Breaking Down the Texas Two-Step: Johnson & Johnson’s Fight Against Mass Tort Liability
Posted on Feb 4, 2025Clara Jiang
Johnson & Johnson (“J&J”) is facing significant legal challenges. For years, its talc baby powder, produced by its subsidiary J&J Consumer Inc. (“Old Consumer”), was a flagship product that established the company as a household name and generated billions in revenue.[1] The powder, made from talc—a mineral mined and processed into a fine powder—was widely used, but as early consumers aged, some developed cancer and began filing lawsuits. In 2020, the Missouri Court of Appeals awarded $2.24 billion to 22 plaintiffs who developed ovarian cancer after prolonged use of J&J’s Baby Powder.[2] By late 2021, Old Consumer and J&J were contending with over 38,000 ovarian cancer lawsuits and more than 400 mesothelioma cases,[3] each with the potential for similar verdicts.
To address these mounting liabilities, J&J turned to bankruptcy courts, a common strategy among mass tort defendants—but with a controversial twist.[4] Instead of filing for bankruptcy itself, J&J used a Texas law to divide Old Consumer into two entities: one retaining assets and the other assuming talc-related liabilities.[5] The liability-burdened entity then filed for bankruptcy.[6] This maneuver, known as the “Texas Two-Step,” has raised concerns about limiting tens of thousands of claimants’ ability to seek justice in court.
What is Texas Two-Step Bankruptcy?
The term “Texas Two-Step bankruptcy” refers to a contentious legal strategy employed by companies to manage their exposure to mass tort claims while continuing to operate their regular businesses. This tactic, pioneered by Jones Day partner Greg Gordon in 2017, involves a two-step process under U.S. bankruptcy law and the use of a unique Texas law, namely Chapter 10 of the Texas Business Organizations Code.[7] This provision allows a company to execute a “divisional merger,” splitting into two or more new entities and allocating the original entity’s assets and liabilities among them.[8]
The first step of this process begins with the creation of two entities: a liability-bearing entity, which assumes the liabilities and minimal assets, and an asset-rich entity, which retains the remaining assets. To strengthen the arrangement, the legacy business—maintaining control over both entities through their officers and directors—may implement mutual indemnification agreements, ensuring that one entity covers the other’s liabilities.[9] The rationale for this setup, at first blush, is that if the funding is sufficient to pay all creditors, creditors and injured parties can be compensated more efficiently and at a lower cost.[10] Yet at the same time, when the liability-bearing entity agrees to cover the debts of the asset-rich entity, an injunction may also shield the latter, as its liabilities are treated as potential obligation of the debtor.[11] As a result, tort claimants are prevented from suing the asset-rich entity for compensation.
The second step involves the liability-bearing entity filing for bankruptcy. This filing protects the original company’s assets from creditors while granting the liability-bearing entity the automatic stay protections under the Bankruptcy Code.[12] The automatic stay immediately halts all creditor actions against the debtor,[13] and in most cases, the debtors also request extensions of this stay or preliminary injunctions to protect the parent company and other related entities from litigation.[14]
Johnson & Johnson’s Texas Two-Step Attempts
J&J’s LTL bankruptcy is arguably the most well‑known Two-Step in recent years.
On October 12, 2021, J&J’s subsidiary Old Consumer underwent a divisional merger under Texas law, splitting the company into LTL Management LLC (“LTL”) and Johnson & Johnson Consumer Inc. (“New Consumer”).[15] This move aimed to resolve talc-related claims through Chapter 11 reorganization without subjecting the entire enterprise to bankruptcy.[16] LTL assumed Old Consumer’s talc liabilities and was obligated to pay up to the value of New Consumer, which was $61.5 billion at the time of the merger.[17] Two days later, on October 14, 2021, LTL filed for bankruptcy in the U.S. Bankruptcy Court for the Western District of North Carolina, a jurisdiction known for being corporate-friendly.[18] The case was later transferred to the District of New Jersey under Judge Kaplan.[19]
Certain talc claimants sought dismissal under § 1112(b), arguing it wasn’t filed in good faith.[20] Judge Kaplan denied the motions, reasoning that LTL faced financial distress from ongoing litigation and its impact on Old Consumer’s business.[21] However, the Third Circuit reversed, concluding LTL was not in financial distress at the time of filing and lacked good faith.[22]
On April 4, 2023, hours after LTL’s first bankruptcy case was dismissed, LTL filed for Chapter 11 for the second time, backed by a $30 billion funding commitment from J&J.[23] Unfortunately for LTL, Judge Kaplan dismissed this second filing on July 28, 2023, citing a lack of immediate financial distress.[24] The Third Circuit later affirmed the dismissal.[25]
In its third bankruptcy attempt, J&J turned to the U.S. Bankruptcy Court for the Southern District of Texas on September 20, 2024.[26] A new entity, Red River Talc, filed a pre-packaged plan reportedly supported by 83% of talc claimants.[27] The outcome of this case remains pending and will be interesting to follow, particularly for its implications in mass tort bankruptcy and Texas Two-Step.
Congress’ Effort to Curb Texas Two-Step Bankruptcy
Congress has turned its attention to the Texas Two-Step maneuver recently. On July 23, 2024, a bipartisan group of lawmakers introduced the Ending Corporate Bankruptcy Abuse Act of 2024 (“the Act”).[28] The Act seeks to curb the use of this strategy by instructing courts to presume bad faith if a bankruptcy filing clearly involves a Texas Two-Step.[29] Additionally, it would prohibit extending the automatic stay to non-bankrupt affiliates in cases where the debtor engaged in such a maneuver.[30] This means that a company like J&J would no longer be shielded from litigation simply by placing an affiliate into bankruptcy. The Act was reintroduced on December 18, 2024[31], but has since seen no progress.
Although its passage is uncertain, the Act, if enacted, would significantly weaken the Texas Two-Step’s ability to limit mass tort litigation and shield parent companies from liability. Its introduction reflects growing scrutiny of corporate bankruptcy practices and may signal increased legislative and judicial efforts to address these tactics.
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[1] In re LTL Mgmt., LLC, 64 F.4th 84, 93 (3d Cir. 2023).
[2] Ingham v. Johnson & Johnson, 608 S.W.3d 663 (Mo. Ct. App. 2020).
[3] In re LTL Mgmt., LLC, 64 F.4th at 93.
[4] Id. at 97.
[5] Id. at 95–97.
[6] Id. at 97.
[7] Dan Levine & Mike Spector, How a bankruptcy ‘innovation’ halted thousands of lawsuits from sick plaintiffs, Reuters (June 23, 2022), https://www.reuters.com/investigates/special-report/bankruptcy-tactics-two-step/]
[8] See Tex. Bus. Orgs. Code Ann. § 10.008(a)(3).
[9] Michael A. Francus, Texas Two-Stepping Out of Bankruptcy, 120 Mich. L. Rev. Online 38, 40 (2023).
[10] Marc Casarino & George R. Calhoun, The Texas Two-Step—It’s Not Dead Yet, 52 The Brief 58, 59 (2023).
[11] Id. (citing In re DBMP LLC, 2021 WL 3552350, at *27 (Bankr. W.D.N.C. Aug. 11, 2021)).
[12] Samantha Goldstein, The Texas Two-Step: A Controversial Bankruptcy Dance, Univ. Miami L. Rev. (May 3, 2022), https://lawreview.law.miami.edu/the-texas-two-step-a-controversial-bankruptcy-dance.
[13] 11 U.S.C. § 362.
[14] Marc Casarino & George R. Calhoun, The Texas Two-Step—It’s Not Dead Yet, 52 The Brief 58, 59 (2023).
[15] In re LTL Mgmt., LLC, 637 B.R. 396, 401 (Bankr. D.N.J 2022).
[16] Id. at 402.
[17] Id.
[18] Id. at 400.
[19] Id.
[20] Id. at 403.
[21] Id. at 417–21, 29.
[22] In re LTL Mgmt., LLC, 64 F.4th at 110.
[23] In re LTL Mgmt., LLC, 652 B.R. 433, 435, 48 (Bankr. D.N.J. 2023).
[24] Id. at 456.
[25] In re LTL Mgmt. LLC, No. 23-2971, 2024 WL 3540467 (3d Cir. July 25, 2024)
[26] Johnson & Johnson Announces that its Subsidiary, Red River Talc LLC, has Filed a Voluntary Prepackaged Chapter 11 Case to Resolve All Current and Future Ovarian Cancer Talc Claims, Johnson & Johnson (Sept. 20, 2024), https://www.jnj.com/media-center/press-releases/johnson-johnson-announces-that-its-subsidiary-red-river-talc-llc-has-filed-a-voluntary-prepackaged-chapter-11-case-to-resolve-all-current-and-future-ovarian-cancer-talc-claims.
[27] Id.
[28] Evan Ochsner, Bipartisan Bill Aims to Deter 'Texas Two-Step' Bankruptcy Tactic, Bloomberg Law (July 24, 2024), https://news.bloomberglaw.com/bankruptcy-law/bipartisan-bill-aims-to-deter-texas-two-step-bankruptcy-tactic .
[29] Id.
[30] Id.
[31] Press Release, Jerry Nadler, U.S. Representative, House of Representative, Nadler, Warren, Lawmakers Renew Push to Make Bankruptcy Less Expensive for Families (Dec. 18, 2024), https://nadler.house.gov/news/documentsingle.aspx?DocumentID=396248.