Bipartisan Bill Aims to Deter ‘Texas Two-Step’ Bankruptcy Tactic

Members of Congress are targeting the corporate bankruptcy maneuver known as the “Texas Two-Step” with a bipartisan bill to water down the controversial legal strategy.

The Ending Corporate Bankruptcy Abuse Act is aimed at deterring the Two-Step, which several major companies, including Johnson & Johnson, have attempted by placing an affiliate into bankruptcy to resolve mass liability. A bipartisan group of senators and representatives said the tactic allows corporations to evade responsibility for injures they’ve caused and delay justice for consumers.

“Our bipartisan bill would end abuse of the bankruptcy process to ensure that victims get the day in court that our constitution entitles them to,” Sen. Sheldon Whitehouse (D-R.I.), a co-sponsor, said in a statement.

The legislation takes clear aim at a maneuver that has been the source of heated debate. Senators at a hearing last year expressed outrage with J&J’s attempts to employ the strategy to address widespread allegations that its talc-based products caused cancer.

The new bill would deter the maneuver by instructing courts to presume that a bankruptcy has been filed in bad faith if it has clear indications that it’s a Texas Two-Step, a summary of the bill said.

Courts should consider whether a debtor has manufactured a connection to the venue where the bankruptcy is filed, or if the effect of the filing is to gain a litigation advantage, or if there’s a prearranged deal that caps the funds available to cover liability, according to the bill summary. Other indicators include if the bankrupt entity was recently formed through a divisional merger, made with a fraudulent transfer, or doesn’t have a valid reorganization purpose.

The bad faith provision is intended to standardize federal rules for dismissing bankruptcies across circuit courts, the summary said.

The bill also takes aim at a key benefit of the Two-Step by prohibiting litigation pauses for nonbankrupt affiliates when “engaged in a Texas Two-Step maneuver within the previous four years.” That provision would mean a company like J&J—which is preparing to try the Two-Step for a third time—wouldn’t be shielded from litigation just because it puts an affiliate into bankruptcy.

The provision is narrow, and would only apply to Two-Steps involving more than 100 tort claims, the summary says.

“Bad corporate actors shouldn’t be able to dodge accountability by using bankruptcy tricks like the Texas Two-Step, which has been exploited by large corporations to sidestep responsibility for the harms they’ve caused,” Rep. Lance Gooden (R-Texas), a co-sponsor, said in a statement.

The bill is also being introduced by Sen. Josh Hawley (R-Mo.) and Rep. Emilia Sykes (D-Ohio).