This procedural maneuver, unique to Texas, permits corporations to split into two new companies, one that holds only mass-tort related liabilities (in J&J’s case all talc-related liabilities) and another that holds non-talc assets and liabilities."
In an opinion closely watched by mass tort practitioners and corporate defendants alike, the 3rd Circuit has rejected J&J’s effort to shield itself from tort liability in bankruptcy for tens of thousands of talc personal injury claims through the use of a controversial Texas law known as the “Texas Two-Step.”
This procedural maneuver, unique to Texas, permits corporations to split into two new companies, one that holds only mass-tort related liabilities (in J&J’s case all talc-related liabilities) and another that holds non-talc assets and liabilities. The new company holding the mass-tort liabilities then immediately files for Chapter 11 protection – in J&J’s case, a mere three days later. Hence the “Texas Two-Step.”
Since 2017 several global companies facing major mass tort liabilities have employed this tactic, including Georgia-Pacific, Saint-Gobain, Trane Technologies and most recently 3M.
Although not a death blow, the 3rd Circuit focused on the alleged “financial distress” of the newly-created J&J entity, determining that it had access to J&J’s other assets via contract to fund its liabilities and thus at the time of its bankruptcy filing was “highly solvent with access to cash to meet comfortably its liabilities as they came due for the foreseeable future.”
J&J has already vowed to move for rehearing, and several similarly controversial “Texas Two-Step” bankruptcies are winding their way through themore bankruptcy-friendly 4th Circuit, so it appears that this dance has not yet danced its last step. We will be monitoring these cases and will provide additional updates as warranted.
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