National Law Journal Quotes Kevin Maclay's Senate Hearing Testimony on Texas Two-Step

02.09.2022
National Law Journal

Lawmakers criticized Johnson & Johnson’s use of a Texas statute and the bankruptcy code to resolve thousands of lawsuits alleging the company’s talcum powder products gave women cancer, with some senators accusing the business of abusing the law.

The comments came during a Senate Judiciary subcommittee hearing Tuesday examining the so-called “Texas Two-Step,” where a company uses a Texas divisional merger statute to split into two entities: One that takes on the company’s liabilities then files for bankruptcy, and another that gets most assets and continues the business. A similar statute exists in Delaware.

. . .

J&J isn’t the first company to use the Texas statute to handle mass tort claims. In 2017, Koch Industries used the Texas divisional merger law to separate one of its companies, Georgia Pacific, into to new entities, with one taking asbestos claim liabilities and then filing for bankruptcy, Kevin C. Maclay, a member of the law firm of Caplin & Drysdale said at Tuesday’s hearing.

. . .

But Maclay, who has represented tort creditors’ committees in Chapter 11 cases, said the agreements aren’t an adequate solution because they don’t stop the company from transferring its assets to other entities or prevent subsequent mergers or acquisitions.

“In other words, these are highly contingent, and frankly, illusory agreements, which are not a protection against anything,” he said during the hearing. “The existing Bankruptcy Code has not been sufficient to stop this scheme.”

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