Democratic and Republican Senators Unite to Oppose Controversial Texas Two-Step Legal Tactic

WASHINGTON (AP) — In a rare show of bipartisan unity, Democratic Senators Dick Durbin and Sheldon Whitehouse, along with their Republican counterpart Josh Hawley, have come together to oppose a legal tactic known as the Texas Two-Step. This maneuver, used by large corporations facing mass tort claims, involves creating a new subsidiary to divert liability and then filing for bankruptcy. The senators have urged the U.S. Supreme Court to overturn a ruling by the U.S. Appeals Court that allowed paper giant Georgia-Pacific to utilize this legal strategy to avoid millions in asbestos liability claims.

The Texas Two-Step has been criticized as a sleight of hand by which companies shield their assets from victims to whom they owe substantial amounts of money. The tactic involves splitting the corporation into two entities, one that holds the assets and another that assumes all liabilities and legal threats. The liability-laden entity is then placed into bankruptcy. Johnson & Johnson is another company that employed this tactic when faced with mass tort claims related to their talcum powder products. They created a subsidiary, poured their legal liabilities into it, and then declared bankruptcy for that entity.

The use of the Texas Two-Step has raised legal and political concerns. The U.S. Court of Appeals for the Third Circuit recently rejected Johnson & Johnson’s use of this strategy, arguing that the subsidiary created for the purpose of bankruptcy protection was not in financial distress. The conflicting interpretations of bankruptcy law between different federal appeals courts overseeing cases involving Georgia-Pacific and Johnson & Johnson may need to be resolved by the U.S. Supreme Court.

Harvard Law Today interviewed bankruptcy law expert Jared Ellias to gain insights into the Texas Two-Step. Ellias argues that this tactic undermines public confidence in the bankruptcy system and raises questions about its permissible use to address societal issues such as the opioid epidemic and child sex abuse.

The Texas Two-Step allows corporations to separate their liabilities from their operating business and seek bankruptcy protection without subjecting their entire business to the bankruptcy court’s jurisdiction. Critics claim that this structure disadvantages plaintiffs and weakens their bargaining power. By liberating the operating business from the bankruptcy process, companies can potentially delay settlements and limit the recovery for tort victims. Ellias believes that this is an abuse of the bankruptcy system and highlights the need to maintain public confidence in the process.

While the Texas Two-Step offers advantages such as uniform treatment for plaintiffs and potentially faster resolutions, Ellias argues that the negative consequences outweigh the benefits. The primary question is whether companies should be allowed to segregate their liabilities into separate entities and file for bankruptcy, even when their overall business is thriving.

The bipartisan opposition to the Texas Two-Step reflects concerns that the system is rigged against victims and undermines public confidence. Both Democrats and Republicans see the need to address this issue to ensure fairness and prevent abuses. However, any changes made to the bankruptcy system should be carefully considered to avoid unintended consequences.

In conclusion, the Texas Two-Step has become a hotly debated legal tactic used by corporations to shield themselves from mass tort claims. The bipartisan alliance against this strategy reflects the shared goal of maintaining public confidence in the bankruptcy system and protecting the rights of tort victims. As the courts grapple with conflicting interpretations of bankruptcy law, the ultimate resolution of this issue may rest with the U.S. Supreme Court.