Comment by triceratops
11 hours ago
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.)
> So the Texas Two-Step supports the idea that companies can’t just put liabilities in a subsidiary and put it into bankruptcy. The Texas Two-Step is an effort to work around that rule.
Sorry I'm having trouble parsing this because the first and second sentences seem to contradict each other. Or I'm just bad at reading.
> Disclosure: I was on the team that won the appeal against J&J on this issue
That's actually pretty cool. If I may ask, given that LTL was funded with many multiples of its liabilities, why was the bankruptcy appealed?
> Sorry I'm having trouble parsing this because the first and second sentences seem to contradict each other. Or I'm just bad at reading.
Sorry, I was unclear. You have a law that says that pre-bankruptcy transfers that were made to avoid liability can be voided: 11 USC 548: https://www.law.cornell.edu/uscode/text/11/548. So say J&J put the liabilities into a subsidiary, but didn’t give it a check. The creditors would have been able to void the transfer of liability and give it back to J&J by proving that J&J transferred the liabilities that the subsidiary couldn’t pay.
To work around that, J&J did a particular formulation of the Texas Two-Step where it gave the subsidiary a big check to pay for the anticipated liabilities. The fact that J&J had to do that shows that the fraudulent transfer law does have some teeth. It was the reason J&J had to take the approach that ultimately got the subsidiary kicked out of bankruptcy court.
> If I may ask, given that LTL was funded with many multiples of its liabilities, why was the bankruptcy appealed
So the amicus brief from Public Justice—which I had no involvement with—does a good job of explaining the public interest concerns: https://www.tzlegal.com/wp-content/uploads/2022/07/2022.07.0.... Bankruptcy court is a debtor-friendly forum and gives debtors tremendous leverage over creditors.
1 reply →
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.
The thread we're in started with the discussion of fraudulent transfers: https://news.ycombinator.com/item?id=47220263
You said the Texas Two Step can't be used for fraudulent transfers (or at least, that's how I interpreted) and offered J&J's case as an example. My reply to that is J&J's Texas Two Step failed for a different reason, unrelated to fraudulent transfers.
No.
My OP said that Texas Two step was used all the time. I said J&J tried to use Texas Two Step and it ultimately failed. And yes it did fail mostly because it was not being used in good faith.
1 reply →
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.
> JJCI was funded to the tune of $2B. Slightly less than the $61.5B of liability, you'll agree
Your numbers are all wrong.
Here's a law firm's summary of all the judgments to date against J&J: https://www.sokolovelaw.com/product-liability/talcum-powder/...
These don't add up anywhere close to $10b, let alone $61.5b.
$61.5b is the amount that J&J ultimately agreed to pay the new company (LTL) that it spun off to take over the liabilities.
This is from the court that rejected the bankruptcy:
"we cannot agree LTL was in financial distress when it filed its Chapter 11 petition. The value and quality of its assets, which include a roughly $61.5 billion payment right against J&J and New Consumer, make this holding untenable."
https://www2.ca3.uscourts.gov/opinarch/222003p.pdf
My translation: "This new company can get up to $61.5b from J&J but says it's in financial straits. Bankruptcy denied."
I'm aware the Texas Two Step is used by companies to get out of paying what they legally owe. It's unclear to me if this particular case is a good example of that today because J&J has committed to paying at least $61.5b and that's much more than the judgements against them.
If in 20 years all the judgements end up being more like $80b and J&J says "Whoopsie, money's run out" then I guess we can call shenanigans.
I don't know what Matt Levine has said about the Texas Two Step outside of this case.
> JJCI re-filed bankruptcy proceedings three hours later
What did they change in their application? What happened to the new filing?
> I'm aware the Texas Two Step is used by companies to get out of paying what they legally owe. It's unclear to me if this particular case is a good example of that today ...
They are using the same law firm (Jones Day) as the others. It's a perfectly good example.
> ... because J&J has committed to paying at least $61.5b and that's much more than the judgements against them.
Actually, the $2B and $8.9B proposals in LTL's two bankruptcy proceedings made the funding from J&J contingent on claimants and future claimants accepting the bankruptcy, i.e. its J&J effectively trying to shoehorn this into an informal class action - plaintiffs can choose to form a class action, defendants are not able to force them into one, but this effectively would. So it seems unlikely that J&J would ever be on the hook for $61.5B. Indeed, HoldCo, the parent of LTL, in turn owned by J&J would only ever be funded to a maximum of $30B.
> Here's a law firm's summary of all the judgments to date against J&J
to date. There's many many more (thirty-eight thousand) cases that have not been adjudicated, in fact.
> because J&J has committed to paying at least $61.5b
Where do you think that number came from? J&J playing good corporate samaritan, or knowing that they still have many, many more cases winding through the courts, or in discovery, than have had final judgments rendered so far?
Good for J&J. They've actually only paid $2B - of the $10B of judgments that you yourself acknowledge. Good for J&J. And they've committed to funding $61.5B? How's that worked out for other companies doing this?
Georgia Pacific, in the same spot, committed to an initial funding of their T2S entity, and to review this further as needed. In the end, they funded it to the tune of $175M. And then told the court that the entity was entirely independent from GP and they had no obligation to do any such thing.
St Gobain, in the same spot, committed to funding to the tune of $50B, and ended up putting in less than $100M and refusing anything further.
So audacious was St Gobain that they were laid into by the court:
> Gross testified that Saint-Gobain repeatedly misrepresented its intent in creating the subsidiary that eventually filed for bankruptcy, calling executives’ testimony and other statements “misleading” and “not truthful.” U.S. Bankruptcy Judge Craig Whitley followed Gross’s testimony last August with factual findings that included his own blistering critique of the executives’ statements as “contrary to the evidence,” saying the company’s story “strains credibility.”
Four major companies have tried the Texas Two Step lately. All of them have used the same one law firm, again, Jones Day. Three of them (J&J being the fourth) have managed to drastically under-deliver on their commitments and liabilities and have emerged unscathed as a result.
Trane Technologies, same thing.
Weird that LTL was formed in North Carolina, where this scheme seems to work, yet J&J has no corporate presence there (headquartered in NJ)
But somehow, J&J, and Matt Levine would love us to believe that this time, somehow, it'll be different.
> What did they change in their application?
They changed the number from $2B to $8B and filed bankruptcy again. It was again dismissed. The first time, the courts as you said described it as an untenable position. Now, they were more annoyed, saying that the application was made in actively bad faith.
"Johnson & Johnson would later make a third attempt at resolving talc litigation through bankruptcy in 2024, which also failed. The company continued to face thousands of lawsuits alleging its talc products were contaminated with asbestos and caused cancer.
The repeated bankruptcy dismissals established important precedent limiting the ability of financially healthy corporations to use the Texas Two-Step strategy to avoid mass tort litigation."
This is from another mesothelioma law firm (important to note that J&J has actually resolved many of the mesothelioma claims against it, ~95%. But the vast majority of claims are around asbestos, and have a much clearer causality, typically resulting in larger verdicts).
April 2025, J&J, sorry, LTL, have since tried, and failed, to file a fourth bankruptcy. They're getting increasingly nervous that they won't be able to sidestep liability.
There's also this hugely perverse incentive with all of these "commitment to fund"s:
"You injured me and have been ordered to compensate me. But in order to do so I have to hope you continue to prosper, potentially injuring others along the way, so I get my compensation. I can choose between getting you shut down, but potentially not being compensated, or being compensated but knowing that you go on to be able to do this to others."
2 replies →