Recently, 3M, the company responsible for selling allegedly defective earplugs to the military, attempted to try a process called the “Texas Two-Step” to avoid having the liabilities attached to their parent company. The courts, however, are blocking the effort.

The process is somewhat dubious, to say the least. Companies facing major liabilities in mass torts, like Johnson & Johnson and 3M, are attempting to create subsidiary companies and transfer all of their liabilities to the subsidiary company. That subsidiary company would then declare bankruptcy, potentially creating a situation where they can make a lowball offer to the plaintiffs in these cases. 

Can This Work for an Individual?

No. It is not even working for major companies. The courts are currently blocking Chapter 11 filings from subsidiary companies. To draw an analogy that is similar, it would be like creating a new identity, transferring all of your debts to that identity, and then having that new identity declare bankruptcy. The bankruptcy would not be attached to your name, so you would not end up with any of the consequences that come from filing bankruptcy. But you would benefit because you would not have to pay the entire amount back, and the bankruptcy would not be attached to your name. 

Johnson & Johnson recently lost several lawsuits related to their talcum powder. The plaintiffs claimed that asbestos in the talcum powder led to several instances of cancer. Johnson & Johnson denied liability in these cases, lost some of the cases, and won others. However, they lost big in the cases that they did lose. The company then wanted to transfer the liabilities from these personal injury cases to a subsidiary company that would declare bankruptcy. It would then allow a bankruptcy judge to divvy up whatever J&J threw into that company to the plaintiffs. The amount would likely be far less than what the plaintiffs were able to recover during the trial.

While bankruptcy does afford companies a way out of paying off huge debts, this process is obviously unethical, and while it does not amount to bankruptcy fraud, it comes quite close. 

Meanwhile, the companies say that they are not attempting to subvert the process of repaying plaintiffs. They had intended to fund the subsidiary companies with nearly $1 billion in funds to repay plaintiffs for their injuries. 

Bankruptcy courts are not allowing companies to perform a Texas-two-step in order to lowball plaintiffs after mass torts resulted in significant liabilities. And the courts won’t let individuals create subsidiary identities to do that either.

Talk to an Indiana Bankruptcy Lawyer Today

Chris Arrington can help Indiana residents who are currently not financially solvent stabilize their finances by declaring bankruptcy. Call our office today to schedule a free consultation, and we can begin discussing your next moves immediately.