Johnson & Johnson's talc bankruptcy is rejected by Third Circuit Court

A federal appellate court on Monday rejected Johnson & Johnson's attempt to shed its baby powder liabilities by transferring them to a subsidiary and placing that subsidiary in bankruptcy.

Why it matters: J&J faces some 38,000 lawsuits from people and their survivors claiming that the company's talc-based powder caused cancer — an allegation that J&J has repeatedly denied.

Driving the news: The Third Circuit Court of Appeals ruled Monday that LTL Management — the subsidiary J&J created for the purposes of housing the liabilities and filing for bankruptcy — is not eligible for Chapter 11 bankruptcy protection.

• That means J&J will have to find an alternative way to deal with its liabilities — which may total in the billions of dollars — unless this ruling is reversed by the Supreme Court.

The big picture: The plan was controversial because it would have protected the bulk of the financially healthy J&J's corporate assets from the legal claims. Critics said the company can afford to pay off alleged victims.

• "Only a putative debtor in financial distress can" get bankruptcy protection, the court ruled. "LTL was not. Thus we dismiss its petition."

The other side: J&J said in a statement that it will appeal the ruling, rejecting the Third Court's contention that the company did not file the case in good faith.

• "As we have said from the beginning of this process, resolving this matter as quickly and efficiently as possible is in the best interests of claimants and all stakeholders," J&J said. "We continue to stand behind the safety of Johnson’s Baby Powder, which is safe, does not contain asbestos and does not cause cancer.”

This story has been updated to include J&J's statement.