Texas Two-Stepping Out of Bankruptcy

13 Pages Posted: 24 Mar 2022

See all articles by Michael Francus

Michael Francus

University of Notre Dame - Notre Dame Law School; Harvard Law School

Date Written: January 30, 2022


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

Suggested Citation

Francus, Michael, Texas Two-Stepping Out of Bankruptcy (January 30, 2022). Available at SSRN: https://ssrn.com/abstract=4021502 or http://dx.doi.org/10.2139/ssrn.4021502

Michael Francus (Contact Author)

University of Notre Dame - Notre Dame Law School ( email )

Eck Hall of Law
Notre Dame, IN 46556
United States

Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics