Comment by DrScientist
13 hours ago
Yet large companies appear to get away with it all the time - for example the so called Texas two step.
https://en.wikipedia.org/wiki/Texas_two-step_bankruptcy
In my view the best way to get this sort of stuff banned is to start using it yourself.
J&J tried it but was ultimately rejected last year.
Somewhat different circumstances.
Summarizing Matt Levine's various columns on the issue from memory:
1. J&J lost a lawsuit about talc and the winner was awarded $Xb (or maybe $XXXm, my memory is fuzzy) in damages.
2. J&J transferred $XXb to a new company.
3. It let the new company take on current and future liabilities for judgements on the talc issue.
4. J&J then had the new company declare bankruptcy. The bankruptcy process is designed to pay out money fairly to all creditors. The new company's only creditors were the plaintiffs in the lawsuit J&J lost + any future claimants. So this wasn't necessarily nefarious.
5. A judge rejected the bankruptcy because J&J had funded the company with $XXb and that was in excess of its current liabilities. As Levine put it, the company wasn't "bankrupt enough" yet.
I didn't keep up with the story after that so maybe I missed something.
Generally true, but one key point. Under bankruptcy law, you can give liabilities to a subsidiary, but you have to give the subsidiary enough money to pay the anticipated liabilities. That’s the reason why J&J gave the subsidiary so much money. Otherwise, the bankruptcy would have been dismissed as a fraudulent transfer. The bankruptcy court approved the bankruptcy filing, but on appeal the Third Circuit dismissed the bankruptcy because the subsidiary wasn’t bankrupt enough. Basically, in order to avoid fraudulent transfer law, J&J had to write the subsidiary a big check, but that money made the subsidiary ineligible for bankruptcy.
(Disclosure: I was on the team that won the appeal against J&J on this issue. My comment above is about the public record.)
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I'm not sure what you mean. I think we are saying the same thing. The strategy to use Texas Two Step failed in 2025 and J&J gave up, and now they are going back to the regular way of resolving the litigation.
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Nah, Matt Levine is an absolute Texas Two Step apologist, something that made me lose a lot of respect for him.
He repeatedly contorts himself into pretzels trying to defend it (why?) and into equal pretzels avoiding exploring the two elephants in the rule:
1. He (and those involved) claim that the process is "actually, truly, intended to be solely for the benefit of the plaintiffs suing us", and that defendants are doing them a favor, going out of their way to spin off these entities that are flimsy houses of cards.
2. Is it just a coincidence that of the firms who've gone through the Texas Two Step process, that they've managed to get away with not having to pay ninety per cent of court-ordered liabilities, and in at least one case, ninety-eight per cent?
Why on earth would these companies bend over backwards to do something that they claim has zero benefit for them, and is only truly intended to help streamline and optimize plaintiff's efforts in suing them?
Why is it even called the Texas Two Step? Is it because:
1. it assists claimants and plaintiffs (their adversaries) to bond together and present one solid unified case against you, or...
2. because it assists them to elegantly dance around their liabilities?
Levine and the firms and companies he's carrying water for insist the name has nothing to do with the second point.
In the JJ case, Levine's apologism of "they weren't bankrupt enough, yet" is horseshit.
JJCI was funded to the tune of $2B. Slightly less than the $61.5B of liability, you'll agree.
After the bankruptcy was rejected, the Judge had said that the bankruptcy might be necessary at some point in the future, but "now wasn't the time".
JJCI re-filed bankruptcy proceedings three hours later.
All these apologists are taking the piss.
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Yup. It's "weird" that all of these companies claim that "swear to god, we fully intend to honor our obligations", then all of them use this one law firm who specializes in doing exactly the opposite and "oops, look what happened, we have no more legal obligation, that belongs now to this other entity that we said we'd fund but ... somehow ... didn't. Or certainly not anywhere near where we said we would."
But there are definitely apologists and deniers of it, even right here on HN. Or "you don't know that's what's going to happen, we owe it to them to wait and see", even as you watch the exact same law firm guide another company through the exact same process in the exact same way, but somehow, maybe, this time, it'll have a different outcome.