Tom Hals and Dietrich Knauth

(Reuters) -A U.S. judge ruled on Friday that a Johnson & Johnson (NYSE:) subsidiary can remain in bankruptcy, preventing plaintiffs from pursuing 38,000 lawsuits against the company alleging its baby powder and other talc products cause cancer.

J&J’s stock rose more than 5%, its biggest one-day gain since the start of the pandemic in spring 2020. The company also said on Friday it planned to move ahead with a $5 billion settlement to resolve claims by states and local governments that J&J contributed to the U.S. opioid epidemic.[L1N2V01ZA]

J&J maintains its talc is safe and is attempting to resolve the talc lawsuits by putting a recently formed subsidiary, LTL Management, into bankruptcy, which the plaintiffs argued was an abuse of the Chapter 11 system.

U.S. Bankruptcy Judge Michael Kaplan forcefully rejected the plaintiffs’ argument, saying that J&J’s approach was “unquestionably” proper and that bankruptcy offers a faster and more fair alternative to decades of litigation in other courts.

Jon Ruckdeschel was an attorney representing plaintiffs who are pursuing talc lawsuits.

“The bankruptcy code was never intended to be abused in this way by massively profitable corporations as a means to delay or prevent cancer victims from having their day in court,” he said in a statement.

J&J used a legal maneuver known as the “Texas two-step,” which allows companies to split valuable assets from liabilities through a so-called divisive merger. LTL, a healthcare conglomerate that has more than $400B in stock market capital, was founded by J&J in October 2021. LTL declared bankruptcy only days later.

Talc plaintiffs as well as some critics warned against the strategy because it could “open up the floodgates” for other companies that are at high risk in mass litigation.

Kaplan stated that maybe the gates ought to be open.

Kaplan stated that there is no reason to be afraid of the transfer of tort litigation from the tort system into bankruptcy.

More than 38,000 lawsuits have been filed alleging that J&J’s talc-based products contained asbestos and caused ovarian cancer and mesothelioma, an illness linked to asbestos exposure.

In a statement, the company called the decision a positive development and stated that independent investigations would prove that LTL formation and Chapter 11 filings were legal.

“LTL stands ready to work with claimants’ counsel and the mediator to reach an equitable and efficient resolution as ordered by the Bankruptcy Court,” J&J said in a statement.

J&J has set aside $2 billion to settle talc claims, but LTL executives characterized that number as a starting point rather than a “cap” during court proceedings last week.

Kaplan indicated that he felt there was an urgent need for independent scrutiny of the company’s restructuring. He said he will consider having an examiner appointed at a hearing on March 8.

LTL attorneys argued that bankruptcy was the only practical way to resolve the sheer volume of lawsuits that have been filed against J&J.

Reuters exclusively reported earlier this month that J&J secretly launched “Project Plato” last year to shift liability from its pending talc lawsuits to the newly created subsidiary, which was then to be put into bankruptcy. [L1N2UF2HM]

Lawyers for plaintiffs in cancer reacted negatively to this strategy, describing it as “rotten at the core”.

The legislation also alarmed U.S. lawmakers. It also alarms lawmakers, including U.S. Senator Sheldon Whitehouse. He said that it was a model for other wealthy corporations to deny victims compensation and hide assets from plain sight.

A 2018 Reuters investigation found that J&J knew for decades about trace amounts asbestos in its baby powder and other cosmetic talc products. Johnson’s discontinued selling Johnson’s baby powder to the United States and Canada between May 2020 and February 2020 due to “misinformation and unfounded claims” regarding the talc-based product.