Johnson & Johnson and 3M Do the Texas Two Step to Shield Assets in Mass Tort Claims

Johnson and Johnson faces over 38,000 claims that it sold talcum powder with the knowledge that it contained cancer-causing asbestos for decades.  Similarly, 3M faces over 280,000 claims from veterans that 3M peddled defective earplugs to United States servicemen and women thereby allowing them to incur a loss of hearing in various battle arenas. There have been numerous million dollar verdicts and even a billion-dollar verdict in the initial trials over these products where juries sided with the plaintiff victims.  Evidence that the corporations knew their products were defective has come out in these trials.

These are the stereotypical stories of corporate greed over safety.  However, thanks to a legal procedure known as the Texas Two-Step, these corporations may be able to skirt responsibility for their actions.

What is the Texas Two-Step in Corporate Law?

The Texas Two-Step refers to a legal procedure whereby a corporation attempts to avoid responsibility by engaging in a divisive merger of the original corporation, places the liabilities with one and the bulk of the assets with the other, and, then files for bankruptcy on the corporation holding the liabilities.

Petition for BankruptcyWhat is a Divisive Merger?

A divisive merger is a Texas legal procedure under which a corporation can effectively divide into two corporations while dividing debts and liabilities between the corporations as it chooses.

Fraudulent Transfer to Shield Assets

If an individual was sued and then tried to transfer assets to someone else so that the assets could not be attached and sold to pay off the judgment, this would be considered a fraudulent transfer. However, because some states such as Texas have specific vehicles for companies to do the “Texas Two-Step,” multi-billion-dollar corporations may be able to get away with defrauding their victims in the name of corporate greed.  They simply place their billions in profits in one corporation and their debts to the victims of their product in another corporation and then file bankruptcy on the debt-laden company to dissolve the debt.

Courts of Appeals to Decide

Both of the above cases have been challenged as bad faith divisions and fraudulent transfers for the sole purpose of avoiding legitimate claims. Both cases are being appealed. It is further likely that they will be appealed all the way to the United States Supreme Court since so much money is at stake.  While these types of pro-corporation anti-individual laws are not uncommon in Texas (see Texas Worker’s Compensation laws the only of the 50 states to make protecting the employee “optional” for the employer; see the Texas Employment at Will laws; See Texas Healthcare Liability Act), hopefully, the U.S. Federal Courts will not allow such clear injustices to stand.