LTL 2.0: The Largest Fraudulent Transfer in History


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:  

  1. The transfer or obligation was to an insider.
  2. Before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit.
  3. The transfer was substantially all of the debtor’s assets.
  4. The value of consideration received by the debtor was not reasonably equivalent to the value of the asset transferred.
  5. 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. I had trouble following the answer regarding the constructive fraudulent transfer—it seemed to doubt whether LTL was insolvent—but the answer I heard regarding the actual fraudulent transfer was disappointingly weak. 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. 

These are laughably bad answers. Like failing the course bad. 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 good intentions of paying talc victims through bankruptcy, well, that could readily be accomplished without the fraudulent transfer. Indeed, I suspect that the entire case could be settled tomorrow if J&J would agree to pay $61 billion.

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 and then convincing 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.]