Thinking Out Loud: The Texas Two-Step

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As divisive as we are, I think we can all agree that our institutions and corporations are not held accountable for their actions. To my right are those concerned with the CDC, WHO, and social media censorship; to my left are those who want to hold the Bigs, tobacco, or food, and federal and state policy accountable. Governmental agencies are hard to pin down because the bureaucracy means everyone and no one is to be held responsible. Because they are legal “individuals,” corporations can have their feet held to the fire by lawsuits. But thanks to a rivalry between Delaware and Texas over who is the most “corporate friendly,” we have corporate’s “Get Out of Jail” free card – the Texas two-step.

It's not the Macarena or a line dance but a Texas law involving the creation of a corporate entity. You know there will be a problem when a law that “creates” a new corporation is designed to take an old corporation apart. Like three-card Monte, a street con, it involves a bit of diversion and sleight of hand.

Step One – incorporate your old company under a new banner in Texas. But just as quickly, split that company into two. All of the old company’s liabilities, for instance, J&J’s outstanding lawsuits over asbestos in their talc products, go into one company, “LiabilityLLC.” All the good parts of the old company are retained under the “NewprofitablebrandLLC.” Why bother with all this legal paperwork? Because now, NewprofitablebrandLLC is financially separate and legally isolated from any financial reckoning for LiabilityLLC.

Step Two – Litigation over cancer has a long tail. Asbestos's role in mesothelioma was identified and its use banned in the 70s, 50 years ago; yet every day, we see ads from attorneys seeking clients with mesothelioma claims. Rather than continue with onerous and expensive litigation of these lawsuits or God-forbid class actions, LiabilityLLC declares Chapter 11 bankruptcy. Chapter 11 has two important features:

  • It moves the proceedings out of civil court into bankruptcy court and mediation, where the rules of evidence and the threshold for liability may differ.
  • More importantly, it suspends any ongoing litigation, in this case against LiabilityLLC, until the bankruptcy can be resolved.

The justice system is not blind to what is going on here. In most states, this maneuver would be considered a “fraudulent transfer” – “an attempt to avoid debt by transferring money to another person or company.” But in Texas, the law is more ambiguous. As the Financial Times reports:

“Texas considers divisions of one company to be a merger, making them exempt from fraudulent transfers.”

To be fair, the author of the legislation has stated,

“Had we known in 1989 that provisions could be dubiously interpreted for entities to avoid known liabilities such as those causing severe and permanent injuries and deaths, it would never have passed with the ‘Texas two-step’ provision. Never, never, never.”

And J&J has set aside $4 billion to resolve the outstanding cases.

We can endlessly debate whether J&J’s talc products caused users to develop cancer. We should agree that asbestos was present in some of their talc products; it is an inevitable result of the talc mining; and that J&J knew it and did not report this to consumers so they could decide for themselves whether to use the product or not.

Is it Just?

For a moment, consider a plaintiff who used those products and now has ovarian cancer – a disease with only a 46% overall survival at five years from diagnosis. They are caught in a terrible bind. Legal relief takes time. The Inghan case in Missouri (21 plaintiffs alleging J&J’s cover-up) was settled with a $25 million payment to each plaintiff and $4.14 billion in punitive damages. It was filed in 2015, the verdict was given in 2018, the settlement reduced, and finally settled, after appeals, in 2021 – six years. That is a long time to wait, especially if your life expectancy is far shorter.

The two-step encourages settlements. In October 2021, J&J settled 1000 cases for $100 million and went down to Texas to form their LiabilityLLC or LTL Management as it is known.

J&J is not the first to dance the Texas Two-Step, nor will they be the last. At least if Jones Day has any say. Who is Jones Day? Although they are a top ten law firm in the US, they are international and have been involved with all four corporations that have sought to dance the Texas-Two Step.

You needn’t be a “social justice warrior” to be bothered by these tactics. Even with the settlements, are payments sufficient justice when a publicly traded company lies and dissembles to the public. Last word to the Financial Times in its assessment of J&J’s sleight of hand,

“…it makes a mockery of its 78-year-old credo, which pledges to put the interests of “mothers and fathers and all others who use our products and services” above those of shareholders.”

Indeed it does.

Sources: All from the Financial Times

 ‘Texas two-step’ outcry risks ending fee bonanza for law firm Jones Day

Inside Johnson & Johnson’s bankruptcy two-step

Architects of ‘Texas two-step’ lambast J&J for its use of the manoeuvre

J&J’s Texas two-step waltzes over its liabilities


J&J tries the 'Texas Two-Step' NPR Planet Money