J&J’s two-step Texas talc bankruptcy strategy remains unclear
A corporate strategy that caught the eye during the bankruptcy of a Johnson & Johnson spin-off continues to face uncertainty despite a refusal to dismiss the Chapter 11 case.
The maneuver, known as Texas Two-Step because of its reliance on Texas corporate law, involves a company spinning off a unit and transferring its tort liability to that unit. The spin-off is then bankrupted to manage these liabilities without involving the assets of the original company.
New Jersey bankruptcy judge Michael Kaplan declined to dismiss LTL Management LLC’s Chapter 11 case stemming from J&J’s talc liability, saying it was not filed in bad faith. This decision is on appeal to the United States Court of Appeals for the Third Circuit.
But a North Carolina bankruptcy judge last week challenged the Texas Two-Step, allowing a group of asbestos victims to pursue a lawsuit seeking to undermine a reverse merger in a separate bankruptcy case. .
The victims are asking for “substantial consolidation”, which would merge the assets of debtors Aldrich Pump LLC and Murray Boiler LLC with those related to industrial manufacturer Trane Technologies Plc, which is not bankrupt. To do so effectively would undo the Texas Two-Step maneuver that Trane used when it created Aldrich Pump and Murray Boiler and placed them out of business.
The North Carolina ruling and others like it suggest Texas’ two-step strategy may not hold up in all courts, said Charles Tatelbaum, an attorney at Tripp Scott PA who specializes in corporate restructuring cases. .
“It reinforces the lack of trust that many of us have in ownership and it’s just another chink in the armor,” Tatelbaum said. “I don’t think one decision is enough. But it’s verbalizing what a lot of people think: that it’s not right.
Judge J. Craig Whitley of the U.S. Bankruptcy Court for the Western District of North Carolina declined to rule on the merits of the consolidation in denying Aldrich Pump and Murray Boiler’s April 1 motion to dismiss. But Whitley also said he was not bound by Kaplan’s decision. in the J&J case.
“The opinions of bankruptcy judges vary across the country on a variety of fronts and no one here will trust the opinion of a bankruptcy judge,” Whitley told a hearing. “The challenges to the merger are going to be resolved higher up, either by an appeals court, maybe the Supreme Court, maybe they’ll be resolved in Congress,” he said.
Last month, Whitley also gave the green light to a group of asbestos victims to file a lawsuit to consolidate the assets of building materials maker CertainTeed LLC with those of its bankrupt spin-off unit, DBMP LLC. .
Whitley was “dead” by not being bound by Kaplan’s decision, said Mark Lanier of the Lanier Law Firm, a plaintiffs attorney who represents asbestos victims.
“Bankruptcy can be a black hole for claims, and it’s a good thing judges aren’t automatically letting one or two dictate outcomes across the country,” he said.
The rulings allow asbestos victims to “peek behind the curtain” to find the “real motivations” behind divisive mergers, said Jon Ruckdeschel of Ruckdeschel Law Firm LLC, an experienced business attorney. of asbestos.
Those victims could eventually pursue claims to void the Texas Two-Step and bring the parent companies’ assets into the bankruptcy case, creating a larger recovery pool, he said. Meanwhile, asbestos victims can probe into the details of how the fallout was created upon discovery, he said.
“If successful, these claims could force profitable parents to bankrupt their entire business if they want to enjoy the benefits of bankruptcy,” Ruckdeschel said.
“Rare Fair Remedy”
But Whitley’s decision isn’t a complete victory for asbestos victims, said Anthony Casey, professor of business law, finance and corporate bankruptcy at the University of Chicago School of Law. . The judge is just letting the case continue and has not made a decision on the merits, he said.
The decision could also just be a strategy to pressure both sides to come to an agreement, Casey said.
“Substantial consolidation is meant to be a rare fair remedy and these are strange cases of substantial consolidation,” he said. “Courts often insist on the point of scarcity saying that this is an extreme remedy.”
Analysts said the J&J decision increases the chances that other companies facing costly product liability claims could pursue the same reverse merger bankruptcy strategy.
But even the J&J affair continues to raise doubts.
Kaplan didn’t adjudicate all of the issues regarding the Texas-Two Step, just that its use was not sufficient grounds to dismiss the case for lack of good faith, said Melissa Jacoby, a professor of bankruptcy law at the University of North Carolina at Chapel. Hill.
The judge also allowed the appeal to go directly to the Third Circuit due to the importance of the issue.
“Opinion had a rosy outlook on bankruptcy being a good place to address talc liability issues, but that doesn’t preclude other kinds of challenges,” Jacoby said.
With Kaplan’s decision heading to the Third Circuit and Whitley saying an appeals court or Congress must intervene, the ownership of Texas Two-Step may be in doubt for some time to come.
“The main takeaway is that we still have a long way to go before these issues are finally resolved,” Casey said.