Honesty or Knavishness? A Verdict on Bankruptcy's "Texas Two-Step"

By: Nicolas V. Torres
Volume IX – Issue I – Fall 2023

Introduction

Following a stint in debtor’s prison for an amount of £17,000, English novelist and merchant Daniel Defoe wrote his first notable publication titled An Essay Upon Projects (1697). His work proposed improvements to England’s social and economic well-being by commenting on subject matters ranging from the repair of highways to the proposal of a national pension office. [1] Defoe even included a chapter most salient to his personal life, where he admits that "No man has tasted differing fortunes more, And thirteen times I have been rich and poor"—a testament to his knack for fortune and insolvency. [2] His chapter, "Of Bankrupts," admits to the foolishness of debtors, but also advocates for a new system in which debtors are given a reasonable opportunity to repay their creditors. Within his discourse, Defoe identifies two types of debtors: [3]

(1) "There is the Honest Debtor, who fails by visible Necessity, Losses, Sickness, Decay of Trade, or the like.

(2) The Knavish, Designing, or Idle, Extravagant Debtor, who fails because either he has run out his Estate in Excesses, or on purpose to cheat and abuse his Creditors."

These debtors, despite their introduction three hundred years ago, maintain their relevance. Following Amchem Prods. v. Windsor (1997), a 6-2 Supreme Court ruling that prevents product liability claims ("claims") from being filed as a class action, companies facing lawsuits ("suits") over their products have employed a creative lawyering tactic that blurs the distinction between honesty and knavishness. [4] Defendants must engage multiple related suits on a case-by-case basis ("mass torts"), making the litigation more expensive and time-consuming. As a response to ongoing product liability litigation, companies Georgia Pacific, Trane Technologies, Saint-Gobain, 3M, and Johnson & Johnson, placed their product liabilities into a separate legal entity and filed for bankruptcy—an unprecedented move called the "Texas Two-Step" that will stress the foundations of U.S. bankruptcy law and create massive implications for plaintiffs seeking compensatory damages.

I. Background of the U.S. Bankruptcy System

i. History

When writing the U.S. Constitution, delegates of the Constitutional Convention understood the need for bankruptcy laws to instill confidence in the country’s merchant system. Article I, Section 8, Clause 4 dictates that "[Congress shall have Power…] To establish [a] uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States"—a capability that was not expanded by legislators until the next decade. [5 ]As a response to the economic panic of 1797, the federal government’s first bankruptcy law passed on April 4, 1800, granting commissioners the power to supervise the bankruptcy process. [6,7,8] However, its repeal three years later deemed bankruptcy laws of the 19th Century a mere response to distressing economic conditions, as opposed to a standing institutional mechanism.

This precedent changed with the Bankruptcy Act of 1898, which redistributed the power between creditors and debtors. [9,10] Creditors lost their ability to discharge a debtor’s bankruptcy filing and instead exercised their power through an elected trustee and creditors’ committees. [11] During the Bankruptcy Act’s effect, it underwent significant revisions during the Franklin D. Roosevelt administration in 1938 and reworked reorganization provisions into what is now Chapters 10, 11, 12, and 13. [12] Though, even these alterations were due for a reckoning.

In the twenty-one year period between 1946 and 1967, the number of bankruptcy cases rose from 10,196 to 208,329, revealing flaws in the Bankruptcy Act. [13] In 1968, the Subcommittee on Bankruptcy of the Senate Committee on the Judiciary determined that the administrative system for bankruptcies was costly, inefficient, time-consuming, and lacked uniformity across jurisdictions, therefore prompting the subcommittee to develop new bankruptcy law. [14] Their efforts culminated in the Bankruptcy Reform Act of 1978, which modernized the commercial bankruptcy system to the one seen today. [15]

i. Chapter 11 Findings

1. Administrative Process

Title 11, Ch. 11 of the Bankruptcy Code facilitates a new start for what can be a viable business by permitting a company to "reorganize" its debt. To commence this process, a debtor (voluntary filing), or creditors upon stricter scrutiny (involuntary filing), files a petition to a bankruptcy court ("the Court") where it has a domicile, residence, or principal place of business. [16,17] The Court then approves or dismisses the filing. A debtor has an exclusive period of 120 days to file a plan of reorganization and obtain acceptance from creditors after the petition is filed. A plan’s filing and acceptance periods may be extended to 18 months and 20 months, respectively. [18,19,20]

Depending on the jurisdiction, either a bankruptcy administrator [21] or a U.S. trustee [22] monitors a debtor’s operation of their business and the bankruptcy process. This entity will then schedule a "Section 341 Meeting" with creditors to orally examine a debtor’s intentions and actions in the filing. [23] In addition to holding the "Section 341 Meeting," the administrator or U.S. trustee will establish a creditors’ committee composed of the seven largest unsecured creditors. [24] In the presence of abundant tort litigation, a tort claims committee can be formed at the discretion of the administrator or U.S. trustee. [25] These committees’ role is to perform checks on a debtor in possession, who may be a debtor or, in special circumstances, a case trustee. [26] Secured creditors, too, have a large influence on the direction of the bankruptcy process. At the request of creditors, an examiner can be appointed by the Court to perform investigations into a debtor and may even file a plan of reorganization and assist with creditor-debtor negotiations. [27]

If the Court approves the filing, creditors holding at least two-thirds in amount and more than one-half of the number of claims must approve a plan of reorganization. [28] Confirmation of a plan revokes a debtor’s prior debt obligations and binds them to new contracts, superseding those of the pre-bankruptcy period. [29]

a. Claims

The Bankruptcy Code identifies two kinds of claims: (1) the right to payment; or (2) the right to an equitable remedy for a breach of performance if the breach gives rise to a right to payment. [30] Claims frequently fall into the first category, including most tort claimants. However, the Court does not hold all claims equal. Due to the "inadequate pie" problem of bankruptcy, where there is not enough money to pay all creditors, payments are made using a waterfall approach. Issuers of debtor-in-possession (DIP) loans are granted "super priority" and therefore receive payment first, followed by secured claims, priority unsecured claims, general unsecured claims, preferred equity, and common equity. [31] If the debtor cannot repay a creditor, the debt can be converted to equity, as specified within a plan. This approach, however, places Tort claimants in a lingo. Courts consider them general unsecured claims, subjecting them to exploitation during bankruptcy proceedings due to their litigationary origin. [32]

b. Automatic Stay

After the Bankruptcy Reform Act of 1978, bankruptcy courts experienced an increase in jurisdiction, authority, and status, made possible by their ability to "issue any order, process, or judgment appropriate for exercising their functions under the code." [33] An order called an "automatic stay" attests to the Court’s newfound authority. Debtors can seek a preliminary injunction from the Court, i.e., the automatic stay, that suspends all judgments, collection activities, foreclosures, and repossessions of property that arise prior to the Bankruptcy. [34] Litigants, such as tort claimants, are therefore prevented from continuing or filing new suits against the debtor and from collecting on a prepetition debt or claim. This permits a debtor to instead funnel resources into the bankruptcy process and the repayment creditors. Due to the immense power of an automatic stay, a debtor’s motives must be questioned when filing for bankruptcy; is a filing a means for garnering bargaining leverage against creditors, or is it truly a good faith filing?

c. “Good Faith“

There is no explicit "Good Faith" requirement in the Bankruptcy Code, however, Courts recognize that a bankruptcy petition must be filed in good faith, or it otherwise has grounds for dismissal. [35,36] Determination of a good faith filing date emanates from the Bankruptcy Act of 1898. Debtors who sought entry of an order for relief had to seek approval of its petition from the Court, prompting the Court to establish if "[the petition] has been filed in good faith, or dismissing" it if found unsatisfactory. [37] In contemporary jurisprudence, general guidance suggests that good faith must be grounded in the "equitable nature of bankruptcy." [38] Due to its ill-definition, this concept inadequately bridges the gap between theoretical abstraction and practical application. In its stead, Courts look for good faith on a case-by-case basis; good faith covers different conduct in different situations. [39] Despite its limitations, the flexibility that comes with good faith interpretations provides Courts the reach to relinquish the power of the Knavish Debtor, protecting the integrity of the bankruptcy apparatus.

d. “Financial Distress”

Without distress, the gateway to a restructuring cannot open. Bankruptcy assumes a debtor seeks relief from their indebtedness; Courts build upon this assumption by requiring that a debtor be in a state of financial distress at the time of filing. [40] This does not condition insolvency, much less any particular requirement. Much like good faith, Courts consider each scenario unique as opposed to applying a rigid test. Common assessments include current capital and access to capital (such as through markets or funding agreements), amongst others. However, the possibility of future burdening liabilities does not fulfill the requirement for financial distress; there must be immediacy to the debtor's financial state. [41] Without distress, firms could enter a filing to alter their obligations, abusing a system intended for an honest, new breath of life.

e. Mass Torts

In the last half-century, bankruptcy courts have advanced the law to meet the needs of mass tort litigants. [42] Were a firm to assume crippling liability for, say, an injurious intrauterine device, as done by A.H. Robins Co. in 1986, the firm could file for Ch. 11 to use the bankruptcy system as a pathway for compensating victims; in essence, these remedies function as de facto settlements. [43] Tort claimants would enter the filing as a creditor, much like any unpaid lender, albeit as an unsecured claim. The significant benefits derived from this process include fairly and expeditiously paying numerous victims, saving the defendant/debtor and Courts from the administrative burden of tens or hundreds of thousands of lawsuits, and reducing the transactional costs of equitable compensation. [44]

II. Texas Two-Step

i. Texas Divisive Mergers

The Texas Business Organization Code § 10.003–10.901 went into effect in 1989. [45] The law, intended to protect cattle and farming operations, allowed Texas businesses to isolate high-risk assets in separate legal entities. [46] When a divisive merger takes effect, a holding company ("Old HoldCo") separates into a new holding company ("New HoldCo") and the liability shell ("LiabilityCo"). Assets and their respective liabilities are distributed between the two entities without any reversion/impairment, or any transfer/assignment having occurred. [47] In application, firms can move "dirty" assets, such as a faulty product, to LiabilityCo and, although disputed, protect the New HoldCo from the legal and financial liabilities associated with said product. When the tort litigants come calling, a firm files to restructure the LiabilityCo. This tactic, colloquially called the "Texas Two-Step," stays the ongoing litigation while the firm tries to convince the litigants and the Court to accept the filing.

ii. Greg Gordon’s Trail

All roads lead to Gregory M. Gordon. Despite its discrete origin over three decades ago, the Texas divisive merger became truly divisive amidst multiple expensive, years-long litigation battles. Only four firms have employed the Texas Two-Step, albeit unsuccessfully. Their umbrella companies are Georgia Pacific, Saint-Gobain, Trane Technologies, and Johnson & Johnson. Greg Gordon, a partner at Jones Day's restructuring practice, represents all four firms. [48] In principle, the filings share similarities; we look to Johnson & Johnson ("J&J"), whose casework has moved the furthest of the group.

III. Johnson & Johnson’s Unprecedented Solution to Mass Torts

i. Background

First sold in 1894, J&J's baby powder became a staple good for consumers from all walks of life—not just babies. [49] The product filled the shelves of pharmacies, supermarkets, and medicine cabinets worldwide. A century, and innumerable consumers later, the U.S. Food and Drug Administration ("FDA") discovered traces of asbestos in the talc used for the baby powder, amongst other J&J goods. [50] Notwithstanding an isolated, small number of allegations that the product caused cancer, government agencies' identification of asbestos in the powder and its association with cancer, triggered a significant liability for J&J. Claimants rushed in, filing over 38,000 ovarian cancer and 400 mesothelioma actions. [51] Although J&J pulled the baby powder and its other asbestos-linked products off the shelves, the future appeared bleak. [52]

ii. Procedural History

To limit Johnson & Johnson Consumer Inc.'s liability ("Old Consumer"), [53] the firm performed a Texas Divisive Merger on October 12, 2021. Two new entities were formed: LTL Management, Inc. ("LTL") and Johnson & Johnson Consumer Inc. ("New Consumer"). [54] LTL assumed the assets tied with tort liabilities, including the baby powder line of business where even the employees in this unit were employed under LTL. The merger allowed J&J to file LTL for bankruptcy without subjecting Old Consumer's (and now New Consumer's) operating enterprise to bankruptcy proceedings and the enormous legal liabilities of talc-related products. [55] Two days later, LTL filed a petition for Chapter 11 in the Bankruptcy Court for the Western District of North Carolina, effectively performing the "Texas Two-Step". The jurisdiction of this filing derived from nothing short of "forum shopping," [56,57] likely driven by a 2014 decision where the Court capped a debtor's asbestos liability at $125 million despite claims seeking $1.4 billion. [58] The Court, however, issued a 60-day injunctive relief and transferred the case's venue to the District of New Jersey due to the "convenience of the parties." [59] While the case pended in New Jersey, the Official Committee of Talc Claimants ("Talc Claimants' Committee")—acting uniformly in their capacity as a creditor committee—filed a motion to dismiss the case on the grounds that it did not fulfill § 1112(b) of the Bankruptcy Code, i.e., the "good faith" requirement. [60] After a five-day trial, Judge Michael B. Kaplan of the Bankruptcy Court for the District of New Jersey rejected the motion to dismiss and issued an injunctive relief.

In Judge Kaplan's opinion, he found that LTL filed its bankruptcy petition in good faith—a determination weighing heavily on the pragmatism of resolving the liabilities through bankruptcy's administrative process. [61,62] The Court also held that LTL was in financial distress. Emphasizing the historic costs of talc-related litigation faced by Old Consumer, the Court suggested that the "continued viability of all J&J companies [was] imperiled." [63] Lastly, the Court rejected the Talc Claimants' Committee allegations that LTL filed with the intention of gamesmanship or inequity, referring to LTL's benefits derived from the injunctive relief. [64] J&J, whose market cap exceeds $350 billion at the time of this writing, pledged to set aside $2 billion to its creditors. [65] The Talc Claimants' Committee appealed to the Third Circuit what they called a "rotten to the core ruling." [66] In May of 2022, the Third Circuit authorized direct appeal, culminating in a decision that would seal the filing's fate, and with it, the Texas Two-Step.

iii. Analysis of the Third Circuit’s Opinion

Plaintiffs, thousands of whom were females with ovarian cancer, had been forced to wait as the bankruptcy proceedings played out over the course of three years (not including preceding personal litigation). As they paid exorbitant medical expenses while awaiting death or the remission of their cancer, [67] the trajectory of their claims fundamentally changed on January 30, 2023. The Third Circuit dealt a landmark verdict dismissing LTL's Chapter 11 petition, subjecting J&J to individually resolve the thousands of tort claimants individually.

1. “Good Faith”

The Court recognized that the Bankruptcy Code "neither sets nor bars explicitly a good faith requirement," but its necessity for a filing's approval instead derives from the "equitable nature of bankruptcy." [68] Judge Thomas L. Ambro, who wrote the opinion, is right to clarify this obfuscation (a determination made by citing Of icial Comm. Of Unsecured Creditors v. Nucor Corp.), [69] but it could create a chink in the chain by suggesting that the "good faith" requirement presupposes that bankruptcy courts are courts of equity. [70] They proceed by applying a test from the Third Circuit's 2004 ruling in In re Integrated Telecom Express, [71] where to recognize that "good faith" exists, the Court must determine that (1) the petition serves a valid bankruptcy purpose, and (2) the petition is not filed merely to obtain a tactical litigation advantage. [72]

The first part of the test is coy for the "financial distress" requirement. Notwithstanding the legalese, the Court eventually made it clear that "absent financial distress, there is no reason for Chapter 11 and no valid bankruptcy purpose." [73] Now the Court had to determine what constitutes "financial distress" and if these descriptions could apply to LTL's filing. Unlike the "good faith" requirement, there is not even a semblance of a test to determine "financial distress," subjecting the Court to loose principles. The first principle the Court lands upon dictates that "insolvency is not strictly required"—rejecting a common fallacy in the bankruptcy system. However, even in a non-insolvent state, the Court will still take consideration of LTL's financial health. The second principle necessitates the immediacy of a filing; [74] the possibility of filing for bankruptcy in the future does not establish distress in the present. The Court's logic lies in that the debtor must try to rehabilitate the business before it succumbs to a "hopeless" situation. [75] Despite the Court stressing to distinguish an acceptable, early filing from a premature filing, their inadequate portrait of how to differentiate the two may close the door to firms attempting to proactively settle their debts. Weighing the facts, the Court finds that LTL does not possess the degree of financial distress required for a filing.

A funding agreement originating from Johnson & Johnson Services, Inc. ("HoldCo"), J&J's umbrella entity, was the key determinant of the Court's foray into LTL's financial condition. Far from insolvent, LTL received a funding backstop ("funding agreement") from HoldCo, functioning as an ATM, where LTL could receive up to $61.5 billion in cash to settle its liabilities. [76,77] Although less significant, LTL's assets also included a revenue stream from issuing royalty rights for eight products, including CLOROX® and SPARTAN®. J&J pegged the backstop to the value of NewCo, creating a de jure relationship between LTL and NewCo, and by extension, a de facto relationship between LTL and HoldCo. [78] The Court interprets that this web link LTL the benefits derived from J&J's capital, which can grow by obtaining loans using its AAA credit rating, selling treasury stock, and drawing from the balance sheet's $31 billion in cash and marketable securities. [79] A reasonable observer may interject: "But what of LTL's liabilities?" The Third Circuit found that the preceding Court erred in its calculation that LTL's tort liabilities amounted to $190 billion. [80] The opinion alleged that theoretical conjectures "ballooned its conclusion" and "ignore[d]…the possibility of meaningful settlement, as well as successful defense and dismissal[] of claims." [81] Had J&J not provided the funding agreement, the filing still would not fulfill the requirements for financial distress due to a lack of immediacy. Similar to the rebuttal against LTL's tort liabilities calculation, LTL did not adequately pursue meaningful legal actions to resolve its liabilities at the time of filing; there is room to "rehabilitate the business." [82]

Since LTL failed to fulfill the first prong of the Third Circuit's "good faith" test, the Court did not proceed to determine if LTL filed the petition to obtain a tactical litigation advantage. [83] By avoiding further fact-finding, the Court prevented J&J and its counsel from obtaining ammunition for an appeal. Moreover, were LTL to fail this prong, finding that a Fortune 100 firm filed to gain an unfair advantage could be suggestive and turn into a sore spot for the Court. Were the Court to consider making this determination, the plaintiffs could argue that filing for Ch. 11 pressures them into a reduced settlement by delaying litigation proceedings.

2. Unusual Circumstances Do Not Preclude Dismissal

In a move that severed LTL's remaining hopes of a successful filing, the Third Circuit found that LTL's lack of financial distress invalidated any "reasonable justification" that would deny dismissal. [84] Were a bankruptcy not filed in good faith, § 1112(b)(2) of the Bankruptcy Code permits that "unusual circumstances establishing that…[dismissal] is not in the best interests of the creditors and the estate" may preclude said dismissal. [85] In layman's terms, bankruptcy courts have an unusually flexible authority that permits them to permit a filing to move forward even when it would've been dismissed otherwise. The preceding Court, likely to foster pragmatism by supporting a de facto settlement between J&J and claimants, found that "unusual circumstances" exist: "the interests of current tort creditors and the absence of viable protections for future tort claimants outside of bankruptcy…constitute such 'unusual circumstances' at to preclude…dismissal." [86]

The Third Circuit took a different stance, claiming instead, perhaps in a show of humor, that the only part unusual about this filing is that the debtor comes to bankruptcy with insurance, i.e., the funding agreement; [87] the Court cannot currently see how LTL can overcome its lack of financial distress, therefore barring the conclusion that "unusual circumstances" pertaining to this filing preclude the case's dismissal. [88] This interpretation devises an "end-all, be-all" approach to the matter. In its conclusion, the Court admits that "we need not lay down a rule that no nontraditional debtor could ever satisfy the [Bankruptcy] Code's good-faith requirement." [89] Had the Court not inserted this backdoor, the Third Circuit could become a jurisdiction unfriendly to nontraditional filers and any supportive creditors.

This determination on "unusual circumstances" could be antithetical to the underlying principles of the Bankruptcy Code. The intent of § 1112(b)(2) is to create judicial maneuverability for reasonable bankruptcies that do not meet the "good faith" criteria. If the opportunity to save all parties from the costs of litigating 38,000 claims—especially in a fair system where a majority of claimants have to approve the bankruptcy plan—does not validate a dire need for judicial pragmatism, then what does?

3. Conclusion

Circuit Judges Restrepo and Fuentes support Judge Ambro's opinion; the Court dismisses LTL's bankruptcy filing. Their conclusion reiterates that the funding agreement mitigates any attempt at filing as of its petition date, but also shares that the Third Circuit does not mean to "discourage lawyers from being inventive," admitting that "creative crafting in the law can at times accrue to the benefit of all." [90] In a battle to balance pragmatism with idealism, the Court ultimately sides with idealism; their decision demonstrates that a "more-than-thorny" problem cannot override the underlying principles of the Bankruptcy Code. [91] Judge Ambro's opinion creates a safeguard to ensure that bankruptcy courts do not abuse their discretion to determine the fate of a restructuring.

IV. Discussion

Although Daniel Defoe's contributions to bankruptcy resonate in the contemporary Bankruptcy Code, his work detriments from its antiquity. Quickly-learned from his fickle success and failure as a merchant, Defoe muses that "if the bankrupt be a merchant, no statute can reach his effects beyond the seas" [92] —but times have changed. The Knavish Debtor no longer hides, but instead approaches today's Court with hubris, allotting the judicial system the power to safeguard equity or sanction malintent. By overturning the decision by the Bankruptcy Court for the District of New Jersey and illegitimatizing the Texas Two-Step, the Third Circuit chose to safeguard equity. Had the Third Circuit denied the motion to dismiss, three issues would've arisen.

First, the use of the Texas-Two Step would increase the difficulty for tortious injury creditors to receive equitable compensation for their claims. Historically, the bankruptcy system has received criticism for undercompensating these individuals. [93] Allowing a de facto settlement by filing a capital-flush shell company would subject creditors to either play their odds in a court battle or approve the filing by voting through the creditors' committee. Although this arguably gives creditors more room for decision-making, it instead presents a decision geared toward the debtor's interests. The nature of filings often permits the automatic staying of litigation, therefore pressing parties to accept the filing amidst—in the case of LTL claimants—the duress of affording medical expenses and, in the most extreme circumstances, seeing a case through before death. By forcing a plaintiff's hand, the debtor likely ensures a lower payout than otherwise expected.

A less concretely linked but still tangible possibility is that the Texas Two-Step disincentivizes firms from producing safe products. Recalling the facts from In re LTL Mgmt., LLC, NewCo continued operating J&J's consumer business without assuming the liabilities derived from the talc-related products. [94] The financial costs associated with tort liability encourage firms to sell their products with caution, otherwise risking expensive payouts and insolvency. Divisive mergers, by allowing firms to shield their operating entity at any moment when tort liabilities are detected, promote the sale of dangerous products. Without the knives hanging over the throne, we could see firms taking an aggressive approach with respect to their products' consumer safety.

Lastly, permitting firms to file in bad faith undermines the foundation of U.S. bankruptcy law. Courts must, and have, acknowledged the difficulty of upholding "good faith" requirements amidst an institution meant for the Honest Debtor. Were Courts to enforce liberal conditions, Knavish Debtors could slip by. This could be performed by either misidentifying the presence of financial distress or by applying the "unusual circumstances" doctrine. An Improper application of bankruptcy's "equitable nature" could harm creditors and undermine the Bankruptcy Code.

LTL's inability to convince the Third Circuit marked the dud of a creative feat and painted its filing an act of knavishness. Yet, LTL's appeal and the ongoing cases of Greg Gordon's four other clients could redeem bankruptcy courts' acceptance of the Texas Two-Step. The stress to U.S. bankruptcy law as an institution has not subsided; all that lies between success and failure is one more time.

Endnotes

[1] Daniel Defoe, An Essay upon Projects, 207.

[2] Reginald Mutter, "Daniel Defoe," Britannica, https://www.britannica.com/biography/Daniel-Defoe.

[3] Defoe, An Essay, 206–207.

[4] Amchem Prods. v. Windsor, 521 U.S. 591.

[5] "ArtI.S8.C4.2.5 Constitutional Limits on Bankruptcy Power," Constitutional Annotated, https://constitution.congress.gov/browse/essay/artI-S8-C4-2-5/ALDE_00013184/.

[6] Bankruptcy Act of 1800, ch. 19, 2 Stat. 19 (1800), repealed by Act of Dec. 19, 1803, ch. 6, 2 Stat. 248 (1803).

[7] "The Bankruptcy Court Is a Court of Equity: What Does That Mean?," LexisNexis, 275–310.

[8] The current system of bankruptcy courts went into effect in 1984; however, a trustee is still used to oversee a debtor’s assets.

[9] Bankruptcy Act of 1898, Ch. 541, 30 Stat. 544 (1898), repealed by Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1978).

[10] Bankruptcy Act of 1898, Ch. 541, 30 Stat. 544 (1898), repealed by Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1978).

[11] Posvogel, "The Bankruptcy," 13,14

[12] Glenn Posvogel, Jr, "The Bankruptcy Reform Act of 1978–A Review and Comments," University of Arkansas at Little Rock Law Review, 20, https://lawrepository.ualr.edu/cgi/viewcontent.cgi?article=1404&context=lawreview.https://lawrepository.ualr.edu/cgi/viewcontent.cgi?article=1404&context=lawreview.

[13] "The Bankruptcy," 275–310

[14] Senate Judiciary Committee, "Report of the Commission on the Bankruptcy Laws of the United States. H.R. Doc. No. 93–137, 93d Cong., 1st Sess., pt. I, 2–5 (1973).

[15] The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 revised the consumer bankruptcy system (as opposed to that of commercial enterprises) to disqualify many consumers from filing for Ch. 7 and instead make them file for Ch. 13.

[16] 11 U.S. Code § 303.

[17] "Chapter 11 - Bankruptcy Basics," US Courts.

[18] 11 U.S.C. § 1121(b).

[19] 11 U.S.C. § 1121(d).

[20] If this exclusive period expires, the creditors’ committee may file a plan to compete with that of a debtor.

[21] Present in North Carolina and Alabama.

[22] Used in the 48 states and territories outside of North Carolina and Alabama.

[23] 11 U.S.C. § 341.

[24] "Chapter 11 - Bankruptcy."

[25] Ibid.

[26] To be differentiated from the U.S. Trustee

[27] "Chapter 11 - Bankruptcy."

[28] 11 U.S.C. § 1126(c).

[29] "Chapter 11 - Bankruptcy."

[30] 11 U.S.C. § 101(5).

[31] Also called the "Absolute Priority Rule."

[32] See Article II, § B(c) of this paper.

[33] 11 U.S.C. § 1.

[34] 11 U.S.C. § 326.

[35] In re SGL Carbon Corp, 200 F.3d 154.

[36] Debtors have the burden of proving they filed in good faith.

[37] Bankruptcy Act of 1898, §141, 11 U.S.C. §541 (1976) (repealed 1978).

[38] "Chapter 11." Id. at 161-62. "A debtor who attempts to garner shelter under the Bankruptcy Code . . . must act in conformity with the Code's underlying principles" (citations omitted).

[39] In re Victory Constr. Co., 42 B.R. 145, 149. The "Good Faith" requirement is described as: "…covers too many different kinds of conduct, in too many different situations" and "functions at such a high level of abstraction that one can scarcely discern what might be underneath it" (citations omitted).

[40] "The Bankruptcy," 21. "One of the primary purposes of the bankruptcy act is to "relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes." This purpose of the act has been again and again emphasized by the courts as being of public as well as private interest, in that it gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of the bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt" (citations omitted).

[41] SGL Carbon, 164 F.3d.

[42] "The Bankruptcy," 25. "In the area of mass torts, Judge Weinstein observes that in the last fifty years concepts of equity have advanced the law to meet changing social needs" (citations omitted).

[43] Douglas G. Smith, "Resolution of Mass Tort Claims in the Bankruptcy System," UC Davis Law Review 16, no. 1613 (2008): 1636, https://lawreview.law.ucdavis.edu/issues/41/4/articles/41-4_smith.pdf.

[44] "The Bankruptcy," 25. "In the mass tort context these include: (1) fairly and expeditiously compensating numerous victims, and (2) deterring wrongful conduct where possible; while (3) preventing over deterrence in mass torts from shutting down industry or removing needed products from the market, (4) keeping the courts from becoming paralyzed by tens or even hundreds of thousands of repetitive personal injury cases, and (5) reducing transactional costs of compensation" (citations omitted).

[45] Act of , 10.003-10.901, 78th Leg. Session Laws

[46] Samir D. Parikh, "Mass Exploitation," University of Pennsylvania Law Review 170, no. 53 (2022): 58, https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1265&context=penn_law_review_online.

[47] Act of , 10.008a,2a,2c, 78th Leg. Session Laws. This law protects Texas divisive mergers from fraudulent-transfer claims.

[48] "Gregory M. Gordon," Jones Day

[49] In re LTL Mgmt., LLC, 64 F.4th 84, 93.

[50] In re LTL Mgmt., LLC, 94.

[51] Id.

[52] Id. "The magnitude of the award in one case also raised the stakes. There, a Missouri jury awarded $4.69 billion to 22 ovarian cancer plaintiffs, reduced on appeal to $2.24 billion to 20 plaintiffs who were not dismissed (Ingham v. Johnson & Johnson, 608 S.W.3d 663, cert. denied, 141 S. Ct. 2716, 210 L. Ed. 2d 879 (2021)." Although an outlier, this case depicted the potential for J&J's baby powder liability to hurt the firm's balance sheet. The average damages per claimant averages $39.7 million. (citations omitted).

[53] A wholly owned subsidiary of Johnson & Johnson Services, Inc. where the umbrella company kept their baby powder line of business.

[54] Same name as Old Consumer, but it is technically a new legal entity due to the divisive merger

[55] Supra note 47, at 93.

[56] "Forum Shopping" is the practice of choosing the court or jurisdiction that may provide the most favorable outcomes.

[57] Laura S. Rossi, "The Texas Two-Step: How Corporate Debtors Manipulate Chapter 11 Reorganizations to Dance Around Mass Tort Liability," Emory Bankruptcy Developments Journal 39, no. 3 (2023): 621, accessed November 27, 2023, https://scholarlycommons.law.emory.edu/cgi/viewcontent.cgi?article=1239&context=ebdj.

[58] In re Garlock Sealing Techs. LLC, 504 B.R. 71, 97.

[59] U.S. Bankruptcy Court Western District of North Carolina Charlotte Division, Order Transferring the Case to the District of New Jersey, Case 21-30589, Doc. 416, 11, November 16, 2021, accessed November 27, 2023, https://document.epiq11.com/document/getdocumentsbydocket/?docketId=929411&projectCode=LLC&docketNum ber=416&source=DM. "Convenience of the parties" is tested by six factors: "(1) the proximity of creditors of every kind to the court; (2) the proximity of the Debtor to the court; (3) the proximity of the witnesses necessary to the administration of the estate; (4) the location of the assets; (5) the economic administration of the estate; and (6) the necessity for ancillary administration if a liquidation should occur." The first and fifth factors support the transfer to New Jersey. Although the claimants come from across the United States, most of the claimants filed suit in New Jersey via multi-district litigation. Accordingly, the New Jersey courts have spent economic resources to administer this litigation. When applying the second, third, and fourth factors, the Court elaborated that J&J's headquarters and most of its officers work out of New Jersey. Contrastingly, "the Debtor’s connections to North Carolina are limited. The only physical asset located in North Carolina is a bank account with $6 million." The sixth test is not elaborated upon (citations omitted).

[60] In re LTL Mgmt., LLC, 98.

[61] Amchem Prods. v. Windsor. Recall that product liability cases cannot receive a class-action certification.

[62] In re LTL Mgmt., LLC.

[63] In re LTL Mgmt., LLC, 99. The 3d. Cir. of Appeals recalling the preceding ruling.

[64] Id.

[65] Dietrich Knauth and Tom Hals, "Judge greenlights J&J strategy to resolve talc lawsuits in bankruptcy court," Reuters, last modified February 25, 2022, accessed November 27, 2023, https://www.reuters.com/legal/transactional/judge-allows-johnson-johnson-talc-unit-remain-bankruptcy-court-2022-02-25/.

[66] In re Garlock Sealing Techs. LLC, 609.

[67] Brian Mann, "J&J tried to block lawsuits from 40,000 cancer patients. A court wants answers," NPR, last modified September 27, 2022, accessed November 27, 2023, https://www.npr.org/2022/09/19/1123567606/johnson-baby-powder-bankruptcy-lawsuits.

[68] In re LTL Mgmt., LLC, 100.

[69] In re SGL Carbon Corp.

[70] "The Bankruptcy Court Is a Court of Equity." Scholars have long debated the question of whether bankruptcy courts are courts of equity. The negative argument relies on the history of bankruptcy's institution and the separation from England's courts of equity.

[71] In re Integrated Telecom Express, Inc., 384 F.3d 108.

[72] In re LTL Mgmt., LLC, 100–101.

[73] Ibid at 101.

[74] Ibid at 102.

[75] Id.

[76] Id at 105.

[77] Id. $61.5 billion is the approximated value of NewCo at the time of the decision.

[78] Id. NewCo, as a subsidiary, has access to HoldCo's balance sheet.

[79] Id at 106.

[80] Id.

[81] Id.

[82] Id at 102.

[83] Id at 109.

[84] Id.

[85] Id.

[86] Id.

[87] Id.

[88] Id.

[89] Id at 110.

[90] Id.

[91] Id.

[92] Defoe, An Essay, 199-120.

[93] Rossi, "The Texas," 611.

[94] In re LTL Mgmt., LLC, 47

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