In a landmark decision on February 25, 2022, U.S. Bankruptcy Court Judge Michael Kaplan in New Jersey gave the green light for healthcare giant Johnson & Johnson’s subsidiary, LTL Management, LLC, to proceed with its Chapter 11 bankruptcy filing. This move, a strategic maneuver in response to a staggering 38,000 lawsuits alleging asbestos contamination in Johnson & Johnson’s talc-based baby powder leading to cancer, has ignited a firestorm of debate and controversy around a legal tactic known as the “Texas Two-Step.”
Johnson & Johnson’s approach involved creating LTL Management and then transferring all legal liabilities related to the talc claims to this newly formed entity before initiating bankruptcy proceedings. This strategy, the “Texas Two-Step,” was met with immediate opposition. The Official Committee of Talc Claimants and other concerned parties filed motions to dismiss LTL Management’s bankruptcy case, arguing that it was not filed in “good faith” as required by section 1112(b) of the Bankruptcy Code. However, Judge Kaplan rejected these motions and granted LTL Management’s motion to halt prosecution of actions, marking the first instance of a court outside of North Carolina accepting this particular bankruptcy strategy. This ruling has far-reaching implications and brings the contentious “Texas Two-Step” – a legal strategy some view as a corporate Two Step Texas Dance around accountability – into the national spotlight.
Decoding the Texas Two-Step: A Divisive Merger Explained
The “Texas Two-Step” is a bankruptcy maneuver rooted in Texas state law, specifically a type of corporate restructuring called a “divisive merger.” Think of it as a legal two step texas dance where a company strategically splits itself into two distinct entities.
The first step in this intricate dance allows a company to divide its assets and liabilities between two newly formed entities. Crucially, Texas law permits this division in a way that allows companies to allocate liabilities and assets seemingly at will. In practice, this often means channeling the bulk of tort liabilities—like those stemming from mass litigation cases—into one entity, while the more valuable assets remain in the other, often healthier, entity. While such asset allocation might typically raise red flags as a potentially fraudulent transfer, Texas law uniquely accommodates this maneuver by defining “merger” to include the “division of a domestic entity into two or more new domestic entities or other organizations.” This legal loophole is the foundation upon which the two step texas dance is built.
The second step of the Texas Two-Step unfolds when the newly created entity burdened with liabilities files for Chapter 11 bankruptcy. This action serves as a shield, protecting the assets of the parent company (or the other newly formed entity holding the assets) from creditors. Furthermore, the liability-laden entity benefits from the Bankruptcy Code’s automatic stay. This automatic stay is a powerful legal tool that immediately freezes virtually all creditor actions against the bankrupt entity, providing a crucial breathing space and legal protection. In the case of LTL Management, the company openly acknowledged its use of the Texas Two-Step, stating its bankruptcy filing aimed to “produce an equitable resolution of both current and future talc claims by means of a settlement trust…that can promptly, efficiently, and fairly compensate claimants.” This justification, however, is viewed skeptically by many who see the two step texas dance as a way to sidestep true accountability.
Controversy and Criticism: Is it Justice or a Corporate Escape Route?
Despite corporate justifications, the Texas Two-Step strategy is deeply controversial. Critics argue vehemently that it allows highly profitable corporations to evade or significantly delay mass tort litigations and potentially secure bankruptcy settlements at discounted rates, shortchanging victims. The core complaint is that the bankruptcy system, designed to offer relief to companies genuinely facing financial distress, is being manipulated. As critics have pointed out, “[t]he 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.” The perception is that the two step texas dance is less about equitable resolution and more about corporate self-preservation at the expense of justice for plaintiffs.
Judge Kaplan, in his ruling, acknowledged the anticipated backlash, stating, “[t]he Court is aware that its decision will be met with much angst and concern.” However, he maintained his position, asserting his “belief that justice will be best served by expeditiously providing critical compensation through a court-supervised, fair, and less costly settlement trust arrangement.” Despite these assurances, the outcome of Judge Kaplan’s decision is that thousands of lawsuits, previously spread across various U.S. courts, are now consolidated within the U.S. Bankruptcy Court under a single judge’s purview, raising concerns about the fairness and individual attention each case will receive. Many see this consolidation as further evidence of the two step texas dance prioritizing efficiency and cost-saving for the corporation over individual justice.
Congressional Scrutiny: A Dance Under the Legislative Spotlight
The controversial nature of the Texas Two-Step has captured the attention of lawmakers. Senator Sheldon Whitehouse, Chairman of the Senate Judiciary Subcommittee, convened a hearing titled “Abusing Chapter 11: Corporate Efforts to Side-Step Accountability Through Bankruptcy.” During this hearing, Senator Whitehouse voiced strong concerns about the Texas Two-Step, outlining how this maneuver potentially undermines fundamental bankruptcy principles. His specific worries include the denial of victims’ right to their day in court, the encouragement of forum-shopping by corporations seeking favorable legal environments, and the significant delays imposed on plaintiffs seeking compensation. Senator Whitehouse’s statements at the hearing strongly suggest an intent to pursue legislative action to address and potentially curb the use of the Texas Two-Step, signaling a potential shift in the legal landscape surrounding this contentious strategy and its two step texas dance around legal responsibility.
Precedent and Future Implications: Will the Dance Continue?
Johnson & Johnson’s case is not an isolated incident. Senator Whitehouse’s concerns are amplified by the increasing number of companies employing the Texas Two-Step in recent years. Notably, in 2017, Georgia-Pacific utilized a divisive merger to create Bestwall LLC, subsequently assigning asbestos-related liabilities and then seeking Chapter 11 protection. Similarly, in 2019, CertainTeed Corporation executed a divisive merger, forming CertainTeed LLC (holding the majority of assets) and DBMP LLC (burdened with asbestos liabilities), with DBMP also filing for bankruptcy thereafter.
Judge Kaplan’s ruling in New Jersey, therefore, is a critical development. With the Texas Two-Step gaining acceptance beyond Texas and North Carolina, the legal landscape for mass tort litigation and corporate bankruptcy could be significantly altered. The question now is whether other courts across the country will follow suit and legitimize the Texas Two-Step, or if legislative or further judicial challenges will curtail its use. The ongoing debate and potential legal challenges suggest that the future of this controversial legal two step texas dance remains uncertain, with significant implications for corporate accountability and victims’ rights.
