Johnson & Johnson
CASE SUMMARY: Johnson & Johnson Pulls Trigger on Texas Two-Step Bankruptcy for Talc Liability; LTL Management Enters Bankruptcy Supported by Proposed $2B Fund ‘Substantially in Excess of Any Liability’
Fri 10/15/2021 07:30 AM
Relevant Documents:
Voluntary Petition
Informational Brief
First Day Declaration
Settlement Fund Motion
Ex Parte Motion for Emergency Hearing
New Brunswick, N.J.-based LTL Management LLC filed for bankruptcy protection in the Western District of North Carolina on Oct. 14, with its petition reporting $1 billion to $10 billion in assets and $1 billion to $10 billion in liabilities with funds available for distribution to unsecured creditors. The case has been assigned to Judge J. Craig Whitley (case No. 21-30589).
LTL is a newly created and separate subsidiary of Johnson & Johnson established to manage and defend what the debtor calls “a virtual tidal wave of [talc-related] claims during the last five years.” The debtor was spun out of Johnson & Johnson via a controversial “Texas Two-Step” divisional merger that some parties have suggested could shield a recipient of assets from fraudulent transfer liability. In its papers, LTL says concerns regarding prejudice to tort claimants are baseless and a “key objective” was “to ensure that the Debtor has at least the same, if not greater, ability to fund talc-related claims” as before the divisional merger. Nevertheless, at least one talc plaintiff group has already vowed to fight what it says is an abuse of the bankruptcy system. As discussed below, the case may also trigger disputes with the debtor’s insurers.
As established after the divisional merger, LTL would oversee the operation of its wholly owned subsidiary, Royalty A&M LLC. Royalty, in turn, owns a portfolio of royalty revenue streams, including revenue from third-party sales of certain products, and has a goal of seeking “opportunities to acquire or finance additional royalty revenue streams.” The debtor projects Royalty A&M will generate about $50 million in revenue per year over the next five years. The debtor estimates its interest in Royalty to have a fair market value of approximately $367.1 million as of the petition date. LTL and Royalty are both North Carolina limited liability companies.
Under a funding agreement dated Oct. 12 between the company, as payee, and J&J and Johnson & Johnson Consumer Inc., or new JJCI, as payors, J&J and new JJCI would be obligated to pay all costs and expenses of the debtor including the costs of administering the chapter 11 case and any and all other costs and expenses of the debtor incurred in the normal course of its business, in both situations to the extent that any cash distributions received from Royalty A&M are insufficient.
In addition to and separate from the funding agreement, the debtor filed a motion seeking approval of the establishment and funding of a “qualified settlement fund” pursuant to section 468B of the Internal Revenue Code, or a QSF trust, to pay talc claims in order “to promote a prompt resolution” of the case and “avoid unnecessary litigation regarding any alleged harm suffered” by talc claimants. As early as Jan. 31, 2022, J&J and new JJCI would then fund $2 billion into the trust as “pre-funding” for payment of “current and future talc-related claims” against or related to the debtor, but excluding any claims that would be “paid or incurred to, or at the direction of, any government or governmental entity.”
Similar “Texas two-step” chapter 11 strategies aimed at shedding tort liabilities have been employed in the DBMP, Bestwall and Aldrich Pump bankruptcy cases, all currently pending in the Western District of North Carolina bankruptcy court. Personal injury claimants and representatives had previously sought to enjoin J&J from utilizing the strategy in the Imerys Talc America chapter 11 cases and a separate lawsuit brought in New Jersey state court. On Sept. 20, the New Jersey court denied a motion to enjoin J&J from implementing the divisional merger and commencing the chapter 11 cases to shed talc liabilities, citing the plaintiffs’ “speculative reliance” on “news reports” and “conjecture.”
The Beasley Allen law firm, which “represents thousands of women and families alleging that use of the company's Baby Powder led to ovarian cancer,” issued a press release saying its clients “will resist J&J's decision to use bankruptcy to avoid legal responsibility for the cancers tied to those products.”
Along with the other first day documents, the debtors filed an informational brief that provides a history of Old JJCI’s cosmetic talc products, an overview of the studies on the risks of talc powder and a history of mass tort talc litigation, in particular J&J’s involvement in such litigation.
The debtor filed a motion to give notice to the top 30 law firms with the most significant representations of talc claimants in lieu of a list of 20 largest unsecured creditors. The debtor’s list of the top 30 law firms only states “unliquidated” for the amount of the claims.
The debtor filed an emergency motion seeking an expedited first day hearing, which has not yet been scheduled.
The petition discloses that the following corporations own, directly or indirectly, 10% or more of the debtor:
The debtor is represented by Jones Day; Rayburn Cooper & Durham; King & Spalding; Shook Hardy & Bacon; and McCarter & English as counsel. AlixPartners is the debtor’s financial advisor. The debtor has also retained Bates White.
Background / Events Leading Up to Bankruptcy Filing
Founded in 1887, J&J first began selling JOHNSON’S® Baby Powder in 1894. In 1972, J&J created a formal operating division for its baby products business. Through a series of transactions beginning in 1979 and ending in 2015, an entity formerly known as Johnson and Johnson Consumer Inc., or Old JJCI, acquired J&J’s baby products business and became responsible for all claims alleging that JOHNSON’S® Baby Powder and other talc-containing products cause cancer or other diseases. In May 2020, Old JJCI announced that it would permanently discontinue its line of talc-based baby powder in the United States and Canada, a decision that it says “was based on business considerations, including lack of sales due to misinformation about the safety of Old JJCI’s talc-based baby powder.”
According to the first day declaration, cosmetic talc litigation has focused primarily on JOHNSON’S® Baby Powder as a cause of ovarian cancer and mesothelioma. The debtor states that prior to 2010 only a “small number of isolated cases” involving cosmetic talc were filed against Old JJCI and J&J. However, the number of claims “began to skyrocket after the Berg (2013) and Fox (2016) trials,” which involved ovarian cancer claims, says the first day declaration. Although no damages were awarded in the Berg case, the jury awarded $72 million in the Fox case, and during the next year-and-a-half, five more verdicts totaling $235 million dollars were issued. Although the verdicts were reversed on appeal, new filings alleging that JOHNSON’S® Baby Powder caused mesothelioma “dramatically increased.”
The debtor states that although prior to the petition date, about 1,300 ovarian cancer and over 250 mesothelioma cases were dismissed without payment and old JJCI achieved 16 “key” defense verdicts, Old JJCI was subject to a number of verdicts “involving unpredictable and wildly divergent compensatory and punitive damage awards.” All of the ovarian cancer verdicts were reversed on appeal with the exception of Ingham v. Johnson & Johnson, in which the total award was $2.243 billion, even after partial reversal on appeal. In total, explains the first day declaration, prior to the petition date Old JJCI also paid approximately $3.5 billion in indemnity in connection with settlements and verdicts and spent nearly $1 billion defending personal injury lawsuits. As of the petition date, says the debtor, there were about 38,000 ovarian cancer cases pending against the debtor, including 35,000 cases in a multidistrict litigation in New Jersey and 3,300 cases in state courts, as well as more than 430 mesothelioma claims. Absent the filing of a petition, the debtor states that it “could soon be spending hundreds of millions of dollars per year in defense costs alone, in addition to settlements and verdicts.”
The debtor “believes” that it has insurance coverage for its talc-related liabilities, including primary and excess liability insurance policies that cover defense and/or indemnity costs related to the talc claims, that “potentially” cover liabilities up to $1.95 billion. This comprises primary and excess aggregate coverage with Travelers Insurance Co. of $293 million and $563 million, respectively, as well as excess policies totaling $1.09 billion with American International Group, Allstate Insurance Co., The Hartford, Home Insurance Co., Nationwide Indemnity Co., and North River Insurance Co. The debtor asserts, however, that certain of its insurers are insolvent and to date none of them have acknowledged their coverage obligations. The debtors note that in May 2019, certain of its insurers filed a lawsuit against Old JJCI, J&J and captive insurance company Middlesex Insurance Co. in the Superior Court of Middlesex County, N.J., seeking a declaratory judgment regarding their obligations under the policies, which remains pending.
The debtor also states that certain talc suppliers, including Imerys Talc America, have contended that they have indemnification and joint insurance proceeds claims against Old JJCI and J&J related to the suppliers’ sale of talc to Old JJCI. Imerys filed an adversary proceeding against Old JJCI and J&J in the Imerys bankruptcy seeking declaratory judgments with respect to indemnity agreements. In addition Cyprus Mines Corp., which owned certain Imerys talc mines, filed an adversary proceeding in the Imerys bankruptcy case against Old JJCI, J&J and others seeking a declaration of contractual indemnity.
The 2021 Corporate Restructuring
LTL states that on Oct. 12 it completed a corporate restructuring through a Texas divisional merger “to globally resolve talc-related claims through a chapter 11 reorganization without subjecting the entire Old JJCI enterprise to a bankruptcy proceeding.” Pursuant to the restructuring, the debtor’s predecessor, or Old JJCI, ceased to exist and two new entities were created: the debtor, which was initially formed as a Texas LLC and then converted into a North Carolina LLC, and Johnson & Johnson Consumer Inc., or New JJCI, which was initially formed as a Texas LLC and then merged into a New Jersey corporation that was its direct parent.
As a result of the restructuring the debtor holds certain of Old JJCI’s assets and “is solely responsible for the talc-related liabilities of Old JJCI.”
Specifically, the debtor, through the restructuring received the following assets:
New JJCI, in turn, was allocated Old JJCI’s remaining assets and liabilities and “is solely responsible for all other liabilities of Old JJCI.” New JJCI is the direct parent of the debtor, which, in turn, is the direct parent of Royalty A&M, organized on Oct. 11. Royalty A&M owns a portfolio of royalty revenue streams, including revenue streams based on third-party sales of LACTAID®, MYLANTA® / MYLICON® and ROGAINE® products. Royalty plans to grow its business by reinvesting its income by acquiring additional external royalty streams and through financings to third parties secured by royalty streams. As noted above, the debtor estimates that the fair market value of its interest in Royalty A&M is approximately $367.1 million and projects that Royalty A&M will generate approximately $50 million in annual revenue over the next five years. The debtor asserts that its total value is approximately $373.1 million, which represents the value of Royalty A&M plus $6 million in cash.
A more detailed description of the restructuring transaction from the first day declaration is available HERE.
The following chart depicts the debtor’s corporate structure:
LTL states that a “key objective” of the restructuring was “to ensure that the Debtor has at least the same, if not greater, ability to fund talc-related claims and other liabilities as Old JJCI had before the restructuring.” LTL asserts that in view of the restructuring steps taken by Old JJCI and J&J “there can be no legitimate argument that the divisional merger prejudiced claimants.”
These steps include an agreement (discussed below) among the debtor and New JJCI and J&J, as joint obligors, to fund, in the event of a chapter 11 case and to the extent that cash distributions from Royalty A&M are insufficient, a talc claims trust and the costs of case administration. According to LTL, J&J’s participation in the funding agreement “should put to rest any concerns regarding the divisional merger or any hypothetical JJCI intercompany transactions, including issuance of dividends or forgiveness of intercompany debt, that could potentially diminish New JJCI's assets during the course of this chapter 11 case.” LTL also highlights the agreement of Old JJCI and J&J to advance an aggregate sum of $2 billion under the funding agreement into a qualified settlement fund for the “exclusive” payment of cosmetic talc claims. LTL maintains that it agreed to this sum, which is “substantially in excess of any liability the debtor should have,” in order “to eliminate any doubt regarding the Debtor’s financial ability to pay legitimate claims.” Finally, the debtor highlights its equity interest in Royalty A&M LLC and its estimated $350 million in royalty streams. The debtor states that given the foregoing it “undeniably has more than sufficient funding to pay any legitimate cosmetic talc claims.”
The case representatives are as follows:
White & Case is representing Johnson & Johnson in the case.
The debtor’s papers contemplate that an official committee of talc claimants and a representative of future talc claimants may be appointed in the case.
The Funding Agreement / QSF Trust
According to the first day declaration, the funding agreement obligates new JJCI and J&J, jointly and severally, to provide funding up to the full value of new JJCI to (i) pay for costs and expenses of the debtor incurred in the normal course of its business “at any time when there is no bankruptcy case” and “during” any chapter 11 case including the costs of administration, and (ii) fund amounts necessary to satisfy the debtor’s talc-related liabilities “at any time when there is no bankruptcy case” and for a trust in the event of a chapter 11 case - in both cases whenever cash distributions received by the debtor from Royalty A&M are insufficient, and in the case of funding a trust, whenever the debtor’s other assets are insufficient to provide such funding.
An amended funding agreement is attached as an exhibit to the first day declaration. According to the agreement permitted funding uses include:
Separately, the debtor filed a motion seeking approval of a North Carolina trust that would constitute a “qualified settlement fund” to resolve or satisfy current and future talc-related claims asserted against or related to the debtor, but which would exclude any claims paid to or incurred at the direction of any government or governmental entity. J&J and new JJCI have agreed to fund the trust as early as Jan. 31, 2022, with an aggregate amount of $2 billion earmarked to resolve current and future talc-related claims.
The debtor asserts that J&J and JJCI have no obligation to make this contribution. However, they have agreed to do so as a “pre-funding of Permitted Funding Uses” under the funding agreement. The funds in the QSF Trust “will be immediately available” for the debtor’s “eventual use when and as needed” to resolve the talc-related claims. The trust would be irrevocable with neither J&J nor JJCI having any right to funds, except if the court determines talc claims have been paid or otherwise satisfied or the court issues an order dissolving the trust.
The debtor states that the $2 billion set aside under the trust should eliminate any doubt regarding the debtor’s financial ability to pay legitimate claims. However, establishing the QSF Trust would not eliminate the debtor’s rights or J&J’s and new JJCI’s obligations under the funding agreement, says the motion.
The funding agreement itself provides for the funding of “one or more trusts under the Bankruptcy Code” for the benefit of such claim holders “as provided in a plan of reorganization” to the extent the company’s other assets are “insufficient” to satisfy its liabilities.
J&J or a designee would serve as the portfolio manager for the trust funds in exchange for a “reasonable fee.” Investments would follow guidelines designed to limit risk and enhance liquidity of the funds.
Prior to the trust being funded, the court must enter an order approving the trust agreement, establishing the trust and determining that the court will be the supervisory court retaining jurisdiction over the trust for the trust’s life.
Services Agreements
In connection with the 2021 Corporate Restructuring, the debtor says it entered into a services agreement with J&J Services. Under the agreement, J&J Services would provide the debtor with certain corporate and administrative services, including “treasury and procurement, corporate finance, accounting, human resources, information technology, legal, risk management, tax and other support
Services.” The parties also entered into a secondment agreement under which J&J Services has agreed to second to the debtor “certain of its employees, including the Debtor’s Chief Legal Officer, on a full-time basis to manage the Debtor’s business.”
The debtor also discloses that Royalty A&M has similar agreements to conduct its business. Under an agreement with J&J Services, J&J Services has agreed to provide “certain corporate and administrative services and an intercompany loan facility agreement with J&J.” Under the loan facility agreement, Royal A&M has the ability to borrow up to $50 million from J&J “on terms consistent with those provided to other J&J affiliates.” Under a services agreement with the debtor, the debtor has agreed to provide “ongoing access to and support from” the debtor’s CEO and CFO “in their capacities as officers of Royalty A&M” in such roles, including “supporting Royalty A&M’s operations, tracking, administering and auditing any royalty streams or other sources of income, and providing strategic planning and analysis, including to seek out opportunities to invest in additional external royalty revenue streams.”
Other Motions
The debtor also filed various standard first day motions, including the following:
Voluntary Petition
Informational Brief
First Day Declaration
Settlement Fund Motion
Ex Parte Motion for Emergency Hearing
New Brunswick, N.J.-based LTL Management LLC filed for bankruptcy protection in the Western District of North Carolina on Oct. 14, with its petition reporting $1 billion to $10 billion in assets and $1 billion to $10 billion in liabilities with funds available for distribution to unsecured creditors. The case has been assigned to Judge J. Craig Whitley (case No. 21-30589).
LTL is a newly created and separate subsidiary of Johnson & Johnson established to manage and defend what the debtor calls “a virtual tidal wave of [talc-related] claims during the last five years.” The debtor was spun out of Johnson & Johnson via a controversial “Texas Two-Step” divisional merger that some parties have suggested could shield a recipient of assets from fraudulent transfer liability. In its papers, LTL says concerns regarding prejudice to tort claimants are baseless and a “key objective” was “to ensure that the Debtor has at least the same, if not greater, ability to fund talc-related claims” as before the divisional merger. Nevertheless, at least one talc plaintiff group has already vowed to fight what it says is an abuse of the bankruptcy system. As discussed below, the case may also trigger disputes with the debtor’s insurers.
As established after the divisional merger, LTL would oversee the operation of its wholly owned subsidiary, Royalty A&M LLC. Royalty, in turn, owns a portfolio of royalty revenue streams, including revenue from third-party sales of certain products, and has a goal of seeking “opportunities to acquire or finance additional royalty revenue streams.” The debtor projects Royalty A&M will generate about $50 million in revenue per year over the next five years. The debtor estimates its interest in Royalty to have a fair market value of approximately $367.1 million as of the petition date. LTL and Royalty are both North Carolina limited liability companies.
Under a funding agreement dated Oct. 12 between the company, as payee, and J&J and Johnson & Johnson Consumer Inc., or new JJCI, as payors, J&J and new JJCI would be obligated to pay all costs and expenses of the debtor including the costs of administering the chapter 11 case and any and all other costs and expenses of the debtor incurred in the normal course of its business, in both situations to the extent that any cash distributions received from Royalty A&M are insufficient.
In addition to and separate from the funding agreement, the debtor filed a motion seeking approval of the establishment and funding of a “qualified settlement fund” pursuant to section 468B of the Internal Revenue Code, or a QSF trust, to pay talc claims in order “to promote a prompt resolution” of the case and “avoid unnecessary litigation regarding any alleged harm suffered” by talc claimants. As early as Jan. 31, 2022, J&J and new JJCI would then fund $2 billion into the trust as “pre-funding” for payment of “current and future talc-related claims” against or related to the debtor, but excluding any claims that would be “paid or incurred to, or at the direction of, any government or governmental entity.”
Similar “Texas two-step” chapter 11 strategies aimed at shedding tort liabilities have been employed in the DBMP, Bestwall and Aldrich Pump bankruptcy cases, all currently pending in the Western District of North Carolina bankruptcy court. Personal injury claimants and representatives had previously sought to enjoin J&J from utilizing the strategy in the Imerys Talc America chapter 11 cases and a separate lawsuit brought in New Jersey state court. On Sept. 20, the New Jersey court denied a motion to enjoin J&J from implementing the divisional merger and commencing the chapter 11 cases to shed talc liabilities, citing the plaintiffs’ “speculative reliance” on “news reports” and “conjecture.”
The Beasley Allen law firm, which “represents thousands of women and families alleging that use of the company's Baby Powder led to ovarian cancer,” issued a press release saying its clients “will resist J&J's decision to use bankruptcy to avoid legal responsibility for the cancers tied to those products.”
Along with the other first day documents, the debtors filed an informational brief that provides a history of Old JJCI’s cosmetic talc products, an overview of the studies on the risks of talc powder and a history of mass tort talc litigation, in particular J&J’s involvement in such litigation.
The debtor filed a motion to give notice to the top 30 law firms with the most significant representations of talc claimants in lieu of a list of 20 largest unsecured creditors. The debtor’s list of the top 30 law firms only states “unliquidated” for the amount of the claims.
The debtor filed an emergency motion seeking an expedited first day hearing, which has not yet been scheduled.
The petition discloses that the following corporations own, directly or indirectly, 10% or more of the debtor:
- DePuy Synthes Inc.,
- Janssen Pharmaceuticals Inc.,
- Johnson & Johnson Consumer Inc.,
- Johnson & Johnson International, and
- Johnson & Johnson.
The debtor is represented by Jones Day; Rayburn Cooper & Durham; King & Spalding; Shook Hardy & Bacon; and McCarter & English as counsel. AlixPartners is the debtor’s financial advisor. The debtor has also retained Bates White.
Background / Events Leading Up to Bankruptcy Filing
Founded in 1887, J&J first began selling JOHNSON’S® Baby Powder in 1894. In 1972, J&J created a formal operating division for its baby products business. Through a series of transactions beginning in 1979 and ending in 2015, an entity formerly known as Johnson and Johnson Consumer Inc., or Old JJCI, acquired J&J’s baby products business and became responsible for all claims alleging that JOHNSON’S® Baby Powder and other talc-containing products cause cancer or other diseases. In May 2020, Old JJCI announced that it would permanently discontinue its line of talc-based baby powder in the United States and Canada, a decision that it says “was based on business considerations, including lack of sales due to misinformation about the safety of Old JJCI’s talc-based baby powder.”
According to the first day declaration, cosmetic talc litigation has focused primarily on JOHNSON’S® Baby Powder as a cause of ovarian cancer and mesothelioma. The debtor states that prior to 2010 only a “small number of isolated cases” involving cosmetic talc were filed against Old JJCI and J&J. However, the number of claims “began to skyrocket after the Berg (2013) and Fox (2016) trials,” which involved ovarian cancer claims, says the first day declaration. Although no damages were awarded in the Berg case, the jury awarded $72 million in the Fox case, and during the next year-and-a-half, five more verdicts totaling $235 million dollars were issued. Although the verdicts were reversed on appeal, new filings alleging that JOHNSON’S® Baby Powder caused mesothelioma “dramatically increased.”
The debtor states that although prior to the petition date, about 1,300 ovarian cancer and over 250 mesothelioma cases were dismissed without payment and old JJCI achieved 16 “key” defense verdicts, Old JJCI was subject to a number of verdicts “involving unpredictable and wildly divergent compensatory and punitive damage awards.” All of the ovarian cancer verdicts were reversed on appeal with the exception of Ingham v. Johnson & Johnson, in which the total award was $2.243 billion, even after partial reversal on appeal. In total, explains the first day declaration, prior to the petition date Old JJCI also paid approximately $3.5 billion in indemnity in connection with settlements and verdicts and spent nearly $1 billion defending personal injury lawsuits. As of the petition date, says the debtor, there were about 38,000 ovarian cancer cases pending against the debtor, including 35,000 cases in a multidistrict litigation in New Jersey and 3,300 cases in state courts, as well as more than 430 mesothelioma claims. Absent the filing of a petition, the debtor states that it “could soon be spending hundreds of millions of dollars per year in defense costs alone, in addition to settlements and verdicts.”
The debtor “believes” that it has insurance coverage for its talc-related liabilities, including primary and excess liability insurance policies that cover defense and/or indemnity costs related to the talc claims, that “potentially” cover liabilities up to $1.95 billion. This comprises primary and excess aggregate coverage with Travelers Insurance Co. of $293 million and $563 million, respectively, as well as excess policies totaling $1.09 billion with American International Group, Allstate Insurance Co., The Hartford, Home Insurance Co., Nationwide Indemnity Co., and North River Insurance Co. The debtor asserts, however, that certain of its insurers are insolvent and to date none of them have acknowledged their coverage obligations. The debtors note that in May 2019, certain of its insurers filed a lawsuit against Old JJCI, J&J and captive insurance company Middlesex Insurance Co. in the Superior Court of Middlesex County, N.J., seeking a declaratory judgment regarding their obligations under the policies, which remains pending.
The debtor also states that certain talc suppliers, including Imerys Talc America, have contended that they have indemnification and joint insurance proceeds claims against Old JJCI and J&J related to the suppliers’ sale of talc to Old JJCI. Imerys filed an adversary proceeding against Old JJCI and J&J in the Imerys bankruptcy seeking declaratory judgments with respect to indemnity agreements. In addition Cyprus Mines Corp., which owned certain Imerys talc mines, filed an adversary proceeding in the Imerys bankruptcy case against Old JJCI, J&J and others seeking a declaration of contractual indemnity.
The 2021 Corporate Restructuring
LTL states that on Oct. 12 it completed a corporate restructuring through a Texas divisional merger “to globally resolve talc-related claims through a chapter 11 reorganization without subjecting the entire Old JJCI enterprise to a bankruptcy proceeding.” Pursuant to the restructuring, the debtor’s predecessor, or Old JJCI, ceased to exist and two new entities were created: the debtor, which was initially formed as a Texas LLC and then converted into a North Carolina LLC, and Johnson & Johnson Consumer Inc., or New JJCI, which was initially formed as a Texas LLC and then merged into a New Jersey corporation that was its direct parent.
As a result of the restructuring the debtor holds certain of Old JJCI’s assets and “is solely responsible for the talc-related liabilities of Old JJCI.”
Specifically, the debtor, through the restructuring received the following assets:
- A bank account and approximately $6 million in cash;
- Old JJCI’s rights and interests as payee under the funding agreement;
- All contracts of Old JJCI related to its talc-related litigation, including settlement agreements, interests in qualified settlement trusts, indemnity rights, service contracts and engagement and retention contracts, if any;
- All equity interests in Royalty A&M;
- Causes of action that relate to the assets and liabilities allocated to the debtor;
- Privileges that relate to the assets and liabilities allocated to the debtor; and
- Records that relate to the assets and liabilities allocated to the debtor.
New JJCI, in turn, was allocated Old JJCI’s remaining assets and liabilities and “is solely responsible for all other liabilities of Old JJCI.” New JJCI is the direct parent of the debtor, which, in turn, is the direct parent of Royalty A&M, organized on Oct. 11. Royalty A&M owns a portfolio of royalty revenue streams, including revenue streams based on third-party sales of LACTAID®, MYLANTA® / MYLICON® and ROGAINE® products. Royalty plans to grow its business by reinvesting its income by acquiring additional external royalty streams and through financings to third parties secured by royalty streams. As noted above, the debtor estimates that the fair market value of its interest in Royalty A&M is approximately $367.1 million and projects that Royalty A&M will generate approximately $50 million in annual revenue over the next five years. The debtor asserts that its total value is approximately $373.1 million, which represents the value of Royalty A&M plus $6 million in cash.
A more detailed description of the restructuring transaction from the first day declaration is available HERE.
The following chart depicts the debtor’s corporate structure:
LTL states that a “key objective” of the restructuring was “to ensure that the Debtor has at least the same, if not greater, ability to fund talc-related claims and other liabilities as Old JJCI had before the restructuring.” LTL asserts that in view of the restructuring steps taken by Old JJCI and J&J “there can be no legitimate argument that the divisional merger prejudiced claimants.”
These steps include an agreement (discussed below) among the debtor and New JJCI and J&J, as joint obligors, to fund, in the event of a chapter 11 case and to the extent that cash distributions from Royalty A&M are insufficient, a talc claims trust and the costs of case administration. According to LTL, J&J’s participation in the funding agreement “should put to rest any concerns regarding the divisional merger or any hypothetical JJCI intercompany transactions, including issuance of dividends or forgiveness of intercompany debt, that could potentially diminish New JJCI's assets during the course of this chapter 11 case.” LTL also highlights the agreement of Old JJCI and J&J to advance an aggregate sum of $2 billion under the funding agreement into a qualified settlement fund for the “exclusive” payment of cosmetic talc claims. LTL maintains that it agreed to this sum, which is “substantially in excess of any liability the debtor should have,” in order “to eliminate any doubt regarding the Debtor’s financial ability to pay legitimate claims.” Finally, the debtor highlights its equity interest in Royalty A&M LLC and its estimated $350 million in royalty streams. The debtor states that given the foregoing it “undeniably has more than sufficient funding to pay any legitimate cosmetic talc claims.”
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtor's Counsel | Brad B. Erens | Jones Day | Chicago |
| Caitlin K. Cahow | |||
| Gregory M. Gordon | Dallas | ||
| Dan B. Prieto | |||
| Amanda Rush | |||
| Debtor's Counsel | C. Richard Rayburn Jr. | Rayburn Cooper
& Durham |
Charlotte, N.C. |
| John R. Miller Jr. | |||
| Debtor's Counsel | Kristen R. Fournier | King &
Spalding |
New York |
| Debtor's Counsel | Kathleen A. Frazier | Shook Hardy
& Bacon |
Houston |
| Debtor's Financial
Advisor |
N/A | AlixPartners | N/A |
| Debtor's Claims
Agent |
Kathryn Tran | Epiq | Los Angeles |
| Co-Counsel to
Johnson & Johnson |
Jessica Lauria | White
& Case |
New York |
| Glenn M. Kurtz | |||
| Ricardo Pasianotto | |||
| Michael C. Shepherd | Miami | ||
| Laura L Femino | |||
| Blair Warner | Chicago | ||
| Co-Counsel to
Johnson & Johnson |
Hillary B. Crabtree | Moore &
Van Allen |
Charlotte, N.C. |
White & Case is representing Johnson & Johnson in the case.
The debtor’s papers contemplate that an official committee of talc claimants and a representative of future talc claimants may be appointed in the case.
The Funding Agreement / QSF Trust
According to the first day declaration, the funding agreement obligates new JJCI and J&J, jointly and severally, to provide funding up to the full value of new JJCI to (i) pay for costs and expenses of the debtor incurred in the normal course of its business “at any time when there is no bankruptcy case” and “during” any chapter 11 case including the costs of administration, and (ii) fund amounts necessary to satisfy the debtor’s talc-related liabilities “at any time when there is no bankruptcy case” and for a trust in the event of a chapter 11 case - in both cases whenever cash distributions received by the debtor from Royalty A&M are insufficient, and in the case of funding a trust, whenever the debtor’s other assets are insufficient to provide such funding.
An amended funding agreement is attached as an exhibit to the first day declaration. According to the agreement permitted funding uses include:
- Payment of any and all costs and expenses incurred in the normal course at any time when there is no bankruptcy proceeding;
- Payment of any and all costs and expenses incurred during the pendency of any bankruptcy case;
- Funding amounts to satisfy Talc related liabilities established by a court judgment or final settlement prior to a bankruptcy proceeding and during a bankruptcy proceeding, Talc related liabilities in connection with the funding of one or more trusts for the benefit of existing and future claimants created pursuant to a plan of reorganization;
- Funding to maintain a minimum of $5 million in the funding account;
- Funding any obligations of the payee owed to the payor or affiliate including indemnification or other obligations under the divisional merger; and
- Payment of any and all costs and expenses of the payee in connection pursuing any remedies or unfunded payments owed to the payee.
Separately, the debtor filed a motion seeking approval of a North Carolina trust that would constitute a “qualified settlement fund” to resolve or satisfy current and future talc-related claims asserted against or related to the debtor, but which would exclude any claims paid to or incurred at the direction of any government or governmental entity. J&J and new JJCI have agreed to fund the trust as early as Jan. 31, 2022, with an aggregate amount of $2 billion earmarked to resolve current and future talc-related claims.
The debtor asserts that J&J and JJCI have no obligation to make this contribution. However, they have agreed to do so as a “pre-funding of Permitted Funding Uses” under the funding agreement. The funds in the QSF Trust “will be immediately available” for the debtor’s “eventual use when and as needed” to resolve the talc-related claims. The trust would be irrevocable with neither J&J nor JJCI having any right to funds, except if the court determines talc claims have been paid or otherwise satisfied or the court issues an order dissolving the trust.
The debtor states that the $2 billion set aside under the trust should eliminate any doubt regarding the debtor’s financial ability to pay legitimate claims. However, establishing the QSF Trust would not eliminate the debtor’s rights or J&J’s and new JJCI’s obligations under the funding agreement, says the motion.
The funding agreement itself provides for the funding of “one or more trusts under the Bankruptcy Code” for the benefit of such claim holders “as provided in a plan of reorganization” to the extent the company’s other assets are “insufficient” to satisfy its liabilities.
J&J or a designee would serve as the portfolio manager for the trust funds in exchange for a “reasonable fee.” Investments would follow guidelines designed to limit risk and enhance liquidity of the funds.
Prior to the trust being funded, the court must enter an order approving the trust agreement, establishing the trust and determining that the court will be the supervisory court retaining jurisdiction over the trust for the trust’s life.
Services Agreements
In connection with the 2021 Corporate Restructuring, the debtor says it entered into a services agreement with J&J Services. Under the agreement, J&J Services would provide the debtor with certain corporate and administrative services, including “treasury and procurement, corporate finance, accounting, human resources, information technology, legal, risk management, tax and other support
Services.” The parties also entered into a secondment agreement under which J&J Services has agreed to second to the debtor “certain of its employees, including the Debtor’s Chief Legal Officer, on a full-time basis to manage the Debtor’s business.”
The debtor also discloses that Royalty A&M has similar agreements to conduct its business. Under an agreement with J&J Services, J&J Services has agreed to provide “certain corporate and administrative services and an intercompany loan facility agreement with J&J.” Under the loan facility agreement, Royal A&M has the ability to borrow up to $50 million from J&J “on terms consistent with those provided to other J&J affiliates.” Under a services agreement with the debtor, the debtor has agreed to provide “ongoing access to and support from” the debtor’s CEO and CFO “in their capacities as officers of Royalty A&M” in such roles, including “supporting Royalty A&M’s operations, tracking, administering and auditing any royalty streams or other sources of income, and providing strategic planning and analysis, including to seek out opportunities to invest in additional external royalty revenue streams.”
Other Motions
The debtor also filed various standard first day motions, including the following:
- Motion to suspend standard notice in light of request for alternative procedures
- Motion to use cash management system
- The company has a bank account with Bank of America NA, which the motion says serves as the “funding account” under the funding agreement. As such, the account “is expected to maintain at least $5 million of cash at all times.”
- Motion to file list of talc case law firms in lieu of 20 largest unsecured creditors
- Motion for case management procedures
- Motion to retain professionals in the ordinary course
- Motion to extend time to file schedules
- Application to appoint Epiq as claims, noticing and ballot agent
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