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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.

Following a lawsuit against FTX Trading founder Sam Bankman-Fried's parents alleging that Stanford University received millions of dollars in donations from the now-collapsed cryptocurrency exchange, the school says it will return the funds of all gifts collected from FTX and related companies, the Associated Press reported. Lawyers for FTX on Monday accused Allan Joseph Bankman and Barbara Fried of exploiting their influence over their son to siphon millions from the company, while spending lavishly on a luxury home as well as funneling contributions to “pet causes” — and Stanford University. The suit claims that Bankman, who is a Stanford law professor and expert in tax law, directed more than $5.5 million in charitable contributions from FTX to the university — in what the complaint describes as “naked self-dealing” in an attempt to “curry favor with and enrich his employer at the FTX Group’s expense.” In a statement sent to The Associated Press on Wednesday, a university spokesperson said that Stanford “received gifts from the FTX Foundation and FTX-related companies largely for pandemic-related prevention and research.” Stanford is in discussions with attorneys for FTX debtors to recover the gifts, the spokesperson added, and "will be returning the funds in their entirety.” The university did not specify the monetary value of the gifts it received.

The chapter 11 bankruptcy for Tempe-based electric scooter company Phat Rides Inc. proved to be short-lived, the Phoenix Business Journal reported. U.S. Bankruptcy Court Judge Paul Sala on Sept. 14 dismissed the bankruptcy case that had been filed two weeks earlier by deposed former CEO Tim Moran, ruling that he "did not have the proper legal authority to execute PRI's voluntary petition under applicable law," according to Sala's order. A power struggle over ownership of the company had been waged since late July, with Moran attempting to maintain control even after Phat Rides defaulted in May on a multimillion-dollar loan from its biggest investor — leading the investor to take control of the company. Sala ruled that an effort by Moran in late August to reappoint himself as sole director of the company was improper because he didn't convene the company's shareholders before doing so. As a result, Judge Sala found that investor Merchant Banking Income Fund LLC (MBIF) maintained control of Phat Rides. When MBIF took control a month prior, it had named its principal, Jeremy Hill, as sole director of Phat Rides. “I don’t know what percentage MBIF owns of this company. I don’t know what percentage Mr. Moran owns of this company. But I know, based on the undisputed facts, that MBIF owns some percentage," Judge Sala said. “This debtor had no authority to file the bankruptcy, and that’s how I’ll rule.”

The Boy Scouts of America’s $2.46 billion settlement trust has begun sending payments to men who were abused as children by troop leaders, under a bankruptcy settlement still facing appeals from a minority group of abuse survivors, Reuters reported. The initial payments are being sent to 7,000 claimants who chose a "quick pay" option under the Boy Scouts of America's bankruptcy plan, with the first 70 claimants paid on Tuesday. Those claimants will receive $3,500 without going through the lengthier evaluation process that awaits 75,000 others who filed claims. The settlement, approved in U.S. bankruptcy court one year ago, was supported by 86% of the 82,000 men who filed abuse claims in the youth organization's bankruptcy. Retired bankruptcy judge Barbara Houser was placed in charge of managing the settlement payments when the Boy Scouts of America emerged from bankruptcy in April, and she said that her team is working to get payments out the door quickly. "We know that this day has been a long time coming for these survivors," Judge Houser said yesterday. The settlement process will take years, as Judge Houser and her team evaluate and pay claims based on factors like the severity of the alleged abuse and when and where it occurred. Individual abuse survivors are expected to receive between $3,500 to $2.7 million, depending on how their claims are assessed, according to the Boy Scouts' bankruptcy plan.

Medical staffing company American Physician Partners LLC filed for bankruptcy protection to wind down its business after it ceased operations in July, citing economic headwinds brought by the pandemic and lost revenue from new regulation, Bloomberg News reported. The company listed assets of as much as $500 million and liabilities of as much as $1 billion in its petition, filed Monday in Delaware. As of July 31, American Physician Partners had transitioned its clients to other emergency medicine companies, hospitals and health systems, according to a statement. It plans to liquidate under court supervision. American Physician Partners’ decision to fold came after it failed to reach a deal with another hospital staffing firm, SCP Health, Bloomberg previously reported. The company said in court papers that it wasn’t able to find a potential acquirer, equity investors or replacement lenders. The Brentwood, Tennessee-based firm was owned by Brown Brothers Harriman & Co., along with member physicians and management. Physician staffing firms were hit hard by the pandemic as many patients delayed elective procedures and avoided emergency rooms over fears of catching COVID-19. The company received more than $30 million in relief funding, which it said helped offset lost revenue in 2020 and 2021. But as staffing shortages persisted, factors like rising labor costs and inflation continued to weigh down on the company’s revenue, according to a court filing yesterday. The company claimed that it also suffered in 2022 after the No Surprises Act went into effect. The law protects customers from large, unexpected bills when they receive care from providers not covered by their insurance, and the company said it left most of its payment disputes with insurers unresolved. Before ceasing operations this summer, American Physician Partners held approximately 150 contracts with emergency departments and hospital systems mostly in the South and Midwest. The company, founded in 2015, suffered operating losses greater than $100 million from 2019 through last year, despite revenue growth that neared 50% across that time period, the court filing shows.

A unit of UpHealth Inc. filed for bankruptcy after a judge recently ruled the telemedicine provider must pay investment bank Needham & Co. a $31.3 million fee for arranging its 2021 merger with a publicly traded blank-check company, Bloomberg News reported. UpHealth Holdings Inc. filed for chapter 11 yesterday, listing assets and liabilities each of between $100 million and $500 million, according to a Delaware bankruptcy petition. The company completed a combination with GigCapital2 Inc. and Cloudbreak Health LLC in June 2021 and began trading on the New York Stock Exchange. The deal is the latest involving a former special purpose acquisition company, or SPAC, transaction to collapse into a bankruptcy. Chief Executive Officer Sam Meckey said in a statement Uphealth turned to bankruptcy to protect its stakeholders “and achieve a fair resolution of this matter through an appeals process of the Needham judgment.” The chapter 11 filing is not expected to have an impact on UpHealth’s operations, Meckey said. The bankruptcy comes little more than a week after New York Supreme Court Justice Margaret A. Chan ruled against UpHealth in a contract dispute with Needham, which was retained to raise capital for the telehealth startup. Filing bankruptcy immediately pauses the litigation.

The Senate Judiciary Committee will be holding a hearing today at 10 a.m. EDT titled "Evading Accountability: Corporate Manipulation of Chapter 11 Bankruptcy." Witnesses include Prof. Melissa B. Jacoby of UNC School of Law (Chapel Hill, N.C.), Lori Knapp (Greeneville, Tenn.), Prof. Samir D. Parikh of Lewis & Clark Law School (Portland, Ore.), Stephen Hessler of Sidley Austin LLP (New York) and Erik Haas of Johnson & Johnson (Armonk, N.Y.). To view a live webcast of the hearing and to view prepared witness statements, please click here.

When investors took over prison healthcare provider Corizon in December 2021, it was on the brink of a bankruptcy filing to weather the loss of key contracts, hundreds of prisoner lawsuits and mounting debts to hospitals and doctors, WSJ Pro Bankruptcy reported. The company, among the nation’s largest correctional health companies, is now nearing a chapter 11 restructuring that would settle those claims for less than its creditors have demanded—without ever appearing in bankruptcy court itself. Its owners could retain control of the business, cleansed of old debts and lawsuits, as it rebuilds its market share under its new brand name, YesCare. YesCare has put a new spin on the Two-Step. The company split itself in May 2022 into an operating business holding its government contracts and a Texas subsidiary called Tehum Care Services that was made responsible for its unpaid bills and legal liabilities. Tehum then filed for chapter 11 in February, carrying into bankruptcy court the debts and liabilities to prisoners, healthcare providers, insurance companies and others accumulated under the company’s prior ownership. In bankruptcy, Tehum has powerful tools at its disposal to resolve creditors’ claims against it—and against its rebranded affiliate YesCare.

Bankrupt drugmaker Mallinckrodt is in talks with major investors about selling some or all of its business units, which could lead to its exit from the opioid business, according to a WSJ Pro Bankruptcy report. Some investors, poised to take control through the company's ongoing bankruptcy proceedings, are suggesting Mallinckrodt break up its business units. The Ireland-based company filed for its second bankruptcy in the United States last month, with a restructuring plan that would cut $1 billion from what it owes to victims of the U.S. opioid crisis. Mallinckrodt, which makes both branded and generic drugs, had first filed for bankruptcy in 2020 to address its high debt load, litigation over its marketing of highly addictive generic opioids and disputes over its drug pricing. As part of its plan to emerge from bankruptcy in June 2022, the company, which denied wrongdoing, agreed to pay $1.7 billion to settle about 3,000 lawsuits alleging it used deceptive marketing tactics to boost opioid sales. Mallinckrodt also disclosed in filings with the Securities and Exchange Commission last month that it recently received a grand jury subpoena from the U.S. Attorney's Office for the Western District of Virginia, seeking information about its reporting of suspicious opioid orders to the U.S. Drug Enforcement Administration.