Red River Talc Finally Says Good-Bye to Bankruptcy by Cliff White[1] After surviving heated litigation challenging venue, and completing a lengthy trial on the merits of confirmation, the Red River Talc LLC (RRT) case was finally dismissed by the bankruptcy court in the Southern District of Texas on March 31st.[2] Perhaps recognizing that if you cannot make it there, then you cannot make it anywhere,[3] parent company Johnson & Johnson (J&J) announced in a news release that it will not appeal or refile another bankruptcy case. RRT is a spin-off from goliath consumer products-maker J&J that was formed through a divisional merger under Texas corporate law for the purpose of holding the parent company’s mass tort liability and filing bankruptcy to resolve ovarian and other gynecological litigation. RRT filed late last year for chapter 11 relief in the Southern District of Texas after two previous bankruptcy cases filed by its predecessor shell company (LTL) were dismissed for bad faith by the United States Court of Appeals for the Third Circuit. In an order and opinion that surprised many observers, the bankruptcy court denied plan confirmation and dismissed because of (1) irregularities in ballot solicitation and voting; and (2) plan provisions that would have granted involuntary non-debtor third-party releases and related plan injunctions and gatekeeping provisions in violation of 11 U.S.C. 524(g) and the Supreme Court’s ruling in Harrington v. Purdue Pharma. 603 U.S. 204 (2024) and the recent Highland Capital II case, No. 23-10534, 2025 U.S. App. LEXIS 6320 (5th Cir. Mar. 18, 2025) (“Highland II”). The court was emphatic in not ascribing bad faith to any parties or professionals, and distinguished the case from previous iterations that the Third Circuit dismissed for bad faith. The court focused on the peculiar facts of the case. Judge Christopher Lopez’s carefully crafted 57-page opinion contained many noteworthy findings of facts and conclusions to law. Parties will debate if the Opinion marks a turning point for creative lawyering in the Southern District of Texas, but the Opinion also did nothing to discourage other mass tort cases from filing in the district as long as they learn certain lessons from the RRT three-times-a-loser case. Solicitation and Voting The court found fatal flaws in the ballot solicitation and voting process. Judge Lopez determined that “over 90,000 votes were cast, but at least half of them cannot count.” Slip op. at 23. Finding that the pre-petition vote could not be certified, the court denied confirmation. In this case, the debtor needed approval from 75 percent of claimants because the plan sought a channeling injunction and releases under Bankruptcy Code’s section 524(g) governing asbestos-related claims. (After denying that its talc products contained asbestos, the debtor reversed course for purposes of seeking confirmation.) The short-comings in balloting and related procedures were somewhat stunning, including: – An unseemly fight between co-counsel over thousands of tort victims whose votes were switched after the debtor reached a deal with one of the co-counsel. – Tort lawyers claiming they could vote on behalf of their clients based on boilerplate language in the retention agreement pertaining to prosecution of claims. The court cited the requirement that counsel cannot vote with a client’s claim without a power of attorney, as provided in FRBP 9010(c) and elsewhere in case governing documents. – Tort lawyers provided their clients with inadequate notice of their voting rights, including by providing negative notice and unreasonable response times. According to the court, one group of “women with cancer had two business days and a weekend to respond and indicate their votes.” Slip op. at 42. The lawyers’ fundamental errors in trying to round-up the necessary votes in favor of a plan they struck with the debtor should perhaps cause policy-makers to consider whether reforming the tort system is preferable to inviting mass tort cases into bankruptcy. It is clear that tort lawyers do not always get it right for their victim-clients, in or outside bankruptcy. Third-Party Releases The court also rejected confirmation because the involuntary non-debtor third-party releases provided in the $7 billion tort settlement plan exceeded the permissible boundaries set forth under section 524(g). Three aspects of the bankruptcy court decision are worth noting in future cases nationwide: – The court found that releases granted under 524(g) only apply to derivative claims and not direct claims that a creditor may have against a third-party. The court agreed with other courts that “liability of the [released] third party must essentially be a claim against the debtor.” The court further found that the obligation of a debtor to indemnify the third-party who was found liable to a creditor does not render the claim as derivative. – The court rejected the debtor’s assertion that this was a “full pay” case (i.e., victims will receive the full value of their claim) that may be an exception to the Supreme Court’s proscription against third-party releases. Bankruptcy Judge Lopez concluded that RRT was not a full pay case, in part, because the debtor’s assertion was based on an analysis of settlements reached in tort litigation even though J&J was found liable in one case for $2.52 billion. The judge also suggested that Fifth Circuit law against third-party releases may preclude releases even in “full pay” cases. – In several places in its opinion, the court noted that the debtor never sought consent for the releases. [4] Even if releases in the plan exceeded section 524(g), the debtor could cure the problem by voluntary consent. Given the liberality with which the bankruptcy court in S.D. Tex. finds consent, such as by requiring dissenters to affirmatively “opt out” of the release provisions, this may be easy advice to follow in a more typical non-tort case. The plan injunction and gatekeeper provisions were also thrown out following the 5th Circuit’s recent decision in Highland Capital II. This decision is still reverberating by potentially empowering creditors to choose their own forum for bringing viable direct claims against third parties post-confirmation. Dismissal The court decided to dismiss the case instead of allowing the debtor to revise its plan and re-solicit votes because the case was not about reorganizing a debtor company to save jobs, but solely to reach a deal with tort claimants, which J&J has repeatedly been unable to do. The court concluded that “[t]he entire construct of the Plan requires re-thinking” and the stay against tort litigation had lasted enough. Slip op. at 56. While the bankruptcy court opinion sets down markers for future litigants, it also shows that there are limits to creative lawyering even in perceived debtor-friendly venues like the Southern District of Texas. # # # Copyright 2025 Creditor Rights Coalition
[1] Cliff White served as Director of the Justice Department’s United States Trustee Program for 17 years before retiring in 2022. Cliff is currently employed by a financial and technology services firm with clients in the banking and lending industry. [2] In re Red River Talc LLC, case no. 4:24-bk-90505 (Bankr. S.D. Tex. filed Sept. 20, 2024). The slip opinion is found on the docket at document number 1425. [3] Apologies to the composers for mashing the lyrics of the famous Sinatra song, “Theme from New York, New York”. [4] The court said it “disagrees with silence equaling consent” under the balloting requirements. Slip op. at 34. That may run a bit counter to the same court’s expansiveness in inferring consent in favor of involuntary third-party releases. |
