In a bold legislative move, U.S. Senators introduced a bipartisan bill aimed at shutting down the controversial practice of “Texas two-step” bankruptcies. This tactic, often used by large corporations, involves splitting a company into two entities—one holding the assets and another, a shell company, burdened with liabilities. The shell company then files for bankruptcy, effectively blocking lawsuits and shielding the parent company from financial responsibility.
The “Ending Corporate Bankruptcy Abuse Act of 2024” was spearheaded by Senators Sheldon Whitehouse and Josh Hawley. They argue that the Texas two-step allows wealthy companies, such as Johnson & Johnson and Georgia-Pacific, to evade accountability for harm caused by their products. Whitehouse emphasized that the tactic contradicts the intent of U.S. bankruptcy laws, which are designed to give struggling debtors a fresh start, not to enable financially robust companies to dodge their liabilities.
The proposed legislation seeks to prevent bankruptcy judges from issuing temporary orders that halt lawsuits against non-bankrupt affiliates of a Texas two-step debtor. These orders, often dragging on for years, can prevent victims from getting their day in court, with some even passing away before their cases are resolved. The bill also aims to make it easier for judges to dismiss cases that appear to be filed in bad faith, particularly in jurisdictions like the 4th U.S. Circuit Court of Appeals, where many of these cases are filed.
Johnson & Johnson, currently navigating a third bankruptcy attempt to resolve claims related to its talc products, maintains that its products are safe. The company has proposed a $6.5 billion settlement to resolve lawsuits over ovarian cancer and other issues, with a decision from claimants expected soon. Georgia-Pacific, which used the Texas two-step to manage asbestos-related lawsuits through its subsidiary Bestwall, has yet to comment on the new bill.
The Senate bill is backed by Senator Dick Durbin, chair of the Senate Judiciary Committee, with a House version to be introduced by a bipartisan group of Representatives. This legislative push reflects a growing effort to close loopholes that allow corporations to sidestep accountability, ensuring that legal strategies do not undermine the rights of individuals seeking justice.
