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15 Wake Forest L. Rev. Online 1 (2025)

handle is hein.journals/wflron15 and id is 1 raw text is: GOOD-FAITH FILINGS, SOLVENT DEBTORS, AND THE BANKRUPTCY CLAUSE Nicholas R. Rader* INTRODUCTION Corporations may, as a result of their operations, incur substantial contingent liabilities that diminish their enterprise value.1 In some cases, these contingent liabilities take the form of mass tort judgments, which threaten to drag corporations into protracted, complex litigation in diverse forums with potentially varied results.2 To avoid this fate, companies have commonly sought creative ways to separate the liabilities from the company's assets.3 One recent method is known as the divisive merger (and more pejoratively, the Texas Two-Step), whereby the corporation employs Texas state law to unevenly divide its assets and liabilities between two new companies.4 The bad company (BadCo) receives all of the parent corporation's mass tort liabilities, while the good company (GoodCo) agrees to pay all the mass tort obligations allocated to BadCo.5 BadCo then files for Chapter 11 bankruptcy, enabling global resolution of the mass tort liabilities while ensuring that GoodCo can continue its normal business operations.6 In these cases, the so-called divisive merger typically presents no business purpose other than to separate the great majority of a solvent corporation's assets from specified contingent liabilities.7 * J.D. Candidate, May 2025, Wake Forest University School of Law; M.A., 2021, Florida State University; B.A., 2015, University of Notre Dame. I would like to thank Colin Ridgell and Mark Lee for their invaluable assistance in bringing this Comment to fruition. 1. Katharine H. O'Neill, Dirty Dancing: Is the Texas Two-Step a Bad Faith Filing?, 91 FORDHAM L. REv. 2471, 2477 (2023). 2. See, e.g., In re LTL Mgmt., LLC, 64 F.4th 84, 94 (3d Cir. 2023) (involving more than 38,000 lawsuits alleging that Johnson & Johnson's baby powder caused ovarian cancer, with one Missouri jury awarding $4.69 billion to twenty- two ovarian cancer plaintiffs). 3. O'Neill, supra note 1, at 2477. 4. Id. at 2475, 2477. 5. Ralph Brubaker, Assessing the Legitimacy of the Texas Two-StepMass- Tort Bankruptcy, BANKR. L. LETTER, Aug. 2022, at 1, 1. 6. Id.; see also Mark Lee, Comment, Don't Mess with Texas(?): Analyzing the Texas Two-Step Bankruptcies, 60 WAKE FOREST L. REV. (forthcoming Apr. 2025). 7. O'Neill, supra note 1, at 2475. 1

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