Texas Two-Step Sets Dangerous Precedent for Injured Plaintiffs

A corporate bankruptcy maneuver known as the “Texas Two-Step” is being used by a handful of
companies to sidestep thousands of lawsuits totaling billions of dollars in damages without
having to file for bankruptcy themselves. The strategy is simple: split the company into two
separate entities, dump all of the liability from the lawsuits into the new entity that is formed,
and have that entity file for bankruptcy.

Greg Gordon, the attorney who developed the Texas Two-Step tactic, described it as “The
greatest innovation in the history of bankruptcy.” Gordon even had the audacity to claim that the
maneuver is beneficial to both the companies and the plaintiffs who are suing them.

It is not hard to see how a move like this benefits companies that are facing mass tort liabilities,
but unfortunately, consumers who have been badly injured by the negligence and/or reckless
actions of these companies are left holding the bag with nowhere to turn for the legal relief they
so desperately need and deserve.

Is the Texas Two-Step Legal?

If we lived in a world with sane and reasonable bankruptcy laws, a maneuver like this would not
be legal anywhere in the US. Instead, it would be considered a “fraudulent transfer” because the
move is done solely for the purpose of avoiding liability for the company’s wrongful actions. In
Texas, however, this tactic is permitted under the state’s corporate-friendly divisive merger
statute. Hence the term “Texas Two-Step”.

If the Texas Two-Step maneuver is allowed to stand, its ramifications will extend far beyond the
Lone Star State. All that companies with mass tort liabilities will need to do is relocate to Texas
(If they are not already based there) and spin off into two separate companies.

One of the pioneers of the Texas Two-Step strategy is healthcare giant Johnson & Johnson (J&J).
Most consumers are familiar with J&J and the countless health and beauty products that are
under their label.

J&J also happens to produce the only Covid vaccine that the FDA has restricted the use of
because of the potential side effect of rare but serious blood clots. J&J has legal immunity for its
Covid vaccine under the PREP Act, but this is not the case with other products that it produces
that harm consumers.

For example, the company has approximately 38,000 lawsuits against them because of its talc-
based baby powder, which has been known to cause cancer due to asbestos contamination. But
rather than work in good faith to try to settle these lawsuits, J&J formed a new entity called LTL
Management LLC, which subsequently filed for Chapter 11 bankruptcy protection, listing as
much as $10 billion in liabilities according to the court filing.

Bearing in mind that J&J has a market cap of nearly $500 billion and earns billions of dollars in
profits each year, it is hard to see this maneuver as anything but a fraudulent attempt to evade
responsibility for the injuries that resulted from its baby powder. The plaintiff’s litigation in this
case certainly did not pose an existential threat to the company, so there is no legitimate reason
why it should seek bankruptcy protection.

Naturally, the plaintiffs from the talc lawsuit and several other parties filed a motion to dismiss
the bankruptcy case filed by J&J’s new spinoff; but astonishingly, the motion was denied. Even
more disturbingly, this happened in a New Jersey court with the judge explicitly endorsing the
maneuver and finding “nothing inherently unlawful” about it.

The Texas Two-Step is a Dangerous Corporate Dance that Must be Stopped

The claim by some attorneys that injured plaintiffs are “better off” pursuing damages through
bankruptcy proceedings after a company employs the Texas Two-Step maneuver is misleading at
best and recklessly fraudulent at worst.

An argument could be made that if the entire company filed for Chapter 11 bankruptcy without
doing the Texas Two-Step, then maybe the plaintiffs could get a fair shake. But no fair-minded
person could possibly believe that plaintiffs would still be better off in a lawsuit against a
company after they spin off a shell corporation that is solely designed to absorb their liabilities
without putting any of their valuable assets at risk.

The bottom line here is that the Texas Two-Step is a dangerous maneuver that poses an
existential threat to the tort system as it is currently constituted. And if this tactic gains
widespread acceptance by judges, corporations will be far less likely to take the safety of their
products seriously.

Consider how many unsafe consumer products hit the market each year even with the knowledge
that they may have to pay out large amounts of damages later if they are successfully sued. The
threat of potential litigation serves as a very important guardrail to help ensure that companies
put some effort into making their products safe. But if this guardrail is removed, there will be
very little to stop corporations from cutting corners and producing products that harm consumers.
It is our hope that there are still enough courts in our country with the sense to rule against
corporations that employ the Texas Two-Step strategy. But if some of the early rulings are any
indication, it is a big mistake to put your faith in the courts alone. The people need to petition
their representatives to address this issue as well.

Congress needs to take action as soon as possible to put a stop to the Texas Two-Step maneuver.
The courts have been split on the issue, and there is no telling how the Supreme Court might rule
once it gets there.

It is time for our representatives to step in and restore justice for injured plaintiffs. Otherwise,
consumers will be at a much greater risk of injuries and deaths from new products that will hit
the market without meeting minimum safety standards. Contact your federal representatives
today and tell them to end the Texas Two-Step once and for all!

US Bankruptcy Court for the Western District of North Carolina
The National Law Review
Texas News