Texas Two-Step Bankruptcy in Mass Torts

Published: 14 hours ago

Subject Matter Expert –

Kim Lavin

The “Texas Two-Step” strategy—a controversial bankruptcy maneuver used by corporate defendants to handle massive mass tort liabilities—has fundamentally reshaped toxic tort litigation. By splitting corporate liabilities into a newly created entity that subsequently files for Chapter 11 bankruptcy, major defendants attempt to resolve tens of thousands of personal injury, asbestos, and talc claims under bankruptcy protection while shielding their primary operating assets.

As courts, legal teams, and claimants grapple with these divisive restructuring tactics, staying ahead of evolving appellate precedents, multidistrict litigation (MDL) developments, and settlement administration frameworks is critical for law firms managing large claimant inventories.

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What Is the “Texas Two-Step” Bankruptcy Strategy?

The “Texas Two-Step” is a legal restructuring tactic executed under Texas corporate law:

Divisive Merger: A company splits into two separate entities.
Liability Offloading: The parent company transfers its massive tort liabilities (such as asbestos or talc litigation) to a newly formed subsidiary while retaining most of its valuable assets.
Bankruptcy Filing: The newly formed entity immediately files for Chapter 11 bankruptcy to halt all pending lawsuits and force a global settlement through a bankruptcy trust.

While corporate defendants view the strategy as an efficient mechanism to resolve sprawling litigation, plaintiffs’ firms, legal scholars, and victim advocates argue it constitutes a bad-faith bankruptcy misuse designed to evade corporate accountability.

Latest Texas Two-Step Updates: Asbestos Claimants Ask Supreme Court to Review CertainTeed Case

The national debate over the legality of the Texas Two-Step has reached the highest court in the nation. According to a September 18, 2026 report by Law360, claimants alleging that CertainTeed’s asbestos-containing products caused mesothelioma have filed a petition for certiorari asking the U.S. Supreme Court to review a lower court ruling that kept their lawsuits frozen in bankruptcy court.

How CertainTeed Used the Two-Step

CertainTeed executed a divisive merger transferring all of its asbestos liabilities to a subsidiary, DBMP LLC, while retaining its profitable operating assets. DBMP then filed for Chapter 11 bankruptcy to stay all pending asbestos claims against the parent company.

The Petitioners’ Argument

The petitioning claimants contend that:

The arrangement serves no legitimate reorganization purpose under Chapter 11.
Financially healthy parent companies should not enjoy bankruptcy liability protections without subjecting their operating businesses to Chapter 11.
The Fourth Circuit’s decision affirming the stay directly conflicts with the Third Circuit Court of Appeals’ rulings rejecting Johnson & Johnson’s similar bankruptcy maneuvers.

What the Supreme Court Is Being Asked to Decide

The petition asks the justices to establish clear legal standards for when divisive merger filings lack good faith under federal bankruptcy law. The Supreme Court’s decision could permanently alter how asbestos, talc, and other mass tort claims navigate the courts. (Review the full filing in the Herlihy Petition for Certiorari).

What the Supreme Court Is Being Asked to Decide

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A Timeline of Johnson & Johnson’s Talc Litigation & Corporate Restructuring

For over 15 years, the litigation surrounding Johnson & Johnson’s (J&J) talc-based products—most notably Baby Powder—has been the defining arena for corporate liability battles and the “Texas Two-Step” bankruptcy strategy. Facing over 67,000 lawsuits alleging that asbestos contamination caused ovarian cancer and mesothelioma, J&J’s strategy has evolved across a decade-and-a-half of trials, appellate rulings, and bankruptcy maneuvers.

Johnson & Johnson talc case for mass tort litigation support.

Early Legal Wins Against J&J Drive Further Talc Lawsuits

1970s–2010s: Early Allegations and Mounting Science

Science Plaintiffs begin alleging that long-term use of talcum powder caused ovarian cancer and mesothelioma. Internal corporate documents surface during discovery, leading plaintiffs to allege that J&J was aware of potential asbestos contamination in its raw talc supply for decades but failed to warn consumers.

2018: Missouri Landmark Verdict Triggers Filing Surge

22 women alleging J&J’s baby powder caused ovarian cancer (later reduced on appeal to $2.12 billion). The massive award gains global media attention and prompts tens of thousands of additional claimants to file talcum powder lawsuits.

2020: J&J Discontinues US Talc Sales

Citing declining sales and what it termed “misinformation” surrounding safety, J&J halts North American sales of its talc-based Baby Powder, as noted in the official Johnson & Johnson Consumer Health Announcement, transitioning exclusively to a cornstarch-based formulation.

2021–2023: First & Second ‘Texas Two-Step’ Bankruptcy Filings

J&J executes a divisive merger in Texas, creating LTL Management LLC to absorb its talc liabilities while retaining main operating assets. LTL files for Chapter 11 bankruptcy in New Jersey to freeze pending lawsuits. However, the Third Circuit Court of Appeals ultimately dismisses the petition in In re: LTL Management LLC, ruling that LTL was not in genuine “financial distress” due to J&J’s financial backing.

2024: Third Bankruptcy Dismissal & Corporate Entity Challenges

J&J creates a new subsidiary, Red River Talc LLC, attempting a third Chapter 11 bankruptcy filing with a $9 billion resolution proposal. Courts again reject the maneuver. Meanwhile, federal courts permit plaintiffs to add J&J affiliates (Kenvue Inc., Janssen Pharmaceuticals, and J&J Holdco) as co-defendants in the federal multidistrict litigation (MDL), severely limiting J&J’s ability to isolate liability in future bankruptcy filings.

2025: High-Stakes Jury Trials Resume

With bankruptcy stays lifted, cases return to state courtrooms, resulting in dramatic and mixed verdicts:

July 2025 (Massachusetts): A Boston jury awards a record $42.6 million to a mesothelioma plaintiff.
October 2025 (California): A Los Angeles jury awards $966 million ($950 million in punitive damages) to the estate of Mae Moore (later reduced by the court on appeal in March 2026).
December 2025 (Maryland): A Baltimore jury delivers a $1.5 billion verdict to a peritoneal mesothelioma claimant.

July 2026: $5.5 Billion Global Settlement Announcement

J&J reaches a proposed global settlement framework reported by Law.com at $5.5 billion (with potential to reach $6–$7 billion) to resolve approximately 76,000 pending ovarian cancer lawsuits, contingent on reaching a 95% claimant approval threshold.

Legal Challenges and Setbacks for J&J’s Bankruptcy Efforts

Operational Challenges for Mass Tort Law Firms

Whether mass tort litigations proceed through individual trials, multidistrict dockets, or bankruptcy settlement trusts, law firms face significant administrative, evidentiary, and operational demands:

Claimant Eligibility & Verification: Managing detailed exposure histories, product identification, and medical records across thousands of inventory files.
Settlement Grid Matrix Execution: Evaluating claims against complex tiered compensation criteria to maximize client recoveries and ensure compliance.
Data Management & Analytics: Organizing large-scale dockets to respond quickly to court orders, court-mandated audits, and Rule 702 Daubert challenges.

Partnering with Verus for Mass Tort Case Management & Settlement Administration

Navigating the complexities of mass torts, asbestos inventory tracking, and Texas Two-Step bankruptcy shifts requires institutional support. Verus provides end-to-end solutions tailored specifically for mass tort law firms and class action litigation:

Mass Tort Case Management Services: Streamline intake, medical record review, and claimant communications across evolving dockets.
Mass Tort Settlement Administration Services: Comprehensive settlement execution, including compensation grid auditing, lien resolution, and secure disbursement handling.
Class Action Law Firm Support: Scalable administrative infrastructure designed to support complex class action workflows.
Mass Tort Litigation Analytics Services: Data insights to help trial teams evaluate inventory strengths, predict exposure values, and optimize settlement terms.
Lead Generation Services: Targeted claimant acquisition strategies to grow high-value mass tort inventories.

To optimize your firm’s mass tort operations, review our insights on Complex Case Management Lessons from the J&J Talc Litigation or Contact Verus Today to discuss how our litigation support services can strengthen your practice.

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Disclaimer: This article provides information for general knowledge and informational purposes only, and does not constitute legal advice. Readers should consult with qualified legal counsel for advice tailored to their specific circumstances.

Kim Lavin Marketing Specialist

Kimberly Lavin joined Verus in October, 2006; she is currently working as a Marketing Specialist where her responsibilities include supporting Verus’ marketing efforts and growing awareness of the company’s expanding case management, analytics, financial and auditing services. She is a frequent contributor to the company’s blog and collaborates with subject matter experts to create valuable thought leadership articles and litigation updates. She also manages a number of settlement administration responsibilities for Verus’ growing inventory.