Download This PaperTexas Two-Stepping Out of Bankruptcy
13 Pages Posted: 24 Mar 2022
Date Written: January 30, 2022
Abstract
Johnson & Johnson has a problem. For decades, it sold talc baby powder, a product that made Johnson & Johnson a household name and earned the business billions. But then, as those babies grew up, they started getting cancer. And then they began suing. Last June, twenty-two plaintiffs cemented a $2.12 billion judgment against Johnson & Johnson for cancer caused by its baby powder. Another thirty-four thousand cases (and counting) remain in progress, each with the potential for a similar verdict.
To handle these mass-tort liabilities, Johnson & Johnson has followed the lead of many businesses and turned to the bankruptcy courts. But it has done so with a twist. Unlike the businesses that pioneered using bankruptcy for mass torts, Johnson & Johnson is not filing for bankruptcy. It is in-stead dividing itself using an obscure Texas law, moving its assets into one business and its talc liabilities into another, and having the liability-laden business file for bankruptcy. This maneuver, known as the “Texas Two-Step,” threatens the tort recovery of tens of thousands of talc claimants.
The Texas Two-Step is the latest addition to a panoply of aggressive techniques debtors have developed to gain the upper hand against creditors. Other scholars, for example, have identified the use of coercive restructuring support agreements and “deathtraps,” third-party releases, and less-than-impartial bankruptcy directors to disadvantage creditors. The use of such techniques has been widely criticized as “bankruptcy hardball,” “the breakdown of chapter 11,” or simply lawlessness.” It is now time to add the two-step to that catalog, and to consider how that aggressive tactic might be counteracted.
The balance of this Essay does just that. Part I begins with an explanation of mass torts in bankruptcy and how the Texas Two-Step offers debtors something new. It then discusses fraudulent-transfer law, the main avenue commentators have considered for tort claimants responding to the Texas Two-Step, and the shortcomings of that avenue. Last, this Essay suggests a role for good-faith challenges, which tort claimants may bring at the beginning of a bankruptcy and have resolved far more quickly, enabling them to counteract the efficacy of the Texas Two-Step.
Keywords: bankruptcy, mass tort
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