NEW YORK, July 26 (Reuters) - A U.S. appeals court has

affirmed a decision that ended J&J's second attempt to resolve

tens of thousands of cancer lawsuits through a shell company's

bankruptcy, while J&J pushes ahead with its third bankruptcy

gambit.

The 3rd U.S. Circuit Court of Appeals on Thursday ruled that

the company's second effort, like its first, had to fail because

the shell company that it placed into bankruptcy was not in

"financial distress."

The decision was not a surprise to J&J, which is pressing

ahead with a revised effort to settle lawsuits alleging that its

baby powder and other talc products were contaminated with

asbestos and caused ovarian and other cancers.

J&J says that its talc products do not contain asbestos and

do not cause cancer, but it is pursuing a third bankruptcy in an

effort to end lawsuits from about 61,000 claimants and prevent

anyone from bringing similar lawsuits in the future.

J&J is collecting votes from people who allege they have

been injured by their talc, and it plans to place a shell

company into bankruptcy for a third time if it can get support

from 75% of those claimants. Votes on J&J's proposal are due

today, and J&J has said it may take a few weeks to count the

votes.

The 3rd Circuit decision found that the earlier bankruptcy

of J&J subsidiary LTL Management was properly dismissed by a

U.S. bankruptcy judge. LTL had presented only "speculative"

evidence that the talc lawsuits created sufficient "financial

distress" to warrant the protections of bankruptcy.

A three-judge panel of the appeals court rejected LTL's

argument that the "financial distress" standard was so

restrictive that it would shut off bankruptcy as an option for

companies facing large numbers of lawsuits.

"No doubt that solvent companies, confronted by mass-tort

litigation, can encounter significant financial distress that

warrants bankruptcy," Circuit Judge Thomas Ambro wrote for the

panel. "When future insolvency is a realistic possibility based

on meaningful evidence - not just the result of a highly

speculative 'worst-case' scenario - a mass-tort defendant has a

viable case for bankruptcy."

J&J intends to appeal to the U.S. Supreme Court, the

company's vice president of litigation Erik Haas said Friday.

But, the 3rd Circuit's ruling was expected and it will not

impact J&J's ongoing effort to gather support for its revised

settlement offer, Haas said.

J&J is confident that it will get votes from over 75% of

talc claimants, Haas said.

Andy Birchfield, an attorney representing people who have

filed ovarian cancer lawsuits against J&J, said the decision

should be a "warning to J&J" that its focus on a bankruptcy

settlement "is unlawful and also defies common sense."

J&J's bankruptcy strategy faces legal hurdles even if it

gets the 75% threshold it is seeking in its current voting

period.

The U.S. Supreme Court's recent ruling in Purdue Pharma's

bankruptcy narrowed courts' ability to stop lawsuits against

people and companies, like J&J, who are not bankrupt, without

the consent of the people who have sued. And attorneys opposed

to J&J's settlement offer will argue that the new deal still

fails under the "financial distress" standard articulated by the

3rd U.S. Circuit.

J&J says the Purdue ruling does not impact its settlement

proposal, because it qualifies for specific non-debtor

protections that U.S. bankruptcy law allows for asbestos

defendants.

New legislation proposed this week could also present an

obstacle by placing limits on the so-called "Texas two-step"

strategy that J&J used to place its talc liabilities into a

shell company. A bipartisan trio of Senators said that

financially healthy companies like J&J should not be allowed to

use bankruptcy courts to evade responsibility for injuries they

caused.

The Texas two-step tactic involves first using Texas

corporate law to split a business into two separate companies,

one that inherits the assets and a shell company which is

saddled with liabilities, including lawsuits. The shell company

then files for bankruptcy protection, and it uses its bankruptcy

to block lawsuits from proceeding against its well-funded

affiliates.

The case is In Re: LTL Management, U.S. Court of Appeals for

the Third Circuit, Nos. 23-2971 and 23-2972

For LTL: Gregory Gordon, Noel Francisco, and Kevin Marshall

of Jones Day

For the official committee of talc claimants: Jeffrey Lamken

of MoloLamken, Jonathan Massey of Massey & Gail

Read more:

The battle over J&J's bankruptcy plan to end talc lawsuit

J&J advances $6.48 billion settlement of talc cancer

lawsuits

US Senate bill aims to curb Texas two-step bankruptcies