If it struck you a bit odd that one of the largest and most profitable corporations in the world (valued at $400 billion) was suddenly filing for bankruptcy, well, you're not alone. A three-judge panel for the U.S. 3rd Circuit Court of Appeals dismissed Johnson and Johnson's Chapter 11 petition for one of its newly created subsidiaries, LTL Management, arguing the move was done in bad faith.

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The pharmaceutical giant is facing $3.5 billion in verdicts and settlements from 38,000 lawsuits claiming that the company's talc products caused cancer. To shield itself from these costs, J & J used the so-called Texas Two-Step to create a subsidiary that absorbs the litigation and then declares the subsidiary bankrupt. The plan was internally named "Project Plato".

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• According to CNBC, Jon Ruckdeschel, a lawyer for the plaintiffs, applauded the bankruptcy dismissal, saying: "“Bankruptcy courts are for honest companies in financial distress, not billionaire mega-corporations like J&J."
• The Appeals Court's 56-page opinion recognizes that Johnson and Johnson created the subsidiary "solely to access the bankruptcy system and not because it faced financial distress," notes CNBC. Furthermore, the opinion states that “Good intentions - such as to protect the J&J brand or comprehensively resolve litigation - do not suffice alone."

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The Verdict

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The Texas Two-Step is a fairly common legal tool for shouldering large settlements and verdicts—especially in toxic torts. So, for this tool to be shot down by the 3rd Circuit Court is major. Of course, this could still be reversed by the Supreme Court, but companies may think twice before using this tactic again in the future.

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