Johnson & Johnson the Latest to Employ the “Texas Two-Step”

Plaintiff attorneys are grappling with the fear of the rise of big companies utilizing bankruptcy court to skirt large final or anticipated judgments.
This phenomenon is called the “Texas Two-Step,” and it's a concern for lawyers across the country.
Nick Koffroth, a complex bankruptcy attorney and partner at Fox Rothschild, said the strategy entails “using state law to create subsidiary entities that effectively held all the liabilities of an otherwise potentially healthy operating business, and to have that entity with all the liabilities then file bankruptcy to shed those liabilities.”
The most recent and high-profile example is Johnson & Johnson’s alleged attempt to utilize this move in its talc bankruptcy litigation. The company has tried and failed three times to settle the more than 60,000 lawsuits brought by mesothelioma victims.
While Johnson & Johnson has so far failed to pull off this alleged tactic, Kelly Reardon, a New London, CT, mass tort attorney at The Reardon Law Firm, worries this type of behavior is becoming commonplace.
“On some occasions, these bankruptcies are legitimate because the companies being sued simply don't have the assets to pay all of the claims that have been made,” Reardon said. “But it's become more of a trend over the past five years or so for larger corporations that do have the assets to pay these claims and to settle them appropriately with fair compensation for each claimant to attempt to use the bankruptcy courts to resolve these claims in a manner that results in far less compensation for the claimants than they would be entitled to in the court system.”
Koffroth said the bankruptcy code exists to address large claims, “but what gets people frustrated is the moral issues often involved in those tort claims, which are real, and how debtors are trying to push the limits of the bankruptcy code to address those tort claims in bankruptcy.
“It's a push and pull,” he added.
Reardon represents three claimants in the talc cases against Johnson & Johnson, two of whom have died.
“It's just very sad for them because I have conversations with them quite frequently saying, ‘Please, please hang in there. I think eventually we're going to get there, but you got to just be patient.’ And it's really difficult to keep saying you have to be patient after 10 years.”
Reardon is also one of the lawyers who brought 35 pending cases on behalf of sexual assault victims against the Norwich Catholic Diocese, which also filed for Chapter 11 Bankruptcy. Not only has the bankruptcy proceeding deterred the claimants from collecting their compensation, but resulted in less money for the creditors.
“Bankruptcy is very expensive,” Reardon said. “If you take a look at the Norwich Diocese bankruptcy, it's been going on for nearly four years, and there have been tens of millions of dollars spent on attorneys on both sides and financial advisors … The money to pay those professionals comes out of the assets of the corporation that is declaring bankruptcy. That means less money in the pot to go to the claimants.”
Koffroth said there’s a policy reason why administrative expenses come first in bankruptcy proceedings.
“If a bankruptcy attorney, or anyone who was helping a debtor through bankruptcy, gets paid the same as other unsecured creditors, who are very frequently paid pennies to the dollar, if anything, no law firm would take that case,” Koffroth said. “Otherwise, it would severely impair a debtor's ability to even file bankruptcy in the first place. The flip side of that, however, is that rates are getting incredibly expensive … It is a real concern for unsecured creditors, because every dollar that an attorney earns is diluting what's available to unsecured creditors.”
While bankruptcy attorneys are expensive for both parties, in the long run, Koffroth said it can work out in the debtors favor.
“It can be very expensive, and because bankruptcy can essentially take the whole universe of potential claims out there, including claims that have yet to be asserted, and cap them off so that a company isn't going to be exposed for the rest of eternity to the potential for the accrual of additional claims,” Koffroth said. “It's helpful, in that sense, [because] in many cases, these judgments can be so big.”
Chapter 11 bankruptcy has not been the only route. Infowars owner Alex Jones was hit with a $1.4 billion verdict by a Waterbury, Connecticut jury for defaming family members of the victims of the Sandy Hook Elementary School shooting. Jones attempted to use Chapter 11 bankruptcy at first, but ended up succeeding in filing for personal bankruptcy, Chapter 7.
“Corporate defendants who are facing liabilities try to reorganize in bankruptcy court, but what I think we're seeing more now, and which is particularly concerning, is that they're trying to use the bankruptcy courts to leverage settlements with plaintiffs who have sued them, who may have obtained verdicts or who may be in the litigation process,” Christ Mattei, partner at Koskoff Koskoff & Bieder and one of the attorneys for the Sandy Hook plaintiffs, said.
Mattei said Jones used many maneuvers to drag out the bankruptcy proceedings to compel the Sandy Hook plaintiffs to settle, which would allow him to sustain his control of Infowars and stay in business.
“To a lay person who believes in basic principles of justice and accountability, it was really astonishing to see how this played out in bankruptcy court,” Mattei said. “Now, the good news is that despite the day-to-day frustration of it, [the Sandy Hook plaintiffs] also have incredible amounts of persistence and determination, and were never so frustrated or tired of it all that they wanted to cut a deal with Jones. Throughout these entire two years, all Jones was trying to do was get the Connecticut families, in particular, to take some deal whereby the bankruptcy process would end.”
While Mattei said Jones was a bad faith actor, Koffroth said the large verdict was likely enough to render Jones insolvent.
“Some of these companies are truly insolvent, at least on their balance sheet, when you consider the size of some of these judgments,” Koffroth said. “It's both to deal with prospective liabilities and to deal with truly, very large claim amounts.”
Reardon said she would like to see a policy change to address the “Texas Two-Step”, but Koffroth said he would be hesistant to go there.
He said he wouldn’t alter the bankruptcy code, “without a lot of real hard thought, because again, all of these, every change, every policy change, the bankruptcy code has, has its costs and its benefits.”