Since the announcement of U.S. Bankruptcy Judge Michael B. Kaplan upholding Johnson & Johnson subsidiary LTL Management’s Chapter 11 bankruptcy case, plaintiff’s attorneys across the country have taken note. Now, in the wake of Judge Kaplan’s decision, attorneys and even senators have come forth to suggest changes be made to the legislation surrounding bankruptcy law.
J&J has used a business maneuver known as a divisive merger to split itself into two entities: Johnson & Johnson Consumer Inc. and LTL Management. After splitting itself in this way, Johnson & Johnson assigned all talc liabilities to LTL and immediately had LTL file for Chapter 11 bankruptcy. This process is known as a Texas two-step and is criticized by plaintiff’s attorneys for exploiting the bankruptcy system in order to avoid current and future litigation.
U.S. Senator Dick Durbin (D-IL) announced that he is drafting a bill to ban the “shameful” use of the Texas two-step to dodge litigation claims. Durbin’s bill limiting the use of the bankruptcy system is based on the belief that companies like Johnson & Johnson, with a $450 billion market cap, are not the type of struggling businesses that Chapter 11 bankruptcy is intended to help. If passed, the senator’s bill would bar future corporate interests from utilizing this strategy, according to Law360.
Several attorneys and organizations have come out against the use of the Texas two-step. The CEO of the American Association for Justice, Linda Lipsen, has called on legislators like Senator Durbin to put an end to the strategy, noting that the two-step has been deployed in multiple asbestos liability bankruptcies in recent years. By approving the two-step, Lipsen argues in a statement, "Johnson & Johnson has now received a green light to evade accountability, limit compensation to cancer victims and undermine civil justice."
One veteran attorney who is critical of the use of the Texas two-step is Jon Ruckdeschel. Ruckdeschel, who has litigated asbestos-related cases for over two decades, released a statement saying, "This ruling underscores the immediate need for legislation to prevent this type of abuse of the bankruptcy system” in order to prevent large corporations from using the bankruptcy system to cover up their civil liability.
Ruckdeschel’s statement also mentioned that while attorneys are "disappointed that J&J's stooge 'bankruptcy' filing for its fall-guy subsidiary LTL Management was not dismissed,” they would not give up. Ruckdeschel resolved that “this matter will be appealed and other remedies will be sought against LTL and J&J as part of the bankruptcy proceeding in the meantime."
The two-step has not been universally maligned, however. J&J and LTL pointed out that this bankruptcy proceeding is superior to fighting the cases one by one. They argue that the tort system has resulted in a lottery-like system where claimants who get their cases in front of a jury quicker have sometimes been rewarded with larger judgments than others. LTL also argued that litigating all existing claims to their completion would likely take hundreds of years at the current pace. LTL suggested that this would cost J&J about $190 billion in defense costs alone.
This line of argument has led Judge Kaplan to agree that bankruptcy was the best solution to handle the existing claims as well as any future claims. Judge Kaplan noted that given the decades-long latency period for diseases caused by asbestos exposure, a bankruptcy trust would be particularly effective. This same line of logic is also the driving force behind the push for legislation to ban the use of the Texas two-step to avoid civil litigation.