The authors of a business-friendly Texas law used by corporations such as Johnson & Johnson and Koch Industries to shield themselves from billions of dollars of legal claims have said they feel it has been “dubiously interpreted” and misused.
“Had we known in 1989 that provisions could be dubiously interpreted for entities to avoid known liabilities such as those causing severe and permanent injuries and deaths, it would never have passed with the “Texas two-step” provision. Never, never, never,” said Steven Wolens, a former Texan lawmaker who wrote the bill.
The 1989 statute enabled so-called divisive mergers, which allow a company to divide its assets and liabilities into separate entities.
Curtis Huff, a former member of the Corporation Law Committee of the Texas State Bar that initially drafted the divisive merger amendments, said they had been intended to create a more flexible business environment in Texas, not to enable companies to avoid liabilities.
“The statute is pretty darn clear that the intent is that this is not a statute that is a means to have somebody skirt obligations that they might otherwise have,” he said.
The criticism comes on the eve of a court hearing beginning Monday over J&J’s decision last year to invoke the Texas statute and create a company called LTL Management, which manages the talc claims, then immediately place it into bankruptcy in North Carolina. The bankruptcy case was subsequently moved to New Jersey, where J&J is headquartered.
The bankruptcy filing has resulted in a stay on almost 40,000 legal claims alleging that the company’s baby talc was sometimes tainted with carcinogenic asbestos. Lawyers representing talc claimants have applied to Judge Michael Kaplan to throw out LTL’s bankruptcy, arguing the healthcare group is trying to “game the bankruptcy system” and delay justice for cancer sufferers.
“Shame on J&J for trying to evade its liabilities for products it sold with its golden stamp of approval for safety,” Wolens, who is now principal at McKool Smith law firm, told the Financial Times. “J&J’s efforts to escape liability, after denying it in court so long, tarnishes and defames its iconic brand.”
J&J has denied its talc contains asbestos and can cause cancer. The company has said its objective is to reach a fair and equitable resolution for claimants, noting that it created a $2bn trust to pay out talc claims as part of its corporate restructuring in October. Courts had “uniformly acknowledged” that fairly resolving these types of claims through Chapter 11 was a legitimate use of the restructuring process, J&J said.
In deploying the Texas two-step, J&J followed the examples set by Koch Industries’ Georgia Pacific, the first to deploy the mechanism in 2017; Trane Technologies; and a US unit of France-based Saint-Gobain. They have used the scheme to shield their main businesses from legal claims. All four companies are represented by Cleveland-based law firm Jones Day, which designed the complex bankruptcy strategy.
Kaplan has said he intends to rule before the end of February on the talc claimants’ motion to dismiss LTL’s bankruptcy. Bankruptcy experts believe that judgment could be pivotal, either opening the door for more corporations to deploy the manoeuvre, or spelling the end for it.
“If Judge Kaplan dismisses J&J’s effort to minimise liability through bankruptcy by capitalising on the Texas two-step in the talc litigation, his ruling could mark the procedure’s last tango in the US,” said Carl Tobias, professor of law at the University of Richmond.
However, if the judge permits the LTL bankruptcy it could encourage other companies to employ the measure, added Tobias.
Huff, who authored a paper on the 1989 statute, told the FT the statute did not override the concept of fraudulent transfer — unfairly moving around assets as part of bankruptcy proceedings — and that judges could consider whether the Texas two-step falls foul of these rules.
Some bankruptcy experts say the Texas two-step was the inevitable consequence of states’ endless competition to attract businesses by reducing their citizens’ legal protections.
“The divisive merger law allows a Texas corporation to unilaterally rid itself of some or all of its debts by so declaring. How could anyone think such a law would not be abused?” said Lynn LoPucki, professor at UCLA School of Law.