A legal tactic called the Texas Two-Step for businesses to manage mass lawsuits continues to work its way through the courts despite some recent setbacks and criticism from lawmakers, WSJ Pro Bankruptcy reported. Texas law lets a company divide itself in two, loading one business entity with its assets and another with its legal or financial liabilities. Several companies facing massive numbers of lawsuits in recent years have placed their liability-laden affiliates in bankruptcy, giving the Texas Two-Step its name. Texas has allowed for such divisional mergers for nearly two decades, but its novel use in bankruptcy began in 2017 when paper products maker Georgia-Pacific placed its Bestwall unit along with asbestos-related liabilities under chapter 11. Since then, healthcare giant Johnson & Johnson and a handful of other companies have used divisional mergers and bankruptcy filings to try to settle mass lawsuits they face using the chapter 11 tactic. The Texas Two-Step allows businesses to move litigation to bankruptcy court without the loss of equity value that would come from filing for chapter 11 themselves. In bankruptcy, corporate defendants are generally shielded from jury trials so they can drive a final resolution of their legal liabilities in a single forum. Proponents of the Texas Two-Step have said it can resolve mass lawsuits more fairly and efficiently in bankruptcy compared with fighting or settling claims one by one. The corporate unit that files for bankruptcy in a Two-Step typically carries a funding commitment from its affiliates to pay creditors through the bankruptcy process. Plaintiffs’ lawyers and other critics have argued the tactic amounts to an abuse of chapter 11 by wealthy corporate defendants, meant to pressure injury victims and other claimants into accepting settlement offers. Members of the U.S. Senate Judiciary Committee held a hearing earlier this week on the legal strategy to deliberate whether companies are misusing the bankruptcy system.
