US lawmakers are planning legislation to outlaw the controversial bankruptcy manoeuvre called the “Texas two step” to prevent large companies from abusing the Chapter 11 process, the chair of the Senate judiciary committee has said.
Dick Durbin, who is also Democratic whip in the Senate, said negotiations are under way within the committee on a draft bill that would remove what he described as a “get out of jail free card” being deployed by some of the wealthiest companies.
His comments follow the failure on Friday by lawyers representing almost 40,000 cancer sufferers to prevent Johnson & Johnson from deploying the bankruptcy scheme to help it settle billions of dollars of claims that its baby talc was tainted with asbestos and caused their illnesses.
“When you have massively profitable companies using this bankruptcy maneuver to avoid accountability to dying cancer victims, it’s clear that corrective action is needed,” Durbin told the Financial Times.
“It is our goal to pursue bipartisan legislation in committee that curbs corporate bankruptcy abuses like the Texas two-step.”
On Friday a US bankruptcy judge threw out a motion by talc claimants to dismiss the bankruptcy of J&J subsidiary LTL management in a ruling that critics warn could open the floodgates for other companies to use the bankruptcy courts to manage person injury and other tort claims.
The “Texas two-step” scheme utilises business-friendly laws in Texas that allowed J&J to split itself into two separate entities and ringfence all its talc liabilities within the LTL subsidiary. LTL then filed for Chapter 11 bankruptcy protection, which put a stay on talc claims.
J&J followed the examples set by Koch Industries’ Georgia Pacific, the first to deploy the Texas two-step in 2017, Trane Technologies, and a US unit of France-based Saint-Gobain. They have used the scheme to shield their main businesses from legal claims linked to asbestos claims.
All four companies are represented by Cleveland-based law firm Jones Day, which designed the complex bankruptcy strategy.
But the deployment of the “Texas two-step” by J&J has prompted a public outcry and prompted lawmakers to consider new legislation and hold public hearings on the issue.
Durbin said J & J’s exploitation of the bankruptcy loophole was “shameful” and “indefensible”, as it denied cancer victims their right to pursue their claims against the company in court.
“If J&J succeeds, tens of thousands of people suffering from ovarian cancer and mesothelioma will be forced to wait years for restitution,” he said.
J&J declined to comment.
Talc claimants had hoped to persuade bankruptcy Judge Michael Kaplan to dismiss LTL’s Chapter 11 filing on the grounds that it was filed in “bad faith” because the company was never in financial distress. They warned J & J’s use of the scheme would open the floodgates for other companies to deploy the “Texas two-step”.
But Kaplan denied the talc claimants motion to dismiss the bankruptcy, ruling they had not proved J&J had acted in “bad faith”. He said resolving talc claims through the bankruptcy process was in the public interest, noting a $ 2bn settlement trust proposed by J&J could benefit talc claimants whose time may be limited due to illness.
“If I were a tort lawyer, I would be afraid after today. Because I would assume that companies are going to explore this and they’re going to threaten to do this Texas two-step, ”said Jared Ellias, professor at Hastings College of the Law, University of California.
Ellias, a critic of the Texas two-step, said the ruling bolstered the call for Congress to legislate to tackle the scheme.
However, J&J said Kaplan’s ruling was a positive development and the trial had established the appropriateness of LTL’s formation and filing for bankruptcy.
Samir Parekh, a bankruptcy law professor at Lewis & Clark Law School in Oregon, said many commentators arguing that mass lawsuits should not be resolved through bankruptcy do not understand the alternatives.
“Bankruptcy avoids the lottery effects we see when mass tort cases are resolved through jury trials; some plaintiffs receive a windfall and others receive nothing. The LTL plaintiffs should be happy their claims will be resolved in bankruptcy. Aside from a few plaintiffs’ attorneys, all parties will benefit, ”he said.
Additional reporting by Sujeet Indap in New York
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