When this process is complete, the next step is for the newly formed company to file for Chapter 11 bankruptcy. In practice, this means that tort disputes must be resolved through insolvency proceedings, without necessarily having to resort to all the assets of the original company, which is now a separate legal entity. On the other hand, a typical trial might be to bring the case before a jury or to reach an out-of-court settlement with the plaintiffs. ATKINS STOHR: And Bob, talk about the current situation of bankruptcy law. It`s that kind of hybrid between state laws that allow Texas to pass laws like this and federal laws. Could federal laws intervene in any way to prevent or at least change the way Texas operates? The civil justice system has been collapsing for 20 years, spurred on by a Supreme Court hostile to any form of consumer lawsuits, from class action lawsuits against telemarketers to individual cases against pharmaceutical companies. Texas` two stages take this trend to its next logical step: forcing plaintiffs to prove their cases in court for years, only to watch defendants cry “bankruptcy,” forcing plaintiffs to do it again, this time on defendants` terms and without a jury. Perhaps the most famous example of a two-stage bankruptcy in Texas is the strategy of pharmaceutical and consumer goods giant Johnson & Johnson. In recent years, the company has been the subject of lawsuits in which plaintiffs have claimed that some of its talcum-powdered baby products contain asbestos, contributing to cancer cases.

RASMUSSEN: I think it`s a very close case. If you listen to the arguments of the Third Circuit, I think the court also thought it was a closed case. It is clear that Johnson & Johnson has taken this two-step step to file for bankruptcy. They want to reap many of the benefits of insolvency. And let`s just remember what they are. A court, a bankruptcy judge would assess the plaintiffs` claims. We would not have all these attempts. ATKINS STOHR: And Mike, why should the strategy be attractive to companies like Johnson & Johnson? And that`s new. This sets a precedent.

And we`ll see what the Third Circle says. “If [the two Texas stages] succeed, hundreds of thousands of individual plaintiffs will be deprived of their constitutional right to a jury trial,” she wrote. “3M – a fully solvent and highly profitable Fortune 500 company that will never file for bankruptcy itself – will reap all the benefits of the bankruptcy system without the burdens that come with it.” The two-stage bankruptcy in Texas is controversial, with critics saying it allows companies to hide from their legal responsibilities. The method has been criticized by sections of the legal community and the general public, as well as by Congress. As a result, it is possible that future laws or legal decisions could jeopardize the viability of Texas` two-stage bankruptcy strategy. JNJ`s strategy has received quite wide media attention, citing it as a clear example of a two-stage bankruptcy in Texas. Critics of this approach have argued that it unfairly limits plaintiffs` ability to recover damages and that by forcing litigation through bankruptcy proceedings, it could potentially delay and thwart victims` efforts to seek compensation. Texas Two-Step Bankruptcy defense attorneys argue that the bankruptcy process will ultimately determine whether the company`s actions are fair and that this process protects companies from the risk of unreasonably punitive jury verdicts.

The two-stage bankruptcy from Texas to Texas is included for technical and informal reasons. The technical reason is that the strategy relies on split fusion (also known as reverse fusion), a technique widely accepted in Texas. But the name is also partly a nod to Texas Two-Step, a popular dance associated with traditional country music. Analysts said J&J`s decision increases the likelihood that other companies facing costly product liability claims could pursue the same reverse merger insolvency strategy. The strategy studied by J&J is known as a “spin-off merger” and was applied when a company with massive tort liabilities divides the company into two companies and allocates the assets and liabilities between the two successor companies at will. “Split mergers” are permitted under Texas law and are often referred to as “Texas Two-Step.” The newly created entity will hold all liabilities and that entity will then request Chapter 11. KIMBERLY ATKINS STOHR: Today we`re talking about a controversial legal strategy known as the Texas Two-Step or Texas Divisive Merger. It`s a tool that companies facing massive litigation have recently used to avoid liability companies like Koch Industries, Georgia-Pacific, and Johnson & Johnson. Last February, the Senate Judiciary Committee held a hearing to investigate the trial.

Democratic Senator Sheldon Whitehouse of Rhode Island presided over the hearing. Some critics of Texas` two-stage bankruptcy argue that it offers wealthy defendants a way to evade their legitimate legal obligations, viewing the practice essentially as a clever legal ploy. Others, however, argue that two-stage bankruptcy in Texas is a legitimate way to resolve outstanding disputes that could speed up the often lengthy jury trial process. While individual judges may have some influence on the acceptance of this practice through the precedents set by their decisions, politicians can ultimately exert even greater influence by passing new laws that maintain or restrict the practice. The move could also be a strategy to pressure both sides to reach an agreement, Casey said. If that sounds damn misleading, your gut is good. In most states, a company trying to offload its debts and liabilities onto a new business would be a paradigmatic example of a fraudulent transfer. But not in Texas, which passed a law in 1989 that legally treats a company`s divisions to mergers and thus exempts them from fraudulent transfer rights. Therefore, lawyers and courts called the “Texas Two-Step”: Once the fake “merger” under Texas law is complete (first step), the new company declares bankruptcy (step two) and – voila! – J&J is free and free from prosecution, without affecting its solvency, without financial supervision by a bankruptcy court or the United States.