BANKRUPTCY-GOOD FAITH/BAD FAITH

LTL Mgmt., LLC v. Those Parties Listed on Appendix A to Complaint ( In re LTL Mgmt., LLC), 2023 U.S. App. LEXIS 2323 (3d Cir. January 30, 2023) (Ambro, C.J.)  Johnson & Johnson Consumer Inc. (“Old Consumer”), a wholly owned subsidiary of Johnson & Johnson (“J&J”), sold healthcare products with iconic names branded on consumers’ consciousness—Band-Aid, Tylenol, Aveeno, and Listerine, to list but a few. It also produced Johnson’s Baby Powder, equally recognizable for well over a century as a skincare product. Its base was talc, a mineral mined and milled into a fine powder. Concerns that the talc contained traces of asbestos spawned in recent years a torrent of lawsuits against Old Consumer and J&J alleging Johnson’s Baby Powder has caused ovarian cancer and mesothelioma. Some of those suits succeeded in verdicts, some failed (outright or on appeal), and others settled. But more followed into the tens of thousands. With mounting payouts and litigation costs, Old Consumer, through a series of intercompany transactions primarily under Texas state law, split into two new entities: LTL Management LLC (“LTL”), holding principally Old Consumer’s liabilities relating to talc litigation and a funding support agreement from LTL’s corporate parents; and Johnson & Johnson Consumer Inc. (“New Consumer”), holding virtually all the productive business assets previously held by Old Consumer. J&J’s stated goal was to isolate the talc liabilities in a new subsidiary so that entity could file for Chapter 11 without subjecting Old Consumer’s entire operating enterprise to bankruptcy proceedings. Two days later, LTL filed a petition for Chapter 11 relief in the Bankruptcy Court for the Western District of North Carolina. That Court, however, transferred the case to the Bankruptcy Court for the District of New Jersey. Talc claimants there moved to dismiss LTL’s bankruptcy case as not filed in good faith. The Bankruptcy Court, in two thorough opinions, denied those motions and extended the automatic stay of actions against LTL to hundreds of nondebtors that included J&J and New Consumer. Appeals followed and are consolidated before us. We start, and stay, with good faith. Good intentions— such as to protect the J&J brand or comprehensively resolve litigation—do not suffice alone. What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not. Thus we dismiss its petition. Chapter 11 bankruptcy petitions are “subject to 2023 U.S. App. LEXIS 2323, *21 Page 12 of 19 dismissal under 11 U.S.C. § 1112(b) unless filed in good faith.” BEPCO, 589 F.3d at 618 (citing NMSBPCSLDHB, L.P. v. Integrated Telecom Express, Inc. (In re Integrated Telecom Express, Inc.), 384 F.3d 108, 118 (3d Cir. 2004)). Section 1112(b) provides for dismissal for “cause.” Our decision dismisses the bankruptcy filing of a company created to file for bankruptcy. It restricts J&J’s ability to move thousands of claims out of trial courts and into bankruptcy court so they may be resolved, in J&J’s words, “equitably” and “efficiently.” But given Chapter 11’s ability to redefine fundamental rights of third parties, only those facing financial distress can call on bankruptcy’s tools to do so. Applied here, while LTL faces substantial future talc liability, its funding backstop plainly mitigates any financial distress foreseen on its petition date. We thus reverse the Bankruptcy Court’s order denying the motions to dismiss and remand this case with the instruction to dismiss LTL’s Chapter 11 petition. Dismissing its case annuls the litigation stay ordered by the Court and makes moot the need to decide that issue.