Facing tens of thousands of claims against Johnson & Johnson's ("J&J's") baby powder and other talc products, alleging that the baby powder contains asbestos and causes cancer, J&J put the talc claims into a separate entity called LTL Management LLC, which then filed for Chapter 11 bankruptcy in mid-October 2021 in the U.S. Bankruptcy Court for the Western District of North Carolina. In re LTL Mgmt., LLC, No. 21-30589 (Bankr. W.D.N.C. Oct. 14, 2021). J&J itself is not part of the bankruptcy filing.
The pharmaceutical company's corporate shuffling and bankruptcy maneuver is known as a "Texas two-step" bankruptcy, whereby J&J split its business through a divisive merger under Texas law and created a new entity to carry the talc liabilities. The Texas law allowed J&J to avoid accountability for the over 40,000 talc powder claims. The State's divisive merger statute, Tex. Bus. Orgs. Code Ann. § 1.002(55)(A), allows a company to divide into two separate entities. Because a divisive merger is not treated as an assignment of assets or liabilities, it is used as a strategic alternative to a traditional spin off or asset sale. Other states, including Delaware, Pennsylvania, and Arizona, also allow divisive mergers, but with restrictions. The Delaware law, Delaware Limited Liability Company Act, 6 Del. Code § 18-217, is limited to divisive mergers of limited liability companies.
The Texas two-step law was notoriously attempted to be applied by the National Rifle Association when it tried to change the venue from New York to Texas. However, the Northern District of Texas Bankruptcy Court dismissed the bankruptcy, concluding that the bankruptcy filing was filed in bad faith and only filed to gain an unfair litigation advantage and as an effort to avoid a regulatory scheme. See In re Nat’l Rifle Ass’n of Am., 628 B.R. 262 (Bankr. N.D. Tex. 2021).