Architects of J&J ‘Texas two-step’ lambast for mechanism usage

The authors of the business-friendly Texas law used by corporations like Johnson & Johnson and Koch Industries to protect themselves from billions of dollars in legal lawsuits have said they feel it has been “interpreted” incomprehensible” and abused.

“If we had known in 1989 that terms could be ambiguously construed to entities to avoid known liabilities, such as those that caused serious and permanent injury, and death, it will never be passed with Texas “two-step” provision. Never, never, never,” said Steven Wolens, a former Texas congressman who wrote the bill.

The 1989 statute allows for so-called split mergers, which allow a company to divide its assets and liabilities into separate entities.

Curtis Huff, a former member of the Texas Bar Corporation Law Committee who originally drafted the divisive merger amendments, said they aim to create a resilient business environment. than in Texas, not to allow companies to avoid debt.

“The statute is pretty clear that the intent is that this is not a statute meant to oblige someone to dress they might have,” he said.

Criticism comes ahead of trial starting next Monday J&J’s decision last year to invoke Texas statute and set up a company called LTL Management, which managed talc claims, then immediately filed for bankruptcy in North Carolina. The bankruptcy was later moved to New Jersey, where J&J was headquartered.

The bankruptcy filing resulted in nearly 40,000 legal complaints alleging that the company’s baby talcum powder was sometimes contaminated with carcinogenic asbestos. Attorneys representing the talc claimants filed a petition asking Judge Michael Kaplan to declare LTL bankruptcy, arguing that the healthcare group was trying to “fool the bankruptcy system” and delay delaying justice for people with cancer.

Wolens, who is now principal at law firm McKool Smith, told the Financial Times: “It is a shame for J&J for trying to shirk responsibility for the products it sells with its gold seal of approval for the degree of authenticity. safe. “J&J’s efforts to evade liability, after denying it in court for so long, have tarnished and smeared its iconic brand.”

J&J has denied its talc contains asbestos and can cause cancer. The company says its goal is to reach a fair and equitable settlement for the claimants, noting that it has created a $2 billion trust to pay talc claims. as part of a corporate restructuring in October. Courts have “unanimously acknowledged” that fair settlement of these types of claims through Chapter 11 is a fair use. method of restructuring, J&J says.

In its two-step rollout in Texas, J&J followed the examples outlined by Georgia Pacific of Koch Industries, which first implemented the mechanism in 2017; Trane Technologies; and a US unit of Saint-Gobain based in France. They used this plan to protect their main businesses from legal claims. All four firms are represented by the Cleveland-based law firm Jones Daydesigned complex bankruptcy strategies.

Kaplan said he intends to issue a ruling before the end of February at the request of the claimants dismissing LTL’s bankruptcy. Bankruptcy experts believe the ruling could be pivotal, opening the door for more corporations to launch the campaign, or marking the end of it.

“If Judge Kaplan rejects J&J’s attempt to reduce liability through bankruptcy by taking advantage of Texas’ two-step talc in the talc case, his ruling could mark the final tango of the prosecution. custom in America,” said Carl Tobias, a law professor at the University of Richmond.

However, if the judge allows LTL to go bankrupt, it could encourage other companies to adopt the measure, Tobias added.

Huff, author of a 1989 article on the statute, told the FT that the statute does not negate the concept of fraudulent transfers – unfair transfers of assets as part of bankruptcy proceedings – and the a judge can look at whether Texas two-step violates these things. Rule.

Some bankruptcy experts say two-step Texas is an inevitable consequence of an endless competition between states to attract businesses by easing citizens’ legal protections.

“Divided merger law allows a Texas corporation to unilaterally write off some or all of its debts by making such a claim. How could anyone think that such a law would not be abused? ” said Lynn LoPucki, professor at UCLA Law School.

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