Great attorneys are supposed to think outside the box — netting their clients advantages others may not have seen. But that doesn’t mean the innovations will be without controversy. Take the “Texas Two-Step.” The brain child of Jones Day partner Gregory Gordon, the legal maneuver has been hailed as the “greatest innovation in the history of bankruptcy” — that is, if you’re a massive conglomerate looking to eschew potential billions in mass tort liabilities.
Of course, attorneys on the plaintiff side of things think the move is an abuse of the bankruptcy system, as it bestows Chapter 11 protections on solvent companies that spin their tort liabilities off into bankrupt affiliate companies. This turns the plaintiffs into creditors, something Jones Day has previously defended as expediting the payment process.
As reported by Law.com, the practice has netted the Biglaw firm quite a bit of money:
In each of the four bankruptcies, the Jones Day bankruptcy team created new companies for defendants under a Texas law (hence the Texas Two-Step) and filed for Chapter 11 in North Carolina, where the party seeking to dismiss a bankruptcy case bears the burden of proving a bad faith filing.
Since filing an initial Texas Two-Step case on behalf of Koch Industries’ Georgia Pacific in 2017, Jones Day has proffered its services to French manufacturing firm Saint-Gobain, Trane Technologies, and Johnson & Johnson. The firm has collected more than $20 million in fees for each case, totaling more than $107 million in Texas Two-Step fees by February 2023.
But now the practice is under fire — and not just from opposing counsel. The Third Circuit halted the practice in the Johnson & Johnson talc litigation — and the bankruptcy of affiliate LTL Management — because there was no finding the parent company was in financial distress when it filed for bankruptcy:
“Good intentions—such as to protect the J&J brand or comprehensively resolve litigation—do not suffice alone. What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not,” federal appellate Judge Thomas Ambro said in last month’s opinion.
For the talc case at least, this moves the litigation from North Carolina to New Jersey. Meaning the burden of proof flips to the debtors to prove they filed bankruptcy in good faith. It remains to be seen if other jurisdictions adopt the Third Circuit’s take on the practice. But it does add a new risk factor to consider for other companies interested in the controversial practice.
Kathryn Rubino is a Senior Editor at Above the Law, host of The Jabot podcast, and co-host of Thinking Like A Lawyer. AtL tipsters are the best, so please connect with her. Feel free to email her with any tips, questions, or comments and follow her on Twitter @Kathryn1 or Mastodon @Kathryn1@mastodon.social.
