The Texas Two-Step Bankruptcy Tactic Fails to Provide Desired Relief, Ignites Controversy: A Closer Look

Austin, Texas – The controversial “Texas Two-Step” bankruptcy cases, which involved corporations using the tactic of restructuring and subsequently filing for bankruptcy to delay mass tort liability, have proven to be unsuccessful. Companies such as Best Wall, DBMP, Aldrich Pump/Murray Boiler, and most recently, LTL, have all attempted this strategy without success. These failed attempts have garnered significant attention, with critics including the U.S. Senate expressing strong opposition.

The concept of the Texas Two-Step has muddled the discussion surrounding the legitimate interests of both public companies seeking “finality” in resolving claims and plaintiffs who want their claims to be determined and fully compensated through the tort system.

The first step of the Texas Two-Step involves separating the mass tort liabilities of the company from its operating assets, which is acceptable as long as the entity responsible for the liabilities has sufficient funds to meet its obligations.

However, the second step, i.e., immediately declaring bankruptcy, has proven to be a disastrous move. So why did these companies opt for the second step? There are two reasons. Firstly, the companies believed that shutting down the tort system would give them greater bargaining power in reaching a resolution for current and future claims. Secondly, by filing for bankruptcy, these companies hoped to transfer future claims to a bankruptcy trust, thereby shielding themselves from any further liabilities.

Fortunately, there is a highly effective and superior alternative to the second step that renders bankruptcy completely unnecessary. Instead of having the entity with liabilities declare bankruptcy, the optimized entity should be sold to an unrelated third party. This disaffiliation would ensure that all current and future liabilities are removed from the parent company’s books, providing the desired “finality.”

Under this alternative approach, plaintiffs’ claims would proceed through the tort system against the disaffiliated entities. They would have the opportunity to benefit from the liquidation and full payment of their claims through the regular course of litigation. This strategy has already proven successful in the cases of Morse TEC and Intelco, demonstrating its viability and fairness in handling mass tort liabilities.

Solvent public companies facing significant mass tort issues rightfully seek finality, which requires eliminating the fear of future claims. Structural optimization and the disaffiliation of liable entities, with the approval of outside auditors, is the appropriate solution for all stakeholders involved, including the capital markets, claimants, boards of directors, and management teams. It is time to change the narrative surrounding solvent company mass tort, which has been tainted by the Texas Two-Step.

In conclusion, the Texas Two-Step bankruptcy strategy has failed to deliver the desired outcomes for companies seeking relief from mass tort liabilities. An alternative approach involving the disaffiliation of optimized entities has proven to be more effective and fair in resolving these issues. Solvent companies, the legal system, and all parties involved stand to benefit from embracing this alternative path forward.