The Texas Two-Step is a bankruptcy strategy where a financially stable company transfers some of its debts to a new, financially weak subsidiary, which then files for bankruptcy. 

The company’s aim is for people with legal claims to go after the bankrupt subsidiary, leaving the parent company untouched.

This helps the main company avoid paying off its debts. In the first step, the main company creates a new subsidiary in Texas and moves its debts there. 

In the second step, the subsidiary declares bankruptcy, protecting the main company from lawsuits. 

The goal is for the subsidiary to take on all the debt, so the main company doesn’t have to pay. This tactic can make it harder for people suing the company to get their money.

How Johnson & Johnson entered the Texas two-step Strategy

In 2021, Johnson & Johnson tried the Texas Two-Step to avoid talc powder lawsuits. They created LTL Management LLC to hold the talc powder liabilities. But the bankruptcy court denied this move. The Third Circuit later reversed this decision and ordered the dismissal of LTL’s bankruptcy because it lacked a valid reason for filing.

In April 2023, Johnson & Johnson tried again, filing for Chapter 11 bankruptcy and agreeing to an $8.9 billion settlement. But many plaintiffs’ lawyers are challenging this settlement, so the outcome is uncertain.

This case is significant for companies facing mass tort liabilities. It shows that defendants will try creative tactics to limit their liabilities, affecting how plaintiffs approach litigation.

How Does Texas Two-Step Impacts Plaintiffs?

For mass tort cases involving the Texas Two-Step, plaintiffs’ legal teams need specialists in bankruptcy and this strategy. They should also work with liability experts to assess potential liabilities.

The Texas Two-Step changes how plaintiffs budget for litigation. Legal teams must account for the high costs of bankruptcy lawyers. It may also affect litigation funding availability, potentially limiting smaller firms’ ability to handle mass tort cases.

If the Texas Two-Step succeeds, plaintiffs may receive lower settlements. This could lead to more equitable recoveries but limit plaintiffs’ options for seeking damages.

Plaintiffs’ legal teams need to adapt their negotiation strategies in light of the Texas Two-Step threat. They may need to negotiate settlements faster and consider the possibility of defendants using this strategy.

Overall, the Texas Two-Step is just one tactic in a defendants’ playbook. They will continue to explore new ways to limit their legal liabilities, challenging plaintiffs and their legal teams to adapt to evolving strategies.

Could Bayer Resort to Bankruptcy to Resolve Roundup Mass Tort?

Recent reports from Bloomberg suggest that Bayer is contemplating using the “Texas Two-Step” bankruptcy strategy to address the remaining Roundup litigation.

Although similar bankruptcy filings by 3M in the earplug Mass Tort and J&J in the Baby Powder Mass Tort were rejected, It is anticipated that Bayer would take this course of action following the series of significant verdicts against them.

The outcome of Bayer’s decision will likely hinge on J&J’s next move. If J&J files for bankruptcy and faces a third rejection, it could signal a bleak outlook for Bayer’s success. Otherwise, all possibilities remain open.

Despite recent setbacks, Bayer recently experienced some victories in Roundup cancer trials. A Roundup wrongful death trial in Delaware resulted in a hung jury, which, considering Bayer’s recent challenges, could be seen as a win. Additionally, another Roundup trial in Arkansas ended in a defense verdict for Bayer.

March is expected to bring more verdicts in Roundup cases.

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