By Dietrich Knauth
July 23 (Reuters) - U.S. Senators introduced a bipartisan bill on Tuesday that would deter so-called Texas two-step bankruptcies, saying that wealthy companies should be able to stop lawsuits by dumping their liabilities into a bankrupt shell company.
Senators Sheldon Whitehouse, a Rhode Island Democrat, and Josh Hawley, a Missouri Republican, introduced the
"Ending Corporate Bankruptcy Abuse Act of 2024" that would prevent financially healthy companies from evading "responsibility for injuries they caused" or bog down consumers in lengthy bankruptcy proceedings, they said in a statement.
The Texas two-step tactic involves first using Texas corporate law to split a business into two separate companies, one that inherits the assets and a shell company which is saddled with liabilities, including lawsuits. The shell company then files for bankruptcy protection, and it uses its bankruptcy to block lawsuits from proceeding against its well-funded affiliates.
"Large corporations on solid financial footing – like Johnson & Johnson and Georgia-Pacific – shouldn't be able use the Texas two-step trick to shirk responsibility for injuries their products have caused," Whitehouse said.
The tactic goes against the spirit of U.S. bankruptcy law, which was meant to give struggling debtors a "fresh start," Whitehouse said.
The legislation aims to end the "dirty back-room deals" that companies use to shield themselves from answering for corporate misconduct, Hawley said.
J&J has twice attempted to use a shell company's bankruptcy to resolve tens of thousands of lawsuits alleging its baby powder and other talc products contained asbestos and caused cancer. J&J says that its talc products are safe and do cause cancer, but it is pursuing a third bankruptcy in an effort to end lawsuits from about 61,000 claimants and prevent anyone from bringing similar lawsuits in the future.
Georgia-Pacific pioneered the legal strategy in 2017, spinning off its asbestos liabilities into a created subsidiary, Bestwall, which then filed for bankruptcy in North Carolina. At the time of the filing, the company faced 64,000 asbestos lawsuits.
The proposed legislation would stop bankruptcy judges from issuing temporary orders that stop lawsuits from proceeding against -bankrupt affiliates of a Texas two-step debtor.
Those "temporary" orders can last for years, and the delays ensure that some people die before they get their day in court, Whitehouse and Hawley said.
The bill would also instruct bankruptcy courts to dismiss Texas two-step cases unless a debtor can prove that its case was filed in good faith, and it would make it easier for judges to dismiss bankruptcy cases filed in the 4th U.S. Circuit Court of Appeals, where the Bestwall case and other Texas two-step cases have been filed.
J&J defended its legal strategy Tuesday, saying that the company is a "fair, efficient and expeditious settlement" that would pay $6.5 billion to end lawsuits over ovarian cancer and other gynecological cancers. J&J has asked plaintiffs to vote on the settlement proposal by July 26.
Georgia-Pacific did immediately respond to a request for comment. The company's attorneys have previously argued that Bestwall's bankruptcy offers the only "equitable and global resolution" of the asbestos lawsuits.
The Senate bill is co-sponsored by Senator Dick Durbin, chair of the Senate Judiciary Committee. Whitehouse, Hawley and Durbin previously urged the U.S. Supreme Court to take action against the Texas two-step in an appeal over the Georgia-Pacific cases, but the court declined to hear that appeal.
A House version of the bill will be introduced by Representatives Emilia Sykes, an Ohio Democrat, Lance Gooden, a Texas Republican, and Jerrold Nadler, a New York Democrat.
(Reporting by Dietrich Knauth in New York)