J & J ’ s Texas Two-Step
In recent years , plaintiffs in thousands of personal injury suits across the country have alleged that asbestos in J & J ’ s talc products , including its widely used baby powder , caused various illnesses , most commonly ovarian cancer and mesothelioma . To manage these cases , J & J turned to the bankruptcy process in a controversial ploy known as the Texas two-step .
The scheme is complicated , but here ’ s a summary : J & J , a New Jersey corporation , relocated to Texas and performed a divisional merger , a unique creation of Texas corporate law , in which it split itself into two corporate entities . It put the vast majority of its assets into one of the entities and its talc-related liabilities into the other . The liability-laden entity , called LTL Management — short for Legacy Talc Litigation Management — immediately filed for Chapter 11 bankruptcy .
Through this corporate maneuvering , J & J manufactured an insolvent entity solely for the purpose of declaring bankruptcy . J & J is thriving . For 2021 , the company reported 13.6 % growth in sales to $ 93.8 billion , including sales of $ 24.8 billion in the fourth quarter alone . It holds at least $ 31 billion in assets and is valued at more than $ 450 billion .
Although these massive revenue streams and abundant assets give it ample ability to pay judgments in favor of talc plaintiffs who prove their cases to juries , J & J created and spun off this new entity to insulate its assets from those claimants and use the unique features of bankruptcy law to limit its liability .
If J & J succeeds in pushing the case through the bankruptcy system , the extraordinary tools available to debtors and bankruptcy courts could allow this Fortune 15 company to shift the costs onto gravely ill cancer victims and their families .
Bankruptcy ’ s Fundamental Compromise
Congress has vested the bankruptcy courts with unique , powerful tools . Among them is the automatic stay under Title 11 of the U . S . Code , Section 362 , which enjoins most creditors — including litigation creditors — from filing suit to collect their debts from the bankruptcy petitioner while the bankruptcy proceeding is pending .
Bankruptcy courts can also order channeling injunctions under Title 11 of the U . S . Code , Subsections 105 ( a ) or 524 ( g ), which require all tort claims to be directed , or channeled , to a litigation trust funded by the bankrupt debtor so that such claims cannot be pursued against the new entity that emerges from bankruptcy or other entities affiliated with the debtor .
Finally , there is the claims-estimation process under Title 11 of the U . S . Code , Subsection 502 ( c ), which allows the bankruptcy court to estimate the value of any contingent claims against the debtor , such as pending litigation , for the purpose of confirming a reorganization plan .
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