Apropos of anything else, J&J's handling of this has been despicable. Creating an entity specifically to pick up all of the related liabilities, picking up those liabilities and then (exact count may be wrong, but it's very close) literally filing for bankruptcy within the space of three days.
The Texas two-step, as it's called.
> In 2021, the company spun off its liabilities into a new entity called LTL Management under a strategy called the “Texas two-step.” That legal but controversial approach allows a solvent parent company to protect its assets by creating a subsidiary to hold its liabilities — and then having the new company declare bankruptcy, as LTL did just days after incorporating. Critics complain it’s an abuse of the bankruptcy system and allows companies facing massive litigation to dodge corporate responsibility.
> The Third Circuit Court of Appeals in Philadelphia dismissed the bankruptcy filing in January, finding LTL was not in financial distress and had “no valid bankruptcy purpose.”
> But hours after that case was formally dismissed in April, LTL filed for bankruptcy protection again, this time with a higher settlement proposal of $8.9 billion.
The fact that this is legal is such a mockery of consumer protection law.
Having read the Matt Levine piece linked below (https://archive.is/KcL2P) I think that J&J did the right thing by attempting to use bankruptcy to organize payments.
It was not avoiding liability at all.
The court that dismissed the claim in general agreed with J&J's process, but said it was too early.
Some key quote from Levine:
> Juries in the US don’t like it when companies make products that kill people, and they tend to award enormous damages in cases like that. You multiply enormous damages by lots of cases, and you can easily end up with damages that exceed the value of the company. This can lead to unfair results, not for you — who cares about you — but for your victims: If a $1 billion company has killed 100 people, the first 10 who sue might get $100 million each of damages, leaving nothing for the remaining 90.
> one pretty practical approach [to how to solve this problem] is bankruptcy. This, after all, is what bankruptcy is for: It is a system to make sure that creditors are all paid fairly out of the assets of a company, rather than paying some creditors a lot because they are early and others nothing because they are too late.
> Bankruptcy courts are run by judges, who are bankruptcy professionals and who are used to dealing with companies that are, you know, bankrupt. They are used to not having enough money to go around; they are not temperamentally lavish with claims.
> That is, LTL — the box where J&J put its talc claims — could draw at least $61.5 billion from J&J to pay off those claims. The point here, the bankruptcy court concluded, was not to keep J&J from having to pay talc claims; the entire value of J&J’s consumer business was still on the line for those claims.
> But the Third Circuit disagreed, not because it thinks that the bankruptcy court is a bad place to resolve claims, and not because it thinks that J&J is avoiding liability with the Texas two-step, but because LTL isn’t bankrupt enough
> In some ways this is a sensible reading of the bankruptcy code, but it is a little bit of a weird result. The point of doing any of this is to do it early, before you are out of money, so that you have plenty of money to pay all the claimants fairly. The court realizes this awkwardness
> You don’t have to be insolvent to file for bankruptcy, and it is good to file early, but not prematurely. You want to file for bankruptcy while you still have plenty of money to pay claims, but not too much money.
> The basic idea of bankruptcy is that if you have a company with $1,000 of assets and $2,000 of liabilities, you can’t pay back everyone everything you owe them. You could just pay back the first creditors who show up and ask for their money back, until the $1,000 is gone, and then give the remaining creditors zero, but that seems unfair
I'm entirely unconvinced that J&J couldn't pay back everything they owe, to everyone they owe it to, without bankruptcy and the fact that they were able to avoid all of those individual lawsuits is already J&J getting off the hook unfairly and avoiding their full liability.
If I'm wrong about that and without bankruptcy J&J would be forced to go out of business before everyone could get paid, then no matter if they use bankruptcy or not, the end result of that bankruptcy should still mean that every penny they have goes to their victims and the families of their victims (evenly distributed or whatever) until J&J actually does go out of business.
If J&J in, any form, survives because of this “Texas two-step" then the “Texas two-step" is an insult to victims and to justice and should be outlawed.
Perhaps bankruptcy is a great way to divide up whatever is owed to everyone, but as long as J&J continues to exist it means that they got off the hook. Honestly, many of J&J's serial killers and mass poisoners should be locked up for the rest of their lives. Murder was extremely profitable for them. They'll do it again if they have the opportunity.
I was a juror on a very small case. A previous trial assigned guilt. Our trial was to determine damages.
It was eye opening for me. We were not allowed to know things like medical bills and costs the victim incurred. We were forced to choose some number without having an basis for establishing the magnitude. I still don’t know if we were too high or too low.
Ambulance chaser here. The most common reasons I don’t offer evidence of bills in a trial are that Medicaid paid the bill for pennies on the dollar, or the hospital wrote off the bills.
In many jurisdictions, if the Plaintiff chooses to introduce evidence of bills, they can only submit the amount still owed or actually paid to satisfy the bill, and the amount that was written off or contractually adjusted stays out.
Often, Medicaid may pay $700 on a $15,000 bill. Since the size of the bills tend to frame the non-economic damages (pain & suffering) awarded by juries, Plaintiffs’ attorneys don’t want small bill numbers to influence the juries into a minimal award. So, they just don’t introduce evidence of bills and hope that juries assume big bills or base their award on something else.
Wouldn't it then be prudent for the defendant to introduce that evidence? Do they ever do that to achieve the effect on perceived non-economic damages that you describe?
It might be, but they can’t. If plaintiff doesn’t ask for compensation for the bills then an itemized bill isn’t relevant evidence to any of the claims or defenses in the case.
If you weren't allowed to see medical bills and such, then you were probably tasked with determining other kinds of damages (e.g. emotional distress) that are totally unrelated to those.
How would you like it if you were a plaintiff suffering severe lifelong emotional distress but the jury saw that the medical bills were only $1000? It's not as simple as you make it out to be.
> I'm entirely unconvinced that J&J couldn't pay back everything they owe, to everyone they owe it to, without bankruptcy and the fact that they were able to avoid all of those individual lawsuits is already J&J getting off the hook unfairly and avoiding their full liability.
The amount that can be awarded by a jury is uncapped, there is absolutely no way of knowing whether J&J could pay all claimants.
There won't be any amounts awarded by juries if J&J get their way and leave it all up to a single bankruptcy judge.
Once J&J has damages awarded that exceed what they cam pay, thay would the the appropriate time for the company as a whole to declare bankruptcy.
A good first step to make sure J&J can pay all their victims would be to stop paying dividends to shareholders in case they need that money for victims.
Which is why you shouldn't be convinced that J&J couldn't pay what they'll owe either. Maybe it will end up that I'm wrong, and the bankruptcy would be necessary, but I have no reason to think that's the case right now. Right now this looks like they're just gaming the system for their own benefit, and not simply doing their best to make sure that their victims (whose well-being they clearly didn't care about while they were being poisoned) are all paid fairly. The idea that J&J is going out their way to apply clever legal loopholes just to protect the people they've been intentionally killing is beyond absurd.
> This can lead to unfair results, not for you — who cares about you — but for your victims: If a $1 billion company has killed 100 people, the first 10 who sue might get $100 million each of damages, leaving nothing for the remaining 90.
There is a valid point there, but one could argue it sets up unfair precedent for companies to act in bad faith if they can get off easy.
The unfairness isn't in what happens after they do something wrong, it's in how they structure their operations to begin with.
The point of limited liability is so that grandpa can invest in an index fund even if he doesn't understand the inner workings of consumer products manufacturing without having to worry that one of the 500 companies in the index will hire a bad manager and have it wipe out not just that investment but his entire retirement account and his house and every other asset.
The problem comes when corporations use the same mechanism to isolate their subsidiaries. Foo Corp is making phones that burn down your house and providing financing to buy them with and cloud services to use them with and software to run on them, but these are each different subsidiaries. Then Foo Electronics files for bankruptcy while its shareholders get to keep all the profits it made from selling the other services instead of making the victims whole.
The solution should be that limited liability is for natural persons, not corporations. If a corporation screws up you can go after the parent. Which makes sense, because the original rationale for limited liability doesn't apply there. We don't expect a business to be a generic investment fund -- if they're buying something it's because it complements their existing products and services, and they understand its operations. If they were just buying it as an independent investment then they could just as well return the money to shareholders to invest in that themselves.
And if that also makes it less advantageous for corporations to consolidate into huge conglomerates, good.
J&J is liable for the full liabilities of the new child company.
The child exists to make sure a pool of at least its current assets exists to split between all claimants. If they’re found to be liable for more than that, then J&J will be liable for it and, if they can’t service that liability, they will have to declare bankruptancy.
This doesn’t work for a particularly useful type of limited liability company: index funds (and mutual funds in general).
Today’s grandpa might be living off the retirement income from his S&P fund investments which should (IMO) have the same level of limited liability to him as grandpa would have if he invested in a tiny slice of each of 500 different companies directly.
> We don't expect a business to be a generic investment fund
Well sure, but those don't have to be a C Corp or an LLC. They could be something else which is restricted to being an investment fund and which isn't allowed to engage in ordinary business activity or own more than e.g. 10% of any given ordinary business.
As the Levine article explained, and as has been reiterated several times in this comment thread:
J&J is not "freed from the shackles of any liability", because it is still liable to its own subsidiary for the talc lawsuit claims, up to the full value of J&J itself (the parent company).
In a sense, the claimants are becoming shareholders of this company. That is, like shareholders, they have a claim to a certain portion of future cash flows. Like shareholders, they should be hoping that the business continues to thrive so that their claims can be paid out.
The decision not to cut dividends in the face of an earnings shock is a pretty common one and not generally a sign of an executive team attempting to enrich themselves. It's more of a sign to shareholders that the executive team has faith in the robustness of the business, which helps if the goal is to survive the present difficulties.
> In a sense, the claimants are becoming shareholders of this company. That is, like shareholders, they have a claim to a certain portion of future cash flows. Like shareholders, they should be hoping that the business continues to thrive so that their claims can be paid out.
This is an extremely perverse incentive and shows how fundamentally broken some of these mechanics are.
"You injured me, and need to compensate me. But in order to do so I have to hope you continue to prosper, potentially injuring others along the way, so I get my compensation. I can choose between getting you shut down, but potentially not being compensated, or being compensated but knowing that you go on to be able to do this to others."
Ok, no "outrage" here @somenits. This is a variation on a "bad bank" scheme that normally is suggested only where jettisoning the toxic liabilities from the main entity will facilitate a government bailout of the resulting "bad bank". That's what makes the scheme work, normally. There isn't a bailout on the way for J+J's bad bank, and the closest suggestion of any value-creation from the manuver comes from disassociating the consumer brand from consumer injuries they allegedly caused. However, that doesn't sound like a compelling case for such a remarkable corporate manuver.
So then, what we are left with is a "bad bank" scheme that is devoid of a compelling legitimate justification, which you yourself do not offer. This naturally raises an inference that J+J hopes to cram down tort claims via the maneuver. Perhaps the cram-down is in administrative overhead associated with litigation. Maybe it's some kind of mismatch in claim acceptance or approval criteria. None of the materials explain, and while I adore Matt's writing the bottom line is it looks like a shell game and that's from someone with no "outrage" whatever involved.
Would you have preferred I refer to a shell game rather than "three card monte." I do confess some ignorance of street hustle lingo. Or, maybe the street people have already switched to simply calling it the "bad bank game?"
I don't think you really understand what "Limited liability" means, nor who these supposed capitalists are. All those public pension plans & unionized retirement funds probably appreciate that they're not on the hook for unlimited liability from J&J.
So? You have said nothing to refute his point. Pention funds are capital.
You don't need to optimise returns on capital at the cost of a generation that in currently young and working. Pention system can be managed differently if needed too.
You're right, they probably do. They're pretty relieved that they don't have to govern (which is what they're doing, by the way) with any regard for anyone but their shareholders.
Boomers who made bad investments instead of just saving for retirement. I sure would feel bad if those were raided to help alleviate the suffering of sick or bereaved people here, now. /s
Not in the general case, but in this specific case it does show that limited liability does more than provide welfare to companies to but also protects a large number of individual investors, including the commenter.
"Well they could do things to harm themselves [because we treat non-profit employees like they implicitly have a wealthy spouse or should live in a shoebox]" is also not helping the argument very much.
One does not need to be a Stylite to have an opinion on society; comparing the actions of individuals, without significant power or influence, with corporate-fiction persons that come equipped with lobbying arms and sufficiently dispersed decision-making power that nasty shit comes out of them regularly, is not and never persuasive.
It’s called having the courage of your convictions. Plenty of people live off of non profit salaries without having a wealthy spouse or even do public sector work.
Not at all. Suppose you believe corporations are out of control, and it's on, what the best way to hurt them? Work for a charity and live in poverty? Become a hermit and live in a forest? no!
Find the corporation tou hate most and get a job there. Do damage from the inside, sleep with the boss, work your way up, drive it bancrupt. Cause it to loose all talent.
Work in two places at once, and do nothing in both jobs. Something like that
And according to a sibling link, 59% have some money in stocks. How many public sector workers for instance who have pensions or retirees who have dividend paying stocks like J and J do you think are cheering for those “evil capitalists pigs” to go bankrupt?
This is assuming the first 10 victims are going to act in a selfish way. That's basically assuming victims behave like companies (which must be selfish because their management has to protect them).
What's despicable? That people would operate in their own self-interest, without regard to potential harm that is not in any way their fault coming to people they've never met? Or the "assumption" that people would behave that way?
If acknowledging how people normally behave, especially when there's no moral obligation for them to behave otherwise, seems despicable, a lot of reality will become unacknowledgeable.
Why would a claimant intentionally take a lower settlement to keep funds available for later claimants? They have as much obligation to do so as you do to give up a portion of your paycheck to make sure claimants against J&J are paid out. Why would being the victim of crime specially obligate someone? Isn't that just a second victimization?
> That people would operate in their own self-interest, without regard to potential harm that is not in any way their fault coming to people they've never met?
We gave a name for that, it's calles psychopathy.
"According to a study conducted by forensic psychologist Nathan Brooks from Bond University, around one in five corporate bosses have clinically significant psychopathic traits. This proportion is similar to that among prisoners. Journalist Jon Ronson found that CEOs are four times more likely to be psychopaths than the average person."
It’s not as different as you might think. There has been a movement of anthropologists to call homo sapien alternatively homo economicus. Our ability to accumulate and share resources, which allowed us to build and trade, has deep roots in evolutionary psychology and sociology, and as these anthropologists argue, is perhaps the thing that most poignantly makes us uniquely human.
> The court that dismissed the claim in general agreed with J&J's process, but said it was too early.
And yet as soon as it was dismissed, within hours J&J had refiled with different numbers.
The court also said that trying to tie this new entity to North Carolina was also trying to maximize a "strained and very limited" connection to the state, and the administrator questioned why this entity had no relationship to the state of New Jersey, where J&J is headquartered and does business out of.
Care to share some references? I’m not well informed on this subject, and the disagreement here makes me think it’s wise to just go read up on the details.
> one pretty practical approach [to how to solve this problem] is bankruptcy. This, after all, is what bankruptcy is for: It is a system to make sure that creditors are all paid fairly out of the assets of a company, rather than paying some creditors a lot because they are early and others nothing because they are too late.
That's a legit argument in favor of bankruptcy of the entire company! There's no good justification for creating a shell company to control the damages on the main company (who did kill people).
Didn't you even skim the article? There's a short summary at the beginning:
> J&J is facing more than 38,000 lawsuits alleging that the company's talc products, including its Baby Powder, were contaminated by asbestos and caused cancers including ovarian cancer and mesothelioma
Right, but these judgements have yet to be levied. The problem they are solving with this maneuver is ensuring a common/fair result for the people suing, without the "unreasonable" step of declaring bankruptcy on the company as a whole without actual obligations.
As other comments have mentioned, Matt Levine has an excellent article describing the logic behind their actions.
$65BN is almost exactly equal to one year's gross profits for the company, on top of which J&J has $24BN in cash and a market valuation of over $400BN.
That $65BN is likely decades worth of claims, not one lump sum being demanded at once. Assuming the claims are spread out over just one decade, the settlement costs would amount to around 10% of their gross profits. Over multiple decades, it starts approaching "rounding error on the balance sheet."
Framing this as "J&J might run out of money to pay people for this" is pretty disingenuous to the point of feeling like corporate apologism.
You should base your projection on net profits, not gross, given that these would be additional expenses (not considering tax effect).
Johnson & Johnson net income for the twelve months ending March 31, 2023 was $12.724B, a 35.83% decline year-over-year. Johnson & Johnson annual net income for 2022 was $17.941B, a 14.07% decline from 2021. Johnson & Johnson annual net income for 2021 was $20.878B, a 41.89% increase from 2020.
They weren't capping the total payouts in damages. The bankruptcy filing itself said that parent company would cover the cost to ensure everyone gets the money. Bankruptcy was a process to ensure every victim gets equal amount.
The term for this process is misleading, and the mental image is very much of a company which is getting out of paying their victims. In this case, filing for bankruptcy created fairness among victims, they did not have to be first or fifth to get the right damages, every victim was treated equal.
> That is, LTL — the box where J&J put its talc claims — could draw at least $61.5 billion from J&J to pay off those claims. The point here, the bankruptcy court concluded, was not to keep J&J from having to pay talc claims; the entire value of J&J’s consumer business was still on the line for those claims. The point, rather, was to deal with those claims in an organized and efficient way, to treat all the claimants fairly.
The only reason the court quashed it was because it wanted J&J to fight the individual or class action lawsuits, and it was too early for bankruptcy.
>In this case, filing for bankruptcy created fairness among victims, they did not have to be first or fifth to get the right damages, every victim was treated equal.
It creates fairness among victims by removing their rights to seek higher damages via their own court cases.
This "fairness" is only needed if the total amount of judgements exceeds what J&J can pay. In which case it is J&J which should be declaring bankruptcy, but that would block their ability to keep paying dividends to shareholders.
> The only reason the court quashed it was because it wanted J&J to fight the individual or class action lawsuits
Exactly. The judge saw through skeezy J&J attempt to use a sham bankruptcy to avoid the large payouts that can come from jury trials.
Edit: Seriously, how can any person believe that J&J are doing this to make sure there is money to "fairly" pay all the victims while J&J is still paying some of the money that might be needed to pay victims as dividends to their shareholders. It is pretty darn extremely clear the J&J's primary goal is to reduce payouts and maximize shareholder value
> It creates fairness among victims by removing their rights to seek higher damages via their own court cases
How is it fair if the first victim gets 10M in damages, but the 100,000th victim does not, given each lawsuit proceeds differently? It's obviously not a race, and getting less/more damages based on the order you filed a lawsuit is surely not the best way. (Damages via settlement or decided by jury). Even in the best case scenario where every victim gets a payout, they should get equal payout for similar damages.
Also, the judge agreed with J&J's idea, but found the filing to be premature. That is even before they fought any lawsuit. Early is encouraged, premature is not. There is a distinction
> We recognize the Code contemplates “the need for early access to bankruptcy relief to allow a debtor to rehabilitate its business before it is faced with a hopeless situation.” A “financially troubled” debtor facing mass tort liability, for example, may require bankruptcy to “enable a continuation of [its] business and to maintain access to the capital markets” even before it is insolvent.
> Still, encouragement of early filing “does not open the door to premature filing.” This may be a fine line in some cases, but our bankruptcy system puts courts, vested with equitable powers, in the best position to draw it.
The problematic part would have been had the money been capped. It's not, evidently.
Then again, if you want to dissolve a company for one product, tell me what happens if tomorrow another product of theirs has some flaw, and now the victims cannot get anything for their damages?
> How is it fair if the first victim gets 10M in damages, but the 100,000th victim does not, given each lawsuit proceeds differently? It's obviously not a race, and getting less/more damages based on the order you filed a lawsuit is surely not the best way
I didn't claim that was an optimal procedure. But as of yet there is no risk of J&J not being able to pay future claims. Indeed, J&J are still financially secure enough to be paying out dividends to their shareholders.
> The problematic part would have been had the money been capped. It's not, evidently.
No, the problematic part is J&J's attempt to use a sham bankruptcy to force litigants against it to to settle through a single judge rather than continuing with regular court cases.
As I have said elsewhere, if bankruptcy is actually required here, then J&J should declare it themselves. They won't because then they'd have to stop paying dividends.
There is plenty of room for tort reform to malye things fairer. Sham bankruptcies and a texas two step is not the appropriate method to bring fairness to victims of a financially solvent company.
Hint, when the victims oppose legal maneuver that is supposed to "make things more fair for them" and the perpetrator supports it, then the legal maneuver probably isn't doing what it claims to be doing.
I quoted you the judge's opinion where he states he recognizes "a need for early filing even before it's insolvent." To me, that is agreeing in principle and idea, just that here he called it too early/premature. You can choose to skip that again, or read the whole thing in context, it's available on the internet.
If we are discussing one suboptimal process against another, it's a matter of opinion, especially when we have no concrete proof that J&J has been trying to limit liabilities.
> sham bankruptcy to force litigants against it to to settle through a single judge
It gets everyone same damages, does it faster, and does it more equitably. Moreover, there likely would be reserve for future victims where they would not have to find a lawyer, litigate a suit, etc. to get damages. Sham would be true if they skimped on damages, they claimed on the filing it's fully backed by parent company so they likely won't.
I don't get the concept of nuking the entire company for one product. Why is dividend even an issue? You think the total cost of damages would be more than their yearly revenue? If not, whatever they do with rest of the money (after the worst case estimate should not be an issue.
I think the motivation was to settle claims and pay damages quickly rather than through a longer drawn out trial. Thats not a bad motive in itself.
> Also, the judge agreed with J&J's idea, but found the filing to be premature.
And when he dismissed the filing, J&J changed some numbers and refiled the very same day. That obviously wasn't the message that they got out of the judge's ruling.
I get the sentiment, but if I stop and think about it, I don't understand the math. I'm not intending to criticize since I struggle with this myself.
Try on this hypothetical. Imagine that ten people in a giant company called ACME made some decisions that led to 50,000 people getting hurt. ACME also employs 100,000 hard working people, representing perhaps 0.3-0.4 million family members dependent upon that income. Imagine further that ACME's other products have dramatically improved the lives of hundreds of millions of other people.
Given that scenario, does the ethical math really work for ACME to be completely destroyed? It is easy to see how the 10 decision makers should be punished. It is also easy to see how the people who were hurt should be compensated in some way. Destroying ACME entirely will harm lots of other people so it is not clear how to justify that. It is a very frustrating domain because we think of these companies as monoliths, but they are really just a large collection of mostly very decent people.
The market will recreate those jobs as competitors rush in to fill the gaps left by J&J, including both employment and the value of their products.
By not destroying the company, you are giving all sufficiently large future companies carte blanche to break all the consumer protection laws they want, and you are rewarding investors for those companies. The long term moral hazard isn’t worth it; the investors and decision makers absolutely need to be wiped out.
It's like not taking down a criminal mafia because the income of the enterprise goes to take care of at least 10x as many children, wives, dogs and cats than people who were actively committing the crimes. It's like not ordering the the proceeds of a crime be returned to the victims because the house the thief purchased with them is so beautiful, and the thief's daughter so well-behaved.
> Imagine that ten people in a giant company called ACME made some decisions that led to 50,000 people getting hurt. ACME also employs 100,000 hard working people, representing perhaps 0.3-0.4 million family members dependent upon that income.
I employ thousands of men, women and children in my mines, many in the poorest and most conflict-ridden parts of the world. The gemstones we produce are some of the most highly valued products out there - what could produce more happiness than an engagement ring?
And yet despite all the good I do, when I want to hunt and kill one or two human beings for sport, apparently it's still illegal. Even when I offered to use people who were terminally ill anyway, and I offered to compensate their families appropriately.
I can only hope that in the future, our political leadership will be more rational and less emotional about these things
I’m not sure I agree that the current argument is about whether the company did something so harmful they should no longer exist, but I agree that whatever it is, it is not the same as TBTF.
The rights to ACME's products (and equipment to manufacture them) will be sold in bankruptcy to other companies that didn't give people cancer. These companies will continue to manufacture and sell them.
As we all know capitalism is the most efficient economic system, those 100,000 hard working people will go work for other companies. I'm sure another company that knows its products contain asbestos would love to hire the legal and PR team that has experience in suing scientists who link products to cancer.
> does the ethical math really work for ACME to be completely destroyed?
The same ethical math tells us we should never imprison parents of young children for smaller crimes, like stealing, because it will harm wellfare of the child. And yet we do it anyway.
> Destroying ACME entirely
By carpet bombing? Sure.
But we do not blow up the factories and we don't neurolise employees. The factories will be bought by a competitor, the employees will work for a competitor or start their own business. Nothing physical is "Destroyed" in the real world
I think I don't care about J&J as long as victims are fairly compensated. For this one, and for any future victims that are affected by this product or any other product created by J&J.
As I understand it, using this scheme, the company is avoiding punishment for their wrongdoings when it could be larger than they're willing to pay. They bankrupt some minor part of their budget instead of bankrupting the entire company.
When a serial killer gets the electric chair, most people consider that a fair punishment. No? So tell me, if a judge wanted to apply capital punishment to a company, which is not even a living thing, it's just money and stamped papers. How could it do that, when the company can use this scheme to escape?
Your understanding is wrong, which leads to a flawed analogy.
> The point here, the bankruptcy court concluded, was not to keep J&J from having to pay talc claims; the entire value of J&J’s consumer business was still on the line for those claims.
The court did not conclude that, or anything about J&J's intentions.
The court concluded that the subsidiary was not actually bankrupt and so couldn't justify J&J's attempt to consolidate all the lawsuits against it into a settlements from one bankruptcy judge.
This attempted consolidation is pretty clearly an attempt to limit the judgement sizes that may come out of jury trials. Pretending otherwise is naive at best.
This is a fascinating comment that will unfortunately get buried. Thank you for this interesting take on this. It really goes to show how the minimal details about a thing can be extremely misleading.
BS. So much stinking BS. This is even contradicted by your own quotes.
>> they are not temperamentally lavish with claims.
Which is just admitting that bankrupty courts are likely to awards lower judgements than the juries and judges who would otherwise be awarding damages. That is pretty clearly reducing liability.
If J&J eas really about to run out of money to pay out liabilities due lawsuits and we need to split what money they do have fairly, then J&J itself should declare bankruptcy. What they are doing instead is a sham legal maneuver designed to reduce judgements sizes and remove the legal rights of their victims.
Trying to couch that as "protecting the victims" is a farce. I wonder how much Matt got paid...
This is the top-voted comment but as many of the other replies have pointed out, it's totally wrong outrage-bait. J&J, the parent company, is still ultimately liable for the full amount. The bankruptcy process just allows the courts to manage all of the claims together under the authority of one judge, instead of having different courts in every state issue incompatible damages awards in a race to judgment.
They're only liable for the full amount because a judge refused to let them go through with the plan. Just because they failed to enact their plan doesn't mean the plan didn't exist.
No, wrong. That's not what happened and it's not what the article says. The court didn't like the idea of them using the bankruptcy system to consolidate the cases.
The main issue with the action seems to be stalling for time in the courts while the parent company can continue to operate without much consequences (as far as I can tell all the companies listed in the texas-two-step wiki page are still operating and have not paid out).
Because the bankrupcy basically pauses all litigation (including against the parent company) it means even more delays on an already extremely lengthy process, but the restrictions of bankrupcy only apply to the spin-out, not the parent. So while in theory they may pay out eventually, the process can easily take more time and money than many of the claimants have (literally in the case of those who have cancer).
In general the immense amount of time most court systems take to actually resolve disputes like this is a big contributer to the lack of faith most people have in them, and the capacity to stall for time available to both parties but especially defendents is a big part of that problem.
> The bankruptcy process just allows the courts to manage all of the claims together under the authority of one judge, instead of having different courts in every state issue incompatible damages awards in a race to judgment
This "just" is sure doing a lot of work.
First off, if J&J is really on the hook for all the liabilities of the child company, then the child company is not bankrupt since it has plenty of money to pay unless J&J is also bankrupt. This makes it pretty clear that the bankruptcy is a sham legal maneuver.
Second, it is a bit rich that this legal maneuver is framed at "protecting claimants" when it blocks those claimants from pursuing cases that maximizes their damages. It seems pretty clear that J&J are not following this strategy to protect the victims an ensure fairness but to minimize their own costs and damages.
What this basically amounts to is subverting bankruptcy law to force claimants into something more akin to a class action without the consent of the claimants.
If it really is the case that total awarded damages exceed what J&J can pay, then J&J should itself file for bankruptcy.
>Second, it is a bit rich that this legal maneuver is framed at "protecting claimants" when it blocks those claimants from pursuing cases that maximizes their damages.
This is purposefully obtuse. If a few courts award 5 plaintiffs the entire pot of gold, then there's nothing left for all the other claimants. And of course it's in J&J's interest to consolidate the cases. It's also in the plaintiffs' interests, especially those who weren't first.
Potentially but it's also a waste of our judicial system resources to have 12 identical cases going at the same time. However if you like paying for legal admin fees on both side its a great way to make sure lawyers get paid.
That's not true. Judges can't just take cases from different districts and different states, different court systems altogether, and consolidate them. Plaintiffs can choose to file a class action, but you can't force them into one. If all the cases are in federal court, you can kind of consolidate into an MDL (multi-district litigation), but that just consolidates certain pre-trial procedures. Unless they settle, the cases still get sent back out to the districts they came from for resolution by the original judges and separate juries.
The idea here was that a bankruptcy judge could more fairly distribute $61.5 billion dollars among claimants than having them sue J&J one at a time and getting uneven awards and costing everyone more lawyer hours.
Is a class action somehow impossible if they don't declare bankruptcy? Or they can't distribute money as easily as in a class action? The mechanics of this don't sound so absolutely necessary.
Further, if your company produces products that kill or injure people, then why should we show any interest in maintaining that companies existence with odd legal hacks like this? Shouldn't they be disbanded, their assets sold, and new businesses allowed to exist in that space?
What are we, in total, as a society, gaining by allowing this?
> Is a class action somehow impossible if they don't declare bankruptcy? Or they can't distribute money as easily as in a class action?
The issue is that there might be multiple actions, and compensation might be used up byt the first one (eg, if the company was sent into bankruptcy by the first class action, then subsequent cases would be useless). This is a pretty reasonable argument IMHO.
> Further, if your company produces products that kill or injure people, then why should we show any interest in maintaining that companies existence with odd legal hacks like this?
This seems fairly debatable.
J&J produces a lot of things that aren't talc, and it isn't like they are a cigarette company that knew the health risks. The risks from talc weren't known are are still debated, and it is a thing that has been used for thousands of years without known issues.
Separately there's a good argument that keeping the company alive is better for those affected because it can fun ongoing liabilities.
The talc itself is not believed to be the carcinagen, but the talc is contaminated with asbestos. Interal documents show that J&J knew about the contamination since 1971. Asbestos was known to be carcinegic at this point and the first bans of asbestos use in construction began rolling out in 1972.
They knew and hid the health risks, just like a cigarette company.
> Separately there's a good argument that keeping the company alive is better for those affected because it can fun ongoing liabilities.
There's a better solution: the government pays all the fines and then nationalizes the company until the profits have paid back everything owed plus reasonable interest. Then, it's sold off. The original owners get nothing.
That way, there's also an incentive for current shareholders to pressure their management to behave ethically - clearly, there's a massive lack of such in the current framework.
> Further, if your company produces products that kill or injure people, then why should we show any interest in maintaining that companies existence with odd legal hacks like this?
> This seems fairly debatable.
To be fair, we might not have some of the drugs many of us are prescribed to us if we just cancelled every company that ever hurt anyone with experimental drugs.
J&J wasn't accidentally hurting people with experimental drugs.
They had full knowledge that they were poisoning people, and they actively hid that from the people they were killing, because J&J wanted more of their victim's money before they died, and a continuous supply of new victims to take the place of the old ones.
That’s all well and good until you discover that you were affected by something else they did but you can’t sue them any more because they went bust servicing the talc powder claims.
Just because there are more people who might need to sue the company isn't a reason to allow it to continue to operate. This is just 'too big to fail' but for different (and now theoretical) reasons.
Maybe the solution is to nationalize J&J.
"You can't bankrupt my company because someone might need to sue me later" is absurd reasoning.
"What good will it do society to punish people who do heinous things to others?" It acts as a great deterrent to keep other corporate stooges from entering into high-risk activities. In many cases I advocate for "restorative justice" as opposed to punishment, but in the case of faceless corporations we can crash their value to 0 and call it even.
We have a system of private ownership where the owners get to reap the rewards of others' labor, but when they do something wrong they pull the "but think of the employees" bullshit. No. Full ownership, full liability.
Bankrupting J&J would achieve none of the things you say you want. It would just mean the first to sue gets everything and everyone else gets nothing. The assets get stripped and sold off to the next company who can just continue to do the same thing.
> The assets get stripped and sold off to the next company who can just continue to do the same thing.
But the shareholders of J&J lose everything, making the ones of the next company think twice before doing the same… Whereas with the shell company bankruptcy, J&J shareholders losses are limited, and they still own and run the company that killed thousands of people.
Ask yourself “what good had jailing Charles Manson at the first lawsuit done for society?” then remember that J&J is responsible for thousands more death than Manson, and likely more than all psycho killers in the history of the US combined…
Rogue corporations are killing people at a scaled rivalled only by dictators…
At least THIRTY NINE THOUSAND people suffered from a cancer that would have been avoided if the execs, who knew about the dangerousness of their product, stopped selling their contaminated crap. We're talking about TENS OF THOUSANDS of shattered lives, children who ended up growing without a mother, and women not able to bear children because the cancer destroyed their body.
This is what's “insane”.
The people who knowingly made this happen are literal monsters, there's just no other words.
If I understand your statement correctly, the idea posited is that a company which has had a large ruling against it should be able to avoid paying out the total amount assessed against it because someone might also have been harmed that could theoretically bring suit?
I don’t really think that some hypothetical future lawsuit is a valid basis to avoid the consequences arrived at for the current one. If one can simply make a virtual entity that holds all of your liabilities and then set it on fire to avoid paying them, isn’t that just a modern play on the ancient tradition of the scapegoat?
Putting all your sins on someone or something else didn’t absolve you then and it should not be a legal way to get out of paying for your mistakes now.
Please read the Matt Levine article that was linked a couple of comments upthread.
You (and many other commenters) seem to be under the impression that the bankruptcy procedure was done for the purpose of "avoiding paying out the total amount assessed against it", when that was not at all the case.
I read that article, and currently consider myself inadequately informed to analyze the legal and financial implications of the particulars of the J&J issue. It seems rather complex and I’m not a lawyer who has reviewed the relevant filings and documents.
My comment was only intended to be a response to the idea posited that some future hypothetical case should have any bearing on present reality. This belief in imaginary cases’ right to be considered in the legal system is turning up in interesting places lately, and I felt compelled to weigh in.
You didn’t understand my statement at all. You also didn’t understand the Matt Levine article because he doesn’t posit any of the things you claim either.
As I understand it, the article describes how, for companies that are going bankrupt, handling victim payouts through bankruptcy is more equitable, since it considers the situation holistically, rather than on a first-come first-serve basis.
However, for companies like J&J that aren't actually going bankrupt, this process also allows them to protect their business and to pay less than they would normally. Otherwise, why wouldn't they just file for bankruptcy directly?
> this process also allows them to protect their business
Obviously, yes.
> to pay less than they would normally.
Not necessarily.
You missed the part where they have a specialist court divide up the claims in a single go, rather than have ad-hoc juries hand out different awards to different claimants.
> aren't actually going bankrupt
You’re missing the part that this is kind of allowed in Texas courts. It’s not unrestricted - the court kicked back the first attempt.
> You missed the part where they have a specialist court divide up the claims in a single go, rather than have ad-hoc juries hand out different awards to different claimants.
What gives you that impression?
> You’re missing the part that this is kind of allowed in Texas courts.
It would seem that what they did was not allowed, given that they lost their case.
Okay. There is zero chance that the corporate lawyers are doing this to ensure that the next people killed by J&J can collect.
“We can’t pay out for these deaths because then we will be out of money to pay out for the other deaths.”
This is only a compelling argument if J&J agrees to dissolve their entire company and work with the courts to distribute 100% of their wealth to aggrieved parties. Let’s see how much they cooperate with that.
This is the most absurd reasoning I've seen al week
"I am sorry, we cant imprison this murderer for life, what if he killed someone else and they need to sue him too, we can't i prison him for life twice!"
This is a ridiculous comparison. Murder is criminal law and we’re talking about civil law (tort). The two are handled completely differently, with different laws and procedures.
Yeah I know - unlike corporations, individuals can’t kill people and escape criminal responsibility. It happens time and again, look at DuPont, Boeing max, etc.
The Texas two-step allows solvent companies to shield their assets from litigants using protections that are normally reserved for bankrupt companies. The goal of a Texas two-step is for the parent company to gain a third-party release of all liabilities it assigned to its spinoff, thus preventing litigants from pursuing those claims against the parent.
And yet here we have multiple people trying to spin things as "Oh, J&J just want what is fair for the litigants!"
Fun fact: the majority of large corporations who utilize the Texas Two Step somehow manage to avoid paying out anything more than a token sum, either through the "new" entity that holds the liabilities, or the "old" entity which promised it'd fully fund the liability holding entity.
Georgia Pacific did this. Pledged $1B, ended up funding $175M. The entity went bankrupt three months later with 62,000 claims fighting over those scraps for mesothelioma (i.e. an average claimant getting less than $3,000 - before legal costs).
Saint-Gobain did the same thing. More building products liabilities. Less than $100M in assets and no operations to fund more than 6,000 asbestos claims per year.
> Gross testified that Saint-Gobain repeatedly misrepresented its intent in creating the subsidiary that eventually filed for bankruptcy, calling executives’ testimony and other statements “misleading” and “not truthful.” U.S. Bankruptcy Judge Craig Whitley followed Gross’s testimony last August with factual findings that included his own blistering critique of the executives’ statements as “contrary to the evidence,” saying the company’s story “strains credibility.”
Trane Technologies. Same deal.
And yet you and Matt talk about how the whole concept is "designed to be more fair for the claimants".
"Facts and analysis" in the three companies who have done this before J&J would disagree with you. Strongly.
Can you find a source saying that Georgia Pacific or any other company was able to use this process to shield the parent company from liability? I’m not finding anything to that effect. Everything I see complains about them using the process to improperly consolidate the cases.
>Georgia Pacific did this. Pledged $1B, ended up funding $175M. The entity went bankrupt three months later with 62,000 claims fighting over those scraps for mesothelioma (i.e. an average claimant getting less than $3,000 - before legal costs).
A source would be helpful here too. Is it because the judge ultimately only found them liable for a total of $175M? Or did the judge find them liable for more but was only able to find $175M in actual money to pay out with?
Do you really think companies can just avoid all of their liabilities two days before something bad happens and protect all of their assets?
Bankruptcy law is hundreds of years old and is designed to protect creditors actually. That’s why there is a separate court to handle things and involved independent outsiders and judges that oversee things. It works and is used every time there is a financial crisis and thousands of times per day at the individual level.
This sort of thing is specifically prevented and handled by a principle called fraudulent conveyance. This principle causes the court to look back in time to what the assets and liabilities were closer to the time of the start of the financial difficulties of the debtor.
The texas two step is not used to skirt liabilities. Its point is to consolidate all the cases in one court to reduce lawyer headaches and ensure each claimant is paid fairly.
No, GP makes a fair point. If it were true that all this does is benefit claimants and plaintiffs, the adversaries of the one taking the action, why would they do it?
Of course it would benefit J&J too. You get to consolidate your cases in one court. You get to be in federal court, which is by conventional wisdom believed to be more defendant-friendly. You get to achieve legal certainty in a shorter period of time. It also benefits all the plaintiffs who weren't early to the party, since they are guaranteed a slice of the pie (if they win), instead of the first few successful plaintiffs eating the whole thing.
> It also benefits all the plaintiffs who weren't early to the party, since they are guaranteed a slice of the pie (if they win), instead of the first few successful plaintiffs eating the whole thing.
The pie is much smaller though. Georgia Pacific was faced with 62,000+ claims. They went through this same process. Spun off their subsidiary. "Pledged" to fund it with an "initial" billion dollars, and that GP would fund all claims.
Never happened. They actually only funded $175M. Less than $3,000 per claimant for asbestos related injuries. Less than $3,000 before legal fees.
And there was nothing defendants could do, because there was no legal obligation that could be created to force GP to fully fund. "That entity is independent and is in bankruptcy. So sad, too bad."
It absolutely is used to reduce payouts. The fact that it limits the potential for very large punitive jury judgments is an argument made by supporters of the texas two step.
It's basically a way of forcing everyone suing you into something akin to a class action, but one where you lose most of the legal rights you would have in a class actions.
They still are. Just indirectly. They set the amount that they were willing to fund the subsidiary to the tune of.
Must be nice, being able to say "Well, we'll give LTL $X and that can be used for settlements" while still throwing off nearly $X a year in profits, and 25% of X in shareholder dividends alone.
Why should a company be allowed to set and determine how much liability it needs to pay?
This is the opposite of what happened. The court rejected their first two step attempt for not having a high enough payout and forced the subsidiary to have a 61.5 billion dollar payout maximum.
And yet in every company where the Texas Two Step has been done, funding, "requirements" etc., have been blatantly disregarded and the only ones who have been screwed over are said claimants.
Georgia Pacific, faced with several billions in claims, formed a subsidiary, and "pledged" to fund it to the full amount, starting with an initial $1B funding...
Actually only funded it to the value of $175M. Less than $3,000 per claimant for mesothelioma.
For one thing, this approach allows J&J to determine their maximum liability by only spinning off a certain amount to the subsidiary.
It seems more fair to allow any and all claimants to sue J&J, or join together for a class action lawsuit. If the liabilities outstrip the company's total worth they can then go for bankruptcy of the entire J&J business and split assets proportionately across all liabilities.
> this approach allows J&J to determine their maximum liability by only spinning off a certain amount to the subsidiary.
This is not what they did.
To quote Levine's piece:
> the box where J&J put its talc claims — could draw at least $61.5 billion from J&J to pay off those claims. The point here, the bankruptcy court concluded, was not to keep J&J from having to pay talc claims; the entire value of J&J’s consumer business was still on the line for those claims.
For emphasis: the entire value of J&J’s consumer business was still on the line for those claims
So they weren't bankrupt, then, because they had funding available for the entirety of any claims.
Which is why the judge dismissed the bankruptcy proceedings.
There's more nuance though than that.
> Moreover, New JJCI has agreed to fund the Debtor LLC’s Chapter 11 case and contribute $2 billion into a settlement trust for the benefit of the talc claimants as part of a Chapter 11 reorganization plan.
$2B = a lot less than $61.5B. And you can guarantee that J&J (who refiled the bankruptcy proceeding within 3 hours of it being dismissed) will fight that vehemently.
I like Matt Levine's reporting, but you'll forgive people for taking Bloomberg taking a pro-business position with more than a little grain of salt.
In your heart of hearts, do you really believe that J&J wants to make things right and pay these claimants what they’re owed, or do you think J&J is trying to minimize what they pay out by any means necessary? Note that J&J shareholders likely interpret the latter as their fiduciary duty.
The CEO and eveyone near him is rich, they company going out of business won't affect them. I'm sure they'll be able to get high paying jobs. In fact the negative association with this case would have me wanting to move on
A large portion of the CEO’s wealth is almost certainly tied up in company equity, and this is true for the shareholders by definition. Anyway, it’s not about teaching them anything, it’s about influencing the risk/reward calculus of other companies that are considering skipping steps and releasing unsafe products.
Good point, we should never hold public companies accountable for anything because it will hurt grandpa’s pension. Think of all those poor retirees! We’re not monsters.
Wouldn't the spin off and it's executives installed specifically for this maneuver have to initiate the lawsuit to pay unfunded liabilities?
Isn't the alternative of directly attacking j&js resources made fantastically harder and more uncertain? The net effect of which is to make claimants more likely to choose the safe path of accepting the figure chosen by the guilty party rather than letting judge or jury directly decide.
> For one thing, this approach allows J&J to determine their maximum liability by only spinning off a certain amount to the subsidiary.
Except that's not what they did. As the article explains, under the J&J agreement the "maximum liability" of the parent to the subsidiary was defined as the entire cash value of the parent.
That extra complexity adds room for plenty of loop holes.
For example, by avoiding bankruptcy any existing liabilities aren't pooled and paid out proportionately along with the lawsuit proceedings. There is also nothing stopping the parent company from moving around funds to limit its "entire cash value".
It allows j&j to only offer what they are willing to lose?
It would different if the court themselves attempted to limit liabilities. If I could limit the cost of my liabilities, you could sure that I’d discount them to the detriment of those that owned the liabilities.
Sounds like a good way for students facing huge student loan debt to discharge it in bankruptcy (just kidding, I know that's not something the US government would allow for anyone except well-connected corporate lobbyists etc.).
In a classic "what could possibly go wrong" move, long ago the federal government decided that you can't discharge student debt in bankruptcy, because if you could, then no one would lend education money (which is not collateralizable) and fewer people would go to college.
It does. Credit cards are fully dischargeable. They also charge interest rates over 30 percent and won’t lend you $100,000 as an 18 year old with no income.
If I truly believed I was not guilty of an accusation that was ruining my reputation, you better believe I would use every means at my disposal to prevent my sinking under questionable data
e) influencing law and legal/justice/political systems such that you get an unfair advantage, using the resources you already have, which was the entire point of my point; you think it's right that a company facing legal action for something they did wrong can spin off a subsidiary to take the fall, being made bankrupt in a laughably short time?
The Texas two-step, as it's called.
> In 2021, the company spun off its liabilities into a new entity called LTL Management under a strategy called the “Texas two-step.” That legal but controversial approach allows a solvent parent company to protect its assets by creating a subsidiary to hold its liabilities — and then having the new company declare bankruptcy, as LTL did just days after incorporating. Critics complain it’s an abuse of the bankruptcy system and allows companies facing massive litigation to dodge corporate responsibility.
> The Third Circuit Court of Appeals in Philadelphia dismissed the bankruptcy filing in January, finding LTL was not in financial distress and had “no valid bankruptcy purpose.”
> But hours after that case was formally dismissed in April, LTL filed for bankruptcy protection again, this time with a higher settlement proposal of $8.9 billion.
The fact that this is legal is such a mockery of consumer protection law.