The Texas Two-Step. Not So Fast!

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The Texas Two-Step is a law allowing for the creation of a corporation that subsequently files for bankruptcy, thereby allowing product liability claims to move into bankruptcy court. J&J was the latest corporate filer until a federal judge said, not so fast.

For those unfamiliar with the Texas Two-Step, you can find my earlier discussion of J&J here. On January 30th, a federal appeals court dismissed a bankruptcy petition from LTL management, a corporation created by Johnson & Johnson to cover the litigation around talc in its baby powder products. J&J has guaranteed up to $16 billion to cover their liabilities, presumably without an admission of guilt, but the court found that,

“While LTL faces substantial future talc liability, its funding backstop plainly mitigates any financial distress.”

And it is financial distress that should be the reason for bankruptcy restructuring, not shifting of litigation from a court to mediation.

Note: I am not discussing the scientific merits of the litigation. I am simply considering the resolution venue, and both have pros and cons. Bankruptcy would mean mediation of claims and would be relatively quick. And bankruptcy would limit the amount of damages awarded, allowing some relief to stockholders. Civil litigation might not limit those damages, but the years in court would mean that much of the monies would go to estates, not people. And for individuals in financial distress now, how tempting would smaller settlements be when paid today when they need them?

"[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt."

These were the words of the US Supreme Court in explaining a bankruptcy decision in 1934. It involves creditors and debtors. The history of bankruptcy law goes back centuries. That having been said, I do not think these laws were designed to address product liability. Product liability law has its roots far more recently in 1963 when the California Supreme Court ruled that manufacturers could be held liable for defective products.

One final thought to help us, on either side of the political aisle, to see the bigger picture. The firm representing J&J and other corporations dancing the Texas Two-Step is Jones Day, one of the ten largest in the country. The New York Times did a long piece on Jones Day last summer. It is a sobering look at one version of the "deep state" and worth reading.


Source: J&J blocked from using bankruptcy to resolve talcum powder lawsuits Financial Times