The Texas Two-Step and How Businesses Can Use It to Avoid Bankruptcy


Health and pharmaceutical giant Johnson & Johnson has faced charges over its baby powder for decades, and surveys revealed that the company knew its flagship product contained asbestos. They were sued in 1997, and J&J denied the allegations, even though internal documents from the 1970s revealed asbestos in his baby powder.

Today, more than 34,000 lawsuits allege that the asbestos in baby powder talc has contributed to cancer in patients across the country, including women linking the use of the powder to cancer of the baby. ‘ovary. The product is no longer sold in the United States and Canada.

But J&J explored a plan to use a Texas law to divert blame and financial penalty to another company, Reuters reports. The movement is called “Two-Stage Texas”. It works like this: a company with liabilities, like J&J and the asbestos suits, transforms into a Texan entity, then the new company undertakes a “split merger” which splits that company into two companies, which is allowed in under Texas Separatory Merger Law. Then the liabilities and assets can be split, protecting the money and letting the other company take on the liabilities. Although this is generally a fraudulent transfer, Texas law makes it legal.

The company that takes over the liability then files for bankruptcy and the other company is released from any claim against it. During settlement discussions, lawyers for J&J mentioned that the company was considering a move. The complainants could not have done anything to stop him. The potential payout could be $ 24 billion, and the ruling would limit compensation to pennies on the dollar and could end all lawsuits in state courts across the country. “The parent company would have none of the stigma attached to filing for bankruptcy,” said Andy Birchfield, head of the Mass Tort section of the Beasley Allen law firm, which represents thousands of ovarian cancer victims. “It would just be the new company formed, and there would be a limited pool of assets in this new company that would be available to the victims who are now creditors.”

In September, the plaintiffs sought a temporary injunction and a preliminary injunction to prevent J&J or any affiliate from transferring its assets to a subsidiary. “Plaintiffs deserve to have their day before a judge and jury, and not arbitrarily placed in bankruptcy court with little hope of adequate compensation,” Birchfield said via a statement. “Bankruptcy should not be used as a ploy to delay or deny justice to victims of a dangerous product manufactured by a company with hundreds of billions of dollars in assets.”

The financial implications could also be enormous. A lawsuit with just 22 plaintiffs has already resulted in an award of $ 2.12 billion, which has been reduced from an original jury award of $ 4.69 billion. With tens of thousands of claimants on the latest lawsuits, the results could be astronomical. This is unlikely to be successful, and J&J hasn’t done anything yet, but Birchfield says the plaintiffs won’t know ahead of time, tying them up in bankruptcy filings rather than giving them their day in court. “It would be excruciating for our clients and cancer victims,” says Birchfield. “They would be further victimized by Johnson & Johnson by taking this bankruptcy process and using it to their advantage, and at an extreme disadvantage to their former clients and our clients.”


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