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J&J Baby Powder Bankruptcy Moved to N.J. Despite ‘Texas Two-Step’

J&J Baby Powder Bankruptcy Moved to N.J. Despite ‘Texas Two-Step’

Johnson & Johnson will have its baby powder bankruptcy moved to its home state of New Jersey, potentially threatening the consumer giant’s strategy for dealing with tens of thousands of lawsuits filed by women who say the product gave them cancer. 

The transfer will be a new test of the plan known as the Texas Two Step in which J&J created a unit in Texas to hold all of the lawsuits, then moved that unit to North Carolina and placed it in bankruptcy. The strategy hasn’t yet been tested in New Jersey’s federal bankruptcy court. 

At the same time, J&J won a short-term reprieve from the lawsuits when U.S. Bankruptcy Judge Craig Whitley ruled Wednesday to grant a 60-day stay on the litigation. When J&J placed its LTL Management unit in bankruptcy, the proceedings halted suits against LTL, but left non-bankrupt J&J exposed to some 38,000 lawsuits, some of which are nearing jury verdicts.

Whitley said in a court that he wanted to give the judge who takes over the case time to decide how to proceed.  “I need to stop the litigation for a short period of time,” Whitley said. “Sixty days is what I have in mind.”

The move of venue gives critics a new chance to have the strategy thrown out, because federal law in New Jersey may be more favorable to them, Greg Gordon, J&J bankruptcy lawyer who helped developed the strategy, said in court.

Showdown Delay

LTL had argued that the case should stay in North Carolina because Whitley is considered the leading expert on the Texas Two Step strategy. Gordon said the move may make the bankruptcy last longer and cost more. 

“It makes me cringe to thing of going to another court,” where LTL’s team will have to start “educating a new judge,” Gordon said.

The temporary stay delays a showdown between J&J and people who say one of the company’s oldest products, baby powder, made them sick. J&J had been fighting the cases one at a time in court earlier this year. It changed tactics in an effort to deal with current and any future cases at one time, in one court.   

Under certain circumstances, a non-bankrupt parent company can benefit from a bankrupt unit’s lawsuit stay. Last month, Whitley declined to immediately protect J&J from the lawsuits and asked the company to return to present more evidence. His ruling today favored J&J.

Critics say the Texas Two Step violates the spirit of the Chapter 11 rules because it allows a profitable company to stay outside of bankruptcy, but still enjoy the protection granted by the lawsuit stay.

The case is LTL Management LLC, 21-30589, U.S. Bankruptcy Court, Western District of North Carolina (Charlotte).

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