Court Rejects J&J's 2nd Talc Bankruptcy

A federal bankruptcy judge in New Jersey dismissed Johnson & Johnson’s second attempt to use bankruptcy to resolve tens of thousands of talc cancer lawsuits, ruling in July 2023 that the company’s subsidiary LTL Management had filed its Chapter 11 petition in bad faith.

The $8.9 Billion Proposal

Johnson & Johnson had offered to fund an $8.9 billion trust to compensate claimants who alleged that the company’s talc-based baby powder caused ovarian cancer. The proposal would have required at least 75% of claimants to accept the deal through a bankruptcy plan confirmation process.

Judge Michael Kaplan found the strategy problematic. Despite increasing the proposed settlement from the original $2 billion offer, J&J still failed to demonstrate that its subsidiary faced genuine financial distress—a fundamental requirement for bankruptcy protection.

What Is the Texas Two-Step?

Johnson & Johnson employed a controversial legal maneuver known as the “Texas Two-Step,” which allows corporations to:

1. Create a new subsidiary under Texas law through a divisive merger
2. Transfer all liability for specific claims to that subsidiary
3. Have the subsidiary file for bankruptcy to halt litigation
4. Force claimants into bankruptcy court rather than civil trials

The strategy derives its name from Texas’s permissive business formation laws and the two-step process of creating a liability-absorbing entity that then seeks bankruptcy protection.

Critics, including bankruptcy scholars and consumer advocates, have called the maneuver an abuse of bankruptcy law that allows healthy companies to avoid accountability while genuine bankruptcy is designed for businesses facing actual financial hardship.

Timeline of J&J’s Bankruptcy Attempts

October 2021: J&J creates LTL Management LLC and transfers all talc liabilities to this new entity. LTL immediately files for Chapter 11 bankruptcy in North Carolina.

February 2022: The case is transferred to New Jersey bankruptcy court.

January 2023: The Third Circuit Court of Appeals dismisses LTL’s first bankruptcy case, finding it was filed in bad faith because J&J itself was not in financial distress.

April 2023: Within hours of the dismissal, LTL Management files for bankruptcy a second time with a revised $8.9 billion settlement offer.

July 2023: Judge Kaplan dismisses the second bankruptcy, again finding bad faith.

Mesothelioma Claims Excluded

Notably, J&J’s bankruptcy proposal specifically excluded mesothelioma claims. The company had already settled approximately 95% of mesothelioma lawsuits filed against it through individual settlements rather than the mass bankruptcy process.

This distinction matters because mesothelioma cases involve a different exposure pathway—asbestos contamination in talc—and often result in larger verdicts due to the severity of the disease and clearer causation evidence.

What It Means for Claimants

The dismissal meant tens of thousands of talc lawsuits could proceed in state and federal courts rather than being consolidated in bankruptcy proceedings. For many claimants, particularly those with advanced illness, traditional litigation offers the possibility of faster resolution and potentially larger awards than bankruptcy trust payments.

Trial verdicts in individual talc cases have ranged from tens of millions to billions of dollars, though many are reduced on appeal or through post-verdict negotiations.

J&J’s Third Attempt

Johnson & Johnson would later make a third attempt at resolving talc litigation through bankruptcy in 2024, which also failed. The company continued to face thousands of lawsuits alleging its talc products were contaminated with asbestos and caused cancer.

The repeated bankruptcy dismissals established important precedent limiting the ability of financially healthy corporations to use the Texas Two-Step strategy to avoid mass tort litigation.