Johnson & Johnson unit’s case needs examiner, U.S. trustee says

By Sarah Lizee

Olympia, Wash., Dec. 16 – Johnson & Johnson’s newly created subsidiary, LTL Management LLC’s, Chapter 11 bankruptcy case should have an examiner appointed, Regions 3 and 9 U.S. trustee Andrew R. Vara said in a motion filed Wednesday with the U.S. Bankruptcy Court for the District of New Jersey.

“Apart from the potentially billions of dollars of tort liabilities that may be at stake, this case presents the question of whether pre-bankruptcy restructuring in which the debtor divests most of its assets to a related entity while retaining its tort liabilities is permissible under the bankruptcy code,” Vara said in his motion.

Under that strategy, which the debtor describes as a “divisional merger” but is commonly referred to by critics as a “Texas two-step,” LTL’s predecessor, Johnson & Johnson Consumer Inc. (Old JJCI) underwent an internal reorganization in which its tort liabilities were allocated to LTL, which sought bankruptcy protection two days later, while the bulk of its assets and operations were allocated to a non-debtor affiliate.

“The combined result of these transactions is a Chapter 11 case that may include billions of dollars of tort liabilities – but few of the assets – of Old JJCI,” the U.S. trustee said.

Vara noted that this is not the first Chapter 11 case to feature this kind of strategy, but it may be the first to consider directly whether such a strategy is consistent with the provisions and purposes of the bankruptcy code.

“The court’s determination of that issue will have profound effects both within and beyond this case,” Vara said.

The U.S. trustee said that it is expected that LTL’s reorganization proposals will face numerous challenges from different parties in interest, many of which may hinge on common questions of law and fact relating to the so-called divisional merger.

Outside of the case, the resolution of these matters also will have broad consequences for the bankruptcy system as a whole, Vara said.

“Because of the intense public attention surrounding this case, and because many of the issues involving the divisional merger will be decided by this court as a matter of first impression, the court’s rulings will provide important guidance to other courts, practitioners and legislators, and the outcome of this case may well determine whether the divisional merger becomes a regular and accepted part of the Chapter 11 attorney’s toolbox,” the U.S. trustee said.

Vara said he is requesting the appointment of an examiner to investigate and report on the circumstances and legal effect of the divisional merger, including whether it was undertaken in good faith, whether the bankruptcy estate of LTL possesses viable claims against Johnson & Johnson, the new Johnson & Johnson Consumer Inc. or any other parties as a result of the divisional merger, and whether the managers and professionals who participated in that transaction have an adversity of interest that should prevent them from serving or representing the debtor in this case.

Johnson & Johnson is a consumer products company based in New Brunswick, N.J. The LTL Management subsidiary filed Chapter 11 bankruptcy on Oct. 14 under case number 21-30589.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.