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Judge Blocks Texas Two-Step for Johnson & Johnson Bankruptcy

Sometimes, corporations are considered people. Other times, they seem not to be. Ultimately, the consideration of personhood seems to benefit the corporation far more often than it harms it. However, Johnson & Johnson will be forced to shoulder their bankruptcy the same way an individual American would have to after a bankruptcy court blocked its efforts to employ the “Texas Two-Step”—a tactic of bifurcating a company in half to deal with bankruptcy debts.

Essentially, the Texas Two-Step allows a company to split itself into two companies. The first company would operate normal business operations. The second company would take on all the debts and liabilities of the first company. Essentially, Johnson & Johnson would create a second company that held nothing but liabilities stemming from baby powder lawsuits, and that company would declare bankruptcy.

If that sounds ludicrous, that is because it is. By analogy, it would be akin to allowing every filer to create a new identity, transfer all their debts to that identity, allow that identity to declare bankruptcy, and not be directly responsible for the debts. 

Attorneys for Johnson & Johnson maintained that the parent company would fund the subsidiary with its own money, placing millions of dollars in the account to pay off its debts. However, that company would be able to report its total assets as whatever J&J wanted to give them. Essentially, it would allow the company to pay plaintiffs whatever they pleased or whatever they thought was fair after a judge or jury returned a verdict. 

The Judge Rules the Tactic Illegal

The pragmatic problem the Texas two-step causes is secondary to a legal problem the subsidiary faces. To file for bankruptcy, you must be in financial distress. A company that creates a second company is in financial distress. But the second company they created is not. Hence, the second company cannot file for bankruptcy protection. It has no good faith basis on which to file bankruptcy.

What Does This Mean for the Texas Two-Step?

It means you cannot create a second company to absorb your liabilities. It also means that plaintiffs will not have to renegotiate jury awards after they have been handed down. If a company could divest its liabilities to a second company, seed the company with capital, and then file for bankruptcy, that would be tantamount to stipulating how much money the plaintiffs could receive. Ultimately, the trustee would look at the assets and liabilities, but they couldn’t look at Johnson & Johnson to determine whether the debt could be paid. Now, the trustee will have to consider Johnson & Johnson’s assets when determining a repayment plan. 

Talk to an Indiana Bankruptcy Attorney Today

Chris Arrington represents the interests of Indiana residents in financial distress. While you cannot transfer your debts to a fake identity, we can help you discharge them legally and strengthen your financial footing moving forward. 

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