Two of the country’s largest companies’ efforts to deal with mammoth asbestos liabilities continue to generate new and surprising developments. Their bankruptcy and Multi-District Litigation (MDL) cases address (some might say provoke) the most consequential issues in bankruptcy specifically and litigation generally. This article revisits the ground we covered in prior issues of The Restructuring Report and then addresses the significant new developments in both cases.
In the February 12, 2024, issue of Fredrikson’s The Restructuring Report, Katherine Nixon and I commented on the Third Circuit LTL Mgmt., LLC case. LTL Mgmt., LLC (LTL) was newly formed and then separated from Johnson & Johnson through a Texas two-step. LTL, the “bad company,” held all the potential liability stemming from the inclusion of talc in baby powder; it filed for Chapter 11 in the Western District of North Carolina, but the case was later transferred to the District of New Jersey. In a decision authored by Judge Thomas L. Ambro, the panel dismissed the Chapter 11 case filed by LTL overruling the bankruptcy court by determining that LTL did not face sufficient financial distress to utilize Chapter 11. Our article on this part of the saga was later expanded and updated, and published as the lead article in Norton’s Annual Survey of Bankruptcy Law for 2024 under the title, “Too Solvent to be in Bankruptcy?”
Our article also compared and contrasted the LTL Mgmt., LLC case with the Bestwall asbestos Chapter 11 case then concurrently pending in the Fourth Circuit. Bestwall had been a manufacturer of joint compound, wallboard and other products containing asbestos which had earlier been merged into Georgia-Pacific. When asbestos liabilities emerged, Georgia-Pacific had used the Texas two-step with Bestwall becoming the “bad company”; it then filed Chapter 11 in the Western District of North Carolina on November 2, 2017.
Early on, Bestwall faced a motion to dismiss for lack of good faith but prevailed, and the movants’ request for leave to appeal was denied by the Fourth Circuit Court. Bestwall faced a group of asbestos victims represented by a particularly aggressive plaintiffs’ counsel. They again sought to have the case dismissed. Straightforward grounds were not available because the earlier ruling was the law of the case. The new motion was based on the assertion that the court lacked subject matter jurisdiction. Such a motion may be brought in a case at any time.
The argument was that Chapter 11 cases filed by a solvent entity were not within the contemplation of the founders. Bankruptcy at the time of the Constitution was only for insolvent debtors. Invocation of bankruptcy by arguably solvent debtors came later, they argued. Much was written about the founders’ original intent, the history, and the understanding of the times and the use of bankruptcy when the Constitution was adopted, and throughout history until recently. The panel denied the motion, 2-1, in one of the most important bankruptcy cases of the recent past. The plurality found the case easy; the scope of the subject-matter jurisdiction of the courts is defined by statute and that was clear enough. But the concurring judge took on the challenge and found that the case was within the Constitution. The dissenting judge vehemently disagreed and adopted the movants’ argument that bankruptcy is not available to solvent debtors and further criticized the use of the Texas two-step as further evidence of a lack of good faith. I commented on this decision in the October 1, 2025, issue of The Restructuring Report.
To make the chronology complete, shortly after the dismissal, LTL filed a second Chapter 11 case in New Jersey, which was then dismissed by the bankruptcy court on July 28, 2023, following the path provided by the circuit court.
After the dismissal of the second LTL case, Johnson & Johnson formed a new affiliate, Red River Talc LLC, and the new “bad company” filed Chapter 11 in the Southern District of Texas. A motion to dismiss that case was unsuccessful and the case moved toward confirmation. However, several issues arose including the ballot count procedure, the application of the then recent Purdue Pharma case and other issues. LTL was unable to overcome these issues, and the bankruptcy judge denied confirmation and dismissed the case on March 31, 2025.
This permits us to pick up the thread again and turn to the more recent very important developments.
In Bestwall, on February 20 of this year, the moving parties sought certiorari from the Supreme Court again arguing that the Bestwall case was an unconstitutional exercise of the bankruptcy authority of the federal courts by solvent debtors. Significant briefing supported and opposed that petition, raising arguments continuing what one prominent academic had heralded as the “case of the century.” On June 11, the Supreme Court denied the writ.
Not relying entirely on their application, the moving parties filed motions in the bankruptcy court for the appointment of a trustee of Bestwall and an examiner. The motion for the appointment of a trustee was denied on August 26 and the motion for an examiner was withdrawn soon after. Bestwall had apparently alluded to a prospective settlement. The judge ordered Bestwall to provide a detailed outline of the proposed terms of a plan of reorganization with information on claims valuations by December 1.
In the other major case, Johnson & Johnson, with the bankruptcy case being dismissed and the stay lifted, individual plaintiffs asserting claims against Johnson & Johnson were free to pursue their cases in federal or state courts. A high percentage of them were being managed by an MDL in New Jersey. Other individual cases were tried with significant victories for the plaintiffs while other individual cases saw significant victories for the defendants. Both sides were declaring victory! In the meantime, a test case selected in the MDL proceeded; the plaintiffs in this test case withdrew two expert witnesses. Johnson & Johnson declared this a victory asserting that the plaintiffs would be unable to prove causation in those and other pending cases.
While the litigation moved forward, negotiations continued. On July 27 of this year, a $5.5 billion settlement of 69,000 to 76,000 cases was announced. The settlement amount is conditioned on approval by plaintiffs’ counsel representing 95% of the plaintiffs in that group. If that level of support is achieved and the settlement consummated, that may be the end of the Johnson & Johnson saga. However, even if that settlement holds, there will presumably be a number of individual cases not covered by the settlement that will proceed.
Attorneys and academics who argued for the dismissal of these mammoth Chapter 11 cases, particularly if they stem from the “divisional mergers” of the Texas two-step, have asserted that not only do the plaintiffs have a constitutional right to have their cases heard in court before a jury, but the individual case process can be efficient, partly because of the availability of the MDL. The recently announced settlement will help test that argument. But we do not know whether the MDL settlement will hold and even if it does, we do not know the number of cases that will be brought outside of that settlement and the ongoing processes, the costs or outcomes. In the meantime, the almost nine-year saga of the Bestwall case, at an estimated $2.9 million of professional fees so far, is still pending. The jury is still out on both procedures in mass tort cases.
For more information or questions, contact Jim Baillie.
Of CounselJim is a nationally recognized bankruptcy lawyer with extensive experience representing financially stressed businesses or their creditors bringing to bear his experience in bankruptcy and workouts, debtor-creditor law ...