A judge dismissed Johnson & Johnson’s third talc bankruptcy after finding “significant voting and solicitation irregularities” in about half of the votes supporting the proposed $10 billion Chapter 11 confirmation plan.
Unlike the two prior Chapter 11 cases filed by Johnson & Johnson subsidiary LTL Management, U.S. Bankruptcy Judge Christopher Lopez, of the Southern District of Texas, spilled little ink on the financial distress of Red River Talc or the controversial “Texas two-step” merger procedure that created the new debtor.
Instead, the judge focused heavily on the voting process and, in particular, the means by which several plaintiffs’ firms cast master ballots on behalf of thousands of clients. Unlike in the past two talc bankruptcies, numerous plaintiffs’ firms jumped aboard in support of the plan. At a hearing that wrapped up a month ago, many of those lawyers testified that they had relied on engagement letters that allowed them to vote for thousands of clients who hadn’t responded by the deadline.
But Lopez concluded that was one of several “significant voting and solicitation irregularities” that doomed the plan.
“Plaintiffs’ firms voted tens of thousands of claims without either hearing directly from their clients or having the requisite authority to do so,” he wrote in Monday’s dismissal order. “The prepetition voting and solicitation history and related issues raised serious questions about whether this case should have started.”
Even if the voting issues could be cured through a re-solicitation process, Lopez found other problems with the talc bankruptcy, such as an injunction order against hundreds of retailers and Kenvue, Johnson & Johnson’s newly created subsidiary that is responsible for talc liabilities, and the potential hurdle of the U.S. Supreme Court’s 2024 decision in Harrington v. Purdue Pharma, which overturned nonconsensual third-party releases in Purdue Pharma’s $6 billion bankruptcy plan.
He called on the parties to reach a resolution, noting that the latest version of the plan contemplated an out-of-court deal if it wasn’t confirmed by the Fifth Circuit.
“While the court’s decision is not an easy one, it is the right one,” Lopez wrote. “The court hopes something gets done for J&J, Red River, and claimants who also want finality on their cases.”
In a statement, however, Johnson & Johnson said it had no intent to settle and reversed the $7 billion reserved for the bankruptcy plan, calling the talc litigation “a plaintiff-lawyer driven fake tort, premised on junk science and fueled by third party litigation financing including from foreign sovereign wealth funds.”
“The court has unfortunately allowed a couple of law firms with financially conflicted motives, who have conceded they have not recovered a dime for their clients in a decade of litigation, to defeat the overwhelming desire of claimants,” Erik Haas, Johnson & Johnson’s worldwide vice president of litigation, said in a statement. “As we have repeatedly stated, in the absence of plan confirmation, we will vigorously present our case in the tort system.”
The Coalition of Counsel for Justice for Talc Claimants had objected to the bankruptcy, along with Travelers Casualty and Surety Co. and a lawyer for the U.S. Trustee’s Office. Adam Silverstein, of New York’s Otterbourg, a lawyer for the coalition said, “J&J tried to wear down victims through delay tactics, legal loopholes, and backroom deals. Today’s ruling shuts down that abuse and ensures that real people—not corporate executives—will decide what justice looks like.”
Votes ‘Did Not Pass Muster’
In Monday’s order, Lopez noted numerous distinctions between the Chapter 11 case before him and Johnson & Johnson’s prior talc bankruptcies. In the first talc bankruptcy, filed in 2021, U.S. Bankruptcy Judge Michael Kaplan of the District of New Jersey refused to dismiss the case, but the Third Circuit reversed, finding that LTL was not in financial distress. With a revised funding agreement, LTL filed a second bankruptcy in 2023, which Kaplan dismissed, citing the Third Circuit’s decision.
At a hearing, Lopez heard two weeks of witness testimony and arguments on whether to dismiss the Chapter 11 case, which Red River Talc filed on Sept. 16 of last year. Much of the hearing, however, focused on an element that didn’t exist in the prior talc bankruptcies: a pre-packaged vote on the plan. Johnson & Johnson insisted that 75% or more of talc claimants voted in favor of the plan, but a small coalition of firms opposing the bankruptcy raised accusations of ballot stuffing to achieve the support of 82% of an estimated 93,000 talc claimants.
During the hearing, Lopez asked lawyers who testified how they voted for their clients.
The attorneys had the option to vote on behalf of clients who had instructed them whether they supported the plan or opposed it, or to cast a ballot under their power of attorney for clients who didn’t indicate their preference.
Lopez said there were numerous issues with the votes cast under the latter option, which “does not pass muster.”
He specifically referenced more than 25,000 votes cast by Mikal Watts, of Watts Law Firm in Austin, Texas; Adam Pulaski, of Pulaski Kherkher in Houston; and Anne Andrews, of Andrews & Thornton in Newport Beach, California.
“The general power under the engagement letters that Andrews, Watts, and Pulaski relied on do not give them express authority to vote on behalf of their clients in this bankruptcy,” he wrote. The engagement letters of all three also said they couldn’t negotiate a settlement, as the bankruptcy plan was characterized, without the client’s consent.
“The court expressly finds that Andrews, Watts, and Pulaski submitted their master ballots in good faith, believing that they had the authority to vote on behalf of their clients,” he wrote. “That said, believing one is right does not make it so.”
Lopez also found the attorneys didn’t give their clients, who are women suffering from ovarian and other gynecological cancers, enough time to make a decision.
“Thousands of claimants were given an unreasonably short time to vote even though there was no real deadline or contingency to start this case,” he wrote. “There was also a controversial vote switch that did not follow the tabulation procedures in the master ballots and the disclosure statement.”
That controversial switch involved Andy Birchfield, of Montgomery, Alabama’s Beasley Allen, who alleged that his co-counsel, R. Allen Smith, of the Smith Law Firm in Ridgeland, Mississippi, had changed the votes of their 11,000 clients from “no” to “yes” after negotiating another $1.1 billion in the plan. Lopez said there were problems with both firms, which voted on behalf of clients without their consent.
However, Lopez also concluded there was no bad faith among the attorneys or Johnson & Johnson, calling many of its actions “inadvertent mistakes.”
“Any mistakes were not intentional. There was no evidence of collusion or other improper behavior,” he wrote. “But the substantive prepetition solicitation and voting issues are troubling.”