10]
LTL
fell short of proving good faith because it had the financial means through the
Funding Agreement to deal with the liabilities. The Third Circuit held that only LTL’s
financial condition matters for this test because it alone is the debtor with
its petition facing dismissal.[11]
The good-faith requirement applies to
the debtor in bankruptcy, not the corporate family.[12]
Here, the test applied to LTL alone, and
it had recourse to cover its liabilities under the Funding Agreement up to
$61.5 billion.[13]
The
Funding Agreement was backed by gold-standard corporate resources, with the
J&J parent holding a AAA-credit rating, worth over $400 billion in equity
value, and $31 billion in cash and marketable securities.[14]
With such financials, the Third Circuit
concluded, “It is hard to imagine a scenario where J&J and New Consumer
would be unable to satisfy their joint obligations under the Funding Agreement.”[15]
The
Third Circuit has spoken on the first gating issue: good faith filing. Other important issues, such as third-party releases, remain at issue in the
Purdue Pharma appeal to the Secord
Circuit (pending) and the Boy Scouts plan appeal in the District of Delaware. With each decision, the practice of mass torts
in bankruptcy will morph and adapt. Potentially,
more legislation may enter the fray.
J&J
promised, and filed on February 13, 2023, a petition for rehearing and
rehearing en banc of the Third Circuit’s precedential opinion.[16]
This petition remains pending.
[1] LTL Management, LLC. v.
Official Committee of Talc Claimants, et al. (In re LTL Management, LLC), --
F.3d ---, Case. No. 22-2003 (3d. Cir. Jan. 30, 2023) (precedential).
[2] 11 U.S.C. § 1112(b). Id. at 29
(describing the motions filed by multiple talc claimants seeking dismissal of
LTL’s bankruptcy petition).
[3] “That said, we mean not to
discourage lawyers from being inventive and management from experimenting with
novel solutions. Creative crafting in the law can at times accrue to the
benefit of all, or nearly all, stakeholders.” LTL Op. 56.
[4] Id.
[5] Id.
[6] LTL Op. at 18.
[7] Id.
[8] Id. at 35.
[9] Id. at 36. The court adds, “[f]inancial
distress must not only be apparent, bit it must be immediate enough to justify
a filing.” Id. at 38.
[10] Id. at 38.
[11] Id. at 43.
[12] Id. at 44. (citing Ralph Brubaker,
Assessing the Legitimacy of the “Texas Two-Step” Mass-Tort Bankruptcy,
42 No. 8 Bankr. L. Letter NL 1 (Aug. 2022)).
[13] Id. at 46.
[14] Id. at 47.
[15] Id.
[16] In re LTL Management LLC, Petition
for Rehearing and Rehearing En Banc, Case No. 22-2003 (3d Cir. Feb. 13. 2023).
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