A Plaintiff’s Blueprint to Defeating the 'Texas Two-Step' Divisive Merger Bankruptcy Maneuver in Mass Tort Litigation

The "Texas Two-Step" has emerged as a controversial strategy within the mass tort legal landscape, allowing corporations to evade liability through divisive mergers and subsequent Chapter 11 bankruptcy filings. Spearheaded by Attorney Gregory Gordon of Jones Day, this maneuver has drawn scrutiny from the Senate Judiciary Committee, with Senator Durbin labeling it a "dirty trick." This article delves into the nuances of the Texas Two-Step and proposes solutions to mitigate its misuse. The first phase of a Texas Two-Step involves divisive mergers, legally permitted in states like Texas, Delaware, Pennsylvania, and Arizona. Corporations leverage these mergers to segregate assets and liabilities, creating a new entity responsible for tort liabilities. Texas stands out with its 1989 Amendment, granting corporations unparalleled freedom to rearrange assets. Delaware, Pennsylvania, and Arizona provide similar frameworks, enabling entities to navigate the legal terrain of divisive mergers. The second phase centers on Chapter 11 bankruptcy, particularly favored in the Texas Two-Step. While bankruptcy is a legitimate means of addressing financial distress, its exploitation for tactical advantage poses ethical concerns. Chapter 11 triggers an automatic stay, halting all legal proceedings and providing debtors with a shield against immediate liabilities. The historical use of Section 524(g) trusts in asbestos litigations is explored, emphasizing the shift from involving the entire corporation in bankruptcy to intentionally creating subsidiaries. While acknowledging the justified use of bankruptcy for entities in genuine financial distress, this article contends that corporations misusing this tool infringe upon the rights of tort claimants, perpetuating delays and denying justice. The core issue with the Texas Two-Step strategy lies in indefinite extension of tort claims created by the automatic stay and compounded by the inappropriate leverage gained through bankruptcy exploitation. This enables corporations to remain insulated within bankruptcy proceedings, avoiding settlement and leaving victims on an uncertain path to justice. To address these concerns, this article proposes solutions for plaintiff’s attorneys by advocating for the dismissal of bankruptcies filed in bad faith or lacking imminent financial distress. It delves into the analysis of financial distress across different circuit tests, emphasizing the need for immediate and apparent financial hardship. This article also considers piercing the corporate veil as a potential remedy, acknowledging its rarity and the cautious approach required. Factors such as dominance and control, alter ego claims, and undercapitalization are examined as potential grounds for piercing the corporate veil. The emphasis is placed on proving these factors in court, ensuring a judicious application of this legal maneuver. This article also briefly explores non-debtor releases, and their role in evading corporate negligence. In conclusion, recent instances, including challenges in the Talcum powder litigation, highlight the resilience of legal systems against the Texas Two-Step. This article underscores the importance of vigilant legal scrutiny to ensure the fair pursuit of justice, prevent the exploitation of legal loopholes, and preserve the integrity of the mass tort litigation landscape.