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What is the “Texas Two-Step,” and why does it matter?

On Behalf of | Aug 31, 2023 | Mass Torts

Countless people have suffered because companies prioritized their bottom lines over public safety. As one example, the U.S. sees thousands of new mesothelioma diagnoses every year because manufacturers and builders used asbestos long after they knew it could cause cancer.

If you are one of these victims, or if you know one, you might not think too much about the ins-and-outs of bankruptcy. But it might be time to pay attention. As Reuters has reported, a number of companies have started using a controversial bankruptcy technique to short-circuit the lawsuits against them. This technique is the “Texas Two-Step.”

How the Texas Two-Step works

The reason the Texas Two-Step matters is that companies have started using it as a way to limit their exposure to lawsuits. This means that if you’re one of the thousands of people who have sued these companies for giving you cancer, the Texas Two-Step allows the company to pause your claim while it heads to bankruptcy court.

The way it works is this:

  1. The parent company reorganizes into two child companies. One is effectively the same as the parent company and continues the business. The other is a vehicle, arguably a shell, that absorbs all the liability for lawsuits.
  2. The vehicle then files for bankruptcy. This halts all claims against the company that is still doing business, and it turns plaintiffs into creditors. This means that people who sued the company for their injuries must now pursue their claims in bankruptcy court.

There are a lot of finer points and technicalities, too. But that’s the essence of the Two-Step. It’s called the Texas Two-Step because Texas is one of four states that allow this maneuver, and it’s the state where the biggest cases have started.

Why the Two-Step matters to victims

When Reuters explained how the Texas Two-Step worked in 2022, it noted four large companies that all faced asbestos lawsuits worth billions of dollars. These were all “mass torts.”

Mass torts are different from class action lawsuits because the plaintiffs each pursue their cases individually. They present different evidence and receive different verdicts and awards. They are different from standard injury cases because the courts bundle all these cases together for the sake of administrative ease.

Even so, these mass torts allow injury victims to pursue compensation for their injuries. Victims can pursue their day in court, present their evidence and ask a jury to hold the wrongdoers accountable. Or, they could if the companies didn’t dance the Texas Two-Step.

Bankruptcy courts work differently, and they resolve claims against the companies differently:

  • Victims with stronger cases and who have suffered more greatly may not claim any more than victims who filed weaker claims.
  • Bankruptcy court puts the lawsuits against companies on hold. Often, this means the sickest plaintiffs can die while waiting to receive justice.
  • Importantly, the bankruptcy proceedings will determine how much funding the vehicles receive to pay back victim-creditors. The injury victims can then no longer press their claims against the parent company’s assets.

This last point is especially frustrating. This is because the companies that have started using the Texas Two-Step are generally healthy companies. They’re not about to go broke. They’re multi-billion dollar behemoths, and they wouldn’t likely file for bankruptcy on their own. Instead, they are, as several Attorneys General recently noted, pursuing the scheme “to improperly gain the benefits of the bankruptcy process without having to face its corresponding burdens.”

The Two-Step allows the companies to wash their hands of liability, and the victims suffer again. They see their pursuit of justice thrown into the gutter, and they’re left to scoop whatever trickles down.

What hope do victims have?

The good news is that the companies trying to dance the Two-Step have not all met with success. One judge oversaw several cases and noted that the circumstances of the bankruptcy filings showed the signs of fraud. The companies weren’t responding to financial distress; they were inventing it.

This hint of fraud gained further support from the claims of a whistleblower. The company’s executives said the vehicle only chose to file for bankruptcy after the restructuring. However, the whistleblower said that bankruptcy was the plan right from the outset.

Thanks to these revelations and the dedicated efforts of some plaintiffs’ attorneys, several of the companies dancing the Two-Step have not yet forced all the cases against them into bankruptcy court. Furthermore, their efforts have drawn greater attention to the Two-Step. Eventually, the courts will have to decide. Should this be upheld as a legitimate maneuver? Or should victims be able to block these bad-faith bankruptcies and win their days in court?

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