Texas Two-Stepping out of Bankruptcy
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TEXAS TWO-STEPPING OUT OF BANKRUPTCY
Michael A. Francus*
INTRODUCTION
Johnson & Johnson has a problem. For decades, it sold talc baby powder,
a product that made Johnson & Johnson a household name and earned the
business billions. But as those babies grew up, they started getting cancer. And
then they began suing. Last June, twenty-two plaintiffs cemented a $2.12 bil-
lion judgment against Johnson & Johnson for cancer caused by its baby pow-
der.1 Another 38,000 cases (and counting) remain in progress, each with the
potential for a similar verdict.2
To handle these mass tort liabilities, Johnson & Johnson has followed the
lead of many businesses and turned to the bankruptcy courts. But it has done
so with a twist. Unlike the businesses that pioneered using bankruptcy for
mass torts, Johnson & Johnson is not filing for bankruptcy. Instead, it is di-
viding itself using an obscure Texas law, moving its assets into one business
and its talc liabilities into another, and having the liability-laden business file
for bankruptcy.3 This maneuver, known as the Texas Two-Step, threatens
the tort recovery of tens of thousands of talc claimants.
The Texas Two-Step is the latest addition to a panoply of aggressive tech-
niques debtors have developed to gain the upper hand against creditors. Other
scholars, for example, have identified the use of coercive restructuring support
agreements and deathtraps,4 third-party releases,5 and less-than-impartial
* Climenko Fellow, Harvard Law School. Many thanks to Jared Ellias, Judge Thomas
Ambro, Judge Craig Goldblatt, Lynn LoPucki, Samir Parikh, Bruce Mann, and Caley Petrucci
for their helpful thoughts and suggestions.
1. Lawrence Hurley, U.S. Supreme Court Rebuffs J&J Appeal over $2 Billion Baby Powder
Judgment, REUTERS (June 1, 2021, 6:17 PM), https://www.reuters.com/legal/government/us-su-
preme-court-declines-hear-jj-appeal-over-2-billion-baby-powder-judgment-2021-06-01 [perma.
cc/R3SP-CD7R]. For a thorough account of the development of talc powder and the asbestos-
based cancer concerns, see Lisa Girion, Johnson & Johnson Knew for Decades That Asbestos
Lurked in Its Baby Powder, REUTERS (Dec. 14, 2018, 2:00 PM), https://www.reuters.com/inves-
tigates/special-report/johnsonandjohnson-cancer [perma.cc/WED6-LKXY].
2. Vince Sullivan, Resistance to J&J's Bankruptcy Gambit May Be Futile, LAw360 (Oct.
15, 2021, 6:10 PM), https://www.law360.com/articles/1431485/resistance-to-j-j-s-bankruptcy-
gambit-may-be-futile [perma.cc/7L3X-MB4T].
3. Id.
4. David A. Skeel, Jr., Distorted Choice in Corporate Bankruptcy, 130 YALE L.J. 366, 370-
71 (2020) (describing restructuring support agreements and deathtraps). See generally Edward
J. Janger & Adam J. Levitin, The Proceduralist Inversion - A Response to Skeel, 130 YALE L.J.F.
335 (2020) (arguing against restructuring support agreements and deathtraps).
5. Adam J. Levitin, Purdue's Poison Pill: The Breakdown of Chapter Il's Checks and Bal-
ances, 100 TEX. L. REV. (forthcoming 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id
38](ViewImageLocal?handle=hein.journals/mlro120&div=4&collection=&method=preview&ext=.png&size=3)
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