In May of 2007, the nation’s largest coal company—Peabody Holdings—spun off its properties in West Virginia, Kentucky, Illinois, and Indiana to a new company: Patriot Coal.
In October 2021, Johnson & Johnson spun off a company called LTL Management and gave it one of their most iconic products.
What do these two things have in common? Corporate bankruptcy law. Corporations are by their nature artificial structures set up to protect investors and corporate executives from taking personal responsibility for their actions. But there are some aspects of corporate bankruptcy law that turn that up to 11. Because here’s how the rest of these two stories play out.
What Peabody spun off to Patriot were its oldest mines, oldest miners, and generations of retirees who were entitled to both pensions and black lung benefits. In 2013, Patriot Coal filed for bankruptcy, asking the court to “slash healthcare and pension benefits for about 13,000 union workers.” At the same time, Peabody made it clear that “it no longer owes benefits to Patriot retirees.” A bankruptcy judge agreed, saying that Peabody “was relieved of that burden.”
What Johnson & Johnson spun off to LTL Management was even simpler: baby powder. Not just the product, but all the lawsuits and all the responsibility related to claims of asbestos in Johnson & Johnson’s baby powder products. Two days after LTL Management was created, it was in federal court filing bankruptcy. And now Johnson & Johnson says it’s been relieved of dealing with lawsuits over the powder.
And now, as a bankruptcy expert explains to NPR, “Johnson & Johnson doesn't have this liability anymore. They pushed all of it into the company they created just to file for bankruptcy."
Corporations spin off other corporations all the time. It can happen when the corporation gets too broad and needs to focus on a core business. It can happen when a technology or investment creates an opportunity that might grow into something new. But all too often, corporations create spin-offs to act as dust bins—bins into which they can deposit their obligations to workers, local governments, lawsuits, environmental cleanup … everything.
In some cases, like that of Peabody and Patriot, there are obligations to keep the spin-off running for a certain length of time. In others, like Johnson & Johnson and LTL Management, the funding provided at the outset covers that obligation. But the key thing in both cases is that these spin-offs are designed to fail. They’re set up with full knowledge that the obligations they carry far exceed any assets they’ve been given.
Peabody knew that the aging mines, old equipment, and undeveloped properties it handed to Patriot could never support the pensions and health care benefits it owed to over 13,000 miners. Johnson & Johnson knows that the $2 billion it provided to LTL won’t come close to meeting the tab for the thousands of lawsuits currently underway around its powder products.
Everyone knew that going in. That’s why they do this.
The result in the case of Johnson & Johnson, as NPR’s bankruptcy expert makes clear, is that "consumers can't recover [damages] against a big solvent company. They have to recover against this smaller fictional company ...”
A smaller, fictional company with limited assets that are slipping down the drain with every lawsuit, settlement, and passing hour. Which makes for the kind of situation in which injured women are tempted to take far less than they deserve before the last drop runs out of the bucket.
As Rep. Katie Porter tweeted last week, Johnson & Johnson knew that some bottles of its baby powder were laced with asbestos, but kept it a secret for decades. And now, “Tens of thousands of women with ovarian cancer are suing, and the company wants to shield its assets.”
This kind of situation shows again just how much power corporations have when compared to individuals. Not only do their massive assets give them far more ability to go to court, stay in court, and drag on cases for years or decades, but the ability to create a dust bin spin-off allows them to shed responsibilities and move on without a backward glance.
Johnson & Johnson’s Chief Financial Officer Joseph Wolk explained the maneuver to investors in a call last week, pitching it as a way to defend the massive company from those bad women who have suffered as a result of a contaminated product.
"There's an established process that allows companies facing abusive tort systems to resolve claims in an efficient and equitable manner," Wolk said. "It's really the bankruptcy courts that will ultimately decide this. It's not plaintiff attorneys. It's not Johnson & Johnson.”
Bankruptcy courts have demonstrated again and again that they’re incredibly deferential to corporations. So long as companies have tagged the right bases in setting up their get-out-of-obligations-almost-free spin-offs, there’s an extremely good chance that a bankruptcy judge will side with them and inform those who had a claim against the original company that they’re simply out of luck.
Another way that corporations are privileged far beyond normal people is that they get to engage in extensive court-shopping. For example, Johnson & Johnson is headquartered in New Jersey. However, it formed LTL Management in Texas to take advantage of how laws in that state allow for a high-speed shift in both assets and obligations. Then J&J attorneys climbed on a plane to file bankruptcy in North Carolina, assuring that their case will be heard in a district where they feel like they’ll get the best results.
All of which seems like a big f##k you to women facing ovarian cancer possibly related to the use of Johnson & Johnson’s product.
Many of the largest and most profitable corporations in the United States pay no taxes, and a distressing number of those in Congress seem to be happy about that idea. But it shouldn’t be too much to ask that when these corporations cause harm, they aren’t able to simply toss off a born-to-fail spin-off and keep on going without so much as a regret.
Author's note:
The reason I’m so familiar with the situation at Peabody is that I was employed by a
subsidiary of Peabody Holdings at the time of the Patriot spin-off. However, I was never a
corporate officer and hold no inside knowledge of the spin-off, assets, or obligations
involved.
