The Texas Two-Step: A Legitimate Federal Tool to Deal With Mass-Tort Claims

James Stang and Jonathan Kim recently published an article in Advocate Magazine (Journal of Consumer Attorneys Associations for Southern California) on the “Texas Two-Step” bankruptcy strategy, which involves a solvent company splitting off its liabilities into a new company that then declares bankruptcy. The strategy is based on Texas corporate law, which allows companies to split their liabilities from their assets through a “divisive” merger. In the piece, James and Jonathan analyze the questions that this strategy poses about the purposes and limits of the federal bankruptcy law system, the case against the Texas Two-Step, and the LTL/Johnson & Johnson case that notably rejected the use of the Texas Two-Step last year.

James and Jonathan ultimately conclude that while some argue that there can be legitimate uses of the Texas Two-Step, “A strong case can and should be made that the Texas Two-Step, as used in cases like LTL, goes over the line as to what should be recognized and accepted by the courts and the bankruptcy system.”