The Silent Epidemic: How Corporations Are Escaping Liability Through Strategic Bankruptcy

Adv Mehul Bansal, Jadetimes Staff

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Image source: AI Generated

Every few years, a headline emerges about a massive corporation filing for bankruptcy protection not because it is genuinely insolvent, but because it is drowning in litigation. Johnson & Johnson, 3M, and a growing list of Fortune 500 companies have in recent years deployed a legal manoeuvre so audacious that legal scholars have given it a name: the "Texas Two-Step." It involves a corporation splitting itself into two entities one that absorbs the liabilities and another that retains the profitable assets and then pushing the liability-holding entity into bankruptcy. The result? Thousands of injury claimants are herded into a bankruptcy court where the rules are different, where class actions are effectively halted, and where corporations can negotiate settlements on their own terms, far away from the scrutiny of juries.

The bankruptcy system in the United States was designed to give honest debtors a fresh start. It was never intended to be a litigation firewall. Yet courts have repeatedly been forced to grapple with this fundamental misuse. In 2023, a federal appeals court struck down Johnson & Johnson's attempt to use this strategy to resolve talc-related cancer claims, holding that the subsidiary it created LTL Management was not in genuine financial distress. The court's reasoning was simple and damning: bankruptcy protection should not be available to a company that is entirely healthy, merely because that company finds litigation expensive and inconvenient.

Critics argue that corporate defendants have developed a systematic playbook. First, hire elite restructuring counsel. Second, create a subsidiary. Third, assign all mass tort liabilities to it. Fourth, file for Chapter 11. The moment the bankruptcy petition is filed, an automatic stay freezes all ongoing litigation. Plaintiffs many of them terminally ill must wait years for resolution. Many die before seeing any compensation. Their families inherit claims that are often settled for pennies on the dollar because the bankruptcy estate controls the process.

Proponents of the strategy argue that it actually benefits claimants. They contend that bankruptcy allows for orderly, equitable distribution of a finite pool of assets, preventing early claimants from gobbling up compensation before later ones can be heard. There is something to this argument in theory. In practice, however, the parent corporation continues to operate profitably, returning dividends to shareholders, while the litigation subsidiary funded by a predetermined amount from the parent becomes the sole recourse for thousands of injured individuals.

The legal community is divided. Some bankruptcy scholars believe that the automatic stay provisions are being weaponised. Others argue that Congress has the power to fix this and has simply failed to act. Legislative proposals have been floated in the Senate that would require a showing of genuine financial distress before mass tort defendants may invoke Chapter 11, but none have advanced meaningfully. Until that changes, the Texas Two-Step remains a powerful and morally troubling tool in corporate America's legal arsenal.