[Updated 4.12.23 to reflect the transcript of the first day hearing with much more detailed analysis of LTL's arguments regarding fraudulent transfer allegations.]
Today was the first day hearing for LTL 2.0. An ad hoc committee of talc claimants (most of the members of the Official Committee from LTL 1.0) weighed in with an informational brief that blasted the bankruptcy filing as being in bad faith and premised on what is, without hyperbole, the largest fraudulent transfer in history, weighing in a jaw-dropping $52.6 billion.
The challenge LTL faces in its second bankruptcy filing is how to comply with the 3rd Circuit's ruling on good faith filing that resulted in the first bankruptcy being dismissed. The 3d Circuit held that the requirement that a bankruptcy be filed in good faith requires that the debtor entity be in immediate financial distress. The application of that standard found LTL 1.0 hoist on its own petard: the 3d Circuit noted that LTL had a $61.5 billion funding backstop from J&J and New JJCI (the consumer products subsidiary), which vitiated any immediate financial distress.
So LTL decided to charge once more unto the breach, a mere two hours and eleven minutes after the first case was dismissed. In that brief intermission, LTL retooled its financed: it released J&J and New JJCI from the $61.5 billion backstop and replace it with an $8.9 billion backstop from from New JJCI (now renamed HoldCo). (It's not clear to me that New JJCI can actually support the $8.9 billion backstop, however, because New JJCI transferred virtually all of its consumer products business to J&J last January and seems to only have $400 million in cash and some sundry subsidiaries itself. If any of that $8.9 would actually have to come from J&J, it would undercut the claim that any contribution from J&J would only be through a settlement in bankruptcy and therefore not part of the good faith filing calculation.)
The ad hoc committee zeroed in on the release of the $61.5 billion backstop and its replacement with an $8.9 billion backstop (not to mention the change in the backstop parties and their economic strength) looks like an enormous fraudulent transfer, both actual and constructive. An actual fraudulent transfer is one undertaken to hinder, delay, or defraud creditors, while a constructive one is a transfer for less than reasonably equivalent value while the debtor is (or becomes) insolvent or undercapitalized.
The analysis here seems straightforward: the funding agreement is an asset of the debtor (it's a contractual right). Parting with a $61.5 billion asset for an $8.9 billion asset deprives creditors of their ability to recover anything beyond $8.9 billion (or of any recovery from J&J, which is no longer a backstop party). That sure looks like an attempt to hinder creditors by removing assets from their potential grasp. And it's also an attempt to delay them because the second bankruptcy filing benefits J&J every day it drags on--it's cheaper to have LTL in bankruptcy than to deal with the MDL talc litigation and delay pushes more and more claimants to accept discounted settlement offers.
In any event, "actual intent to hinder, delay, or defraud" is usually determined in reference to certain "badges of fraud," and this transfer looks to be wearing polkadots:
- The transfer or obligation was to an insider.
- Before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit.
- The transfer was substantially all of the debtor’s assets.
- The value of consideration received by the debtor was not reasonably equivalent to the value of the asset transferred.
- The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
As for constructive fraudulent transfer, it's beyond peradventure that $8.9 billion is not reasonably equivalent value to $61.5 billion, so the only issue remaining is whether the debtor was insolvent or rendered insolvent or unreasonably capitalized. It would sure look as if the debtor was rendered insolvent—there's a valuation question about the extent of the talc tort debt, but it's a lose-lose proposition for LTL. If LTL was rendered insolvent, then it's a fraudulent transfer, while if LTL was still solvent, well, where's the immediate financial distress? (There's also a set of important fiduciary duty issues for LTL's management and LTL's professionals, as the transaction was engineered during LTL 1.0, when LTL was a fiduciary for its creditors...)
I was eager to hear how J&J LTL would respond to these arguments at the first day hearing. The answer regarding the actual fraudulent transfer allegation was disappointingly weak.
LTL's Response to the Actual Fraudulent Transfer Allegation
LTL's answer was that it did not have actual intent to hinder, delay, or defraud because (1) a majority of claimants are [allegedly] cool with it and (2) it undertook the transfer in the service of an attempt to pay talc victims through the bankruptcy. Specifically, LTL's counsel said
At bottom, there can be no fraudulent transfer because all claimants will be paid under the proposed plan on terms acceptable to the large majority of claimants and hopefully, that majority will increase.
There can be no actual fraudulent transfer or actual fraud because there's no intent to hinder, delay, or defraud creditors. The only intent is to pay claimants promptly and in a manner that treats them equitably. The Third Circuit itself acknowledged that LTL's goal in the first case, which was the same, that its intentions were sincerely held. It acknowledged that LTL's good intentions and sincerely held belief that the first bankruptcy would benefit the claimants. Well, the same here. It's the same intent. Nothing has changed.
These are laughably bad answers. Like failing the course bad. As to the first argument, a majority cannot bind a minority as to whether a transfer was fraudulent, and it's a long-standing principle in bankruptcy (Moore v. Bay) that if a fraudulent transfer is voidable as to a penny, the entire transfer is voidable. A majority can bind a minority to a plan, but the plan must still comply with best interests and good faith, and letting a $50 billion fraudulent transfer go is neither.
As for the second argument, regarding the good intentions of paying talc victims through bankruptcy, well, whatever one thinks of the supposedly eleemosynary nature of the bankruptcy, the issue isn't LTL's intent in filing for bankruptcy. It's LTL's intent in releasing the $61.5 billion funding agreement. The fact that it was done in order to manufacture financial distress so as to satisfy the 3rd Circuit's good faith filing standard in order to effectuate a bankruptcy that supposedly would achieve better result for talc claimants is simply irrelevant to whether the particular transfer was fraudulent.
And even if it mattered, well, there's an easy way to achieve an even better end for talc victims that does not require any fraudulent transfer: just pay them for their harms. Indeed, I suspect that the entire case could be settled tomorrow if J&J would agree to pay $61 billion. LTL did not need to release the funding agreement in order to take care of the talc victims. It's mind-blowingly absurd that LTL is claiming that it is trying to do the talc victims a solid by depriving of them of $52.5 billion in potential recoveries.
LTL's Response to the Constructive Fraudulent Transfer Allegation
As for constructive fraudulent transfers, LTL argued:
There's no constructive transfer either because LTL has not been rendered insolvent by the new financing arrangements. ... The new funding arrangement from HoldCo is available to pay talc claims in and outside bankruptcy, and it has significant values. And importantly, J&J's support is available to ensure a trust is funded in the amounts agreed to with the claimant's supporting this plan....
There were questions that the company had as to whether the original financing arrangements remained enforceable in the wake of the Third Circuit's opinion. That decision was not reasonably foreseeable. It defeated the fundamental purpose of J&J's backstop. It called into question the enforceability of that backstop and the funding agreement as a whole. But notwithstanding that, LTL was able to secure new financing arrangements that provided the funding it needs to provide the amount negotiated with the claimants. In short, there was reasonably equivalent value, too.
This is just word salad. If LTL's solvency depended on having a $61.5 billion backstop, then cutting out $52.5 billion of that would almost assuredly render LTL insolvent, unless the talc liability were less than $8.9 billion. The extent of the liability is of course a disputed question, but if LTL is offering $8.9 billion, it's pretty clear that it isn't offering 100¢ on the dollar, especially as that $8.9 billion has to cover not just present claims, but futures, governmental claims, and insurers. I'm not a gambling man, but this is a bet I'd like to take.
Now curiously, LTL emphasizes that it isn't insolvent because "J&J's support is available to ensure a trust is funded in the amounts agreed to with the claimant's supporting this plan". Say what? I thought the whole conceit here that there was in fact financial distress was that LTL was cut off from the J&J ATM. Is J&J's backing really needed for the $8.9 billion offered? If so, isn't it a farce that J&J isn't actually on the hook?
The reasonably equivalent value claim is just nonsensical. LTL is claiming that $8.9 billion is equal to $61.5 billion because the $61.5 billion was somehow unenforceable after the 3rd Circuit's opinion:
Based on that ruling and its consequences, the debtor concluded that there was a material risk that the J&J co-obligation, and in fact the entirety of the initial funding agreement, were rendered void or voidable, and as a result, unenforceable.
There's nothing that I can see in the 3rd Circuit opinion that calls into question the enforceability of the 2021 backstop. The 3rd Circuit's opinion did not touch on that issue, nor did any party ever raise it. The backstop was not dependent upon good faith filing. It seems a rather motivated conclusion.
Now LTL's subjective valuation of the 2021 funding agreement after the 3rd Circuit's opinion is completely irrelevant to the question of whether it received reasonably equivalent value, which is an objective valuation question. At most, LTL's subjective valuation goes to whether it was an actual fraudulent transfer or a breach of fiduciary duty. But it's also a dangerous game for LTL to play. If LTL wants to make claims about its subjective valuation, it's going to have to waive attorney-client privilege, because there's no way that LTL could have reached that conclusion without attorney input. Is there a Jones Day memo analyzing the issue and concluding that there's real legal risk about the enforceability of the funding agreement? If so, why wasn't it just ratified to be sure. I'd be very interested in seeing what might come out in that discovery, which will in turn inform the good faith filing question.
J&J's game plan seems to be to pretend that this is a typical Chapter 11 case: put a deal on the table with a RSA binding a bunch of parties to support it, trumpet it as the biggest deal the world has ever seen, so therefore it must be good, and then convince the court than any opponents are just dreaded "holdouts" who should be steamrolled. That works when the debtor has done relatively limited sharp dealings, but when the scale of the problems gets larger, well that's where these cases are more likely to come off the rails. I don't see any easy way for LTL to get around its fraudulent transfer problem.
[Disclosure: I am retained as a consultant for parties or counsel for parties in certain pending mass tort cases; the opinions here are my own.]