The Texas Two-Step bankruptcy strategy is a controversial legal maneuver that some large corporations have attempted to shield themselves from massive liability claims—without having to declare full corporate bankruptcy. The name comes from a two-step process that’s legal under Texas law, allowing a company to split into two entities, place all legal liabilities in one, and then push that liability-laden entity into Chapter 11 bankruptcy.
In theory, the original, now “clean,” company continues its business operations uninterrupted. Meanwhile, claimants seeking justice are forced to wait as their cases are sorted out in bankruptcy court, often receiving reduced compensation. This process in someways flips bankruptcy proceedings upside down.
Johnson & Johnson has attempted this three times – which each attempt being rejected for several reasons. Other corporations have also attempted to take advantage of this unusual method.
If accepted as a permissible division of liabilities, the Texas Two-Step could have serious implications for mass tort victims seeking justice.
How the Texas Two-Step Works
Here’s how this strategy typically unfolds:
- Step One: Corporate Split
Under Texas’s divisive merger statute, the company splits into two. One gets the assets; the other inherits the liabilities.
- Step Two: Bankruptcy Filing
The liability-heavy entity immediately files for Chapter 11 bankruptcy protection.
This structure freezes ongoing litigation and consolidates claims in bankruptcy court, which can drastically reduce the payouts corporations owe to victims—especially when the original company is still highly profitable.
Johnson & Johnson: The Case That Made Headlines
The most well-known example of the Texas Two-Step in action is Johnson & Johnson. Facing over 40,000 lawsuits alleging that its talc-based baby powder caused ovarian cancer and mesothelioma, J&J created a new entity, LTL Management, and assigned it all talc-related liabilities.
LTL then filed for bankruptcy in an effort to use a $10 billion trust to settle all existing and future claims. But courts pushed back. In 2023, 2024, and most recently in March 2025, a Houston judge rejected the bankruptcy strategy, ruling that J&J was too financially healthy to qualify for Chapter 11 protections.
The decision reasserted that bankruptcy laws are for distressed businesses—not as a legal shield for solvent corporations. Read more here:
👉 Johnson & Johnson Talc Bankruptcy Rejected
👉 J&J Talc Bankruptcy Settlement Faces Scrutiny
Other Major Corporations That Used the Texas Two-Step
While Johnson & Johnson’s failed attempt brought national attention, several other large corporations have successfully—or controversially—used the Texas Two-Step.
Georgia-Pacific and Bestwall LLC
In 2017, Georgia-Pacific (a Koch Industries subsidiary) created Bestwall LLC to offload its asbestos liabilities. Bestwall promptly filed for bankruptcy in North Carolina, effectively pausing thousands of lawsuits while the parent company continued to profit.
Saint-Gobain and DBMP LLC
Saint-Gobain’s North American unit CertainTeed used the same strategy in 2019, forming DBMP LLC to manage its own asbestos claims, which were similarly swept into bankruptcy proceedings.
Trane Technologies and Aldrich/Murray LLCs
Trane Technologies (formerly Ingersoll-Rand) established Aldrich Pump LLC and Murray Boiler LLC in 2020. These new entities were assigned asbestos liabilities and sent into bankruptcy court, allowing the parent company to proceed unaffected.
Corizon Health and Tehum Care Services
Corizon Health, a provider of prison healthcare, restructured into Tehum Care Services, transferring hundreds of medical neglect lawsuits to the new company before filing for bankruptcy—triggering outrage from advocacy groups and inmates’ families.
The Sackler Family and Purdue Pharma: A Related Strategy
Although not a traditional Texas Two-Step, Purdue Pharma, owned by the Sackler family, used a similar legal strategy to seek protection from lawsuits related to the opioid crisis. Purdue filed for bankruptcy in 2019 and proposed a multi-billion dollar settlement.
The Sacklers agreed to contribute over $6 billion to help address the opioid epidemic, but demanded legal immunity from all future civil lawsuits—even though they didn’t file for bankruptcy personally.
In a landmark 2024 decision, the U.S. Supreme Court struck down the deal, ruling that non-debtors like the Sacklers cannot be shielded from liability unless claimants give consent. The ruling was a huge win for victims of the opioid crisis and a powerful blow against corporate legal immunity.
Why Is the Texas Two-Step So Controversial?
The strategy has drawn fierce criticism for several reasons:
- Unfair to Victims: It delays justice and limits compensation for people suffering serious harm.
- Abuses Bankruptcy Protections: The strategy was never meant for solvent corporations.
- Denies Jury Trials: Claims that would be heard in open court are instead handled behind closed doors in bankruptcy proceedings.
Consumer advocates argue it turns a legal safety net into a litigation shield for wealthy corporations.
How Courts Are Pushing Back
Recent decisions—including multiple rejections in the Johnson & Johnson case—highlight a growing trend: judges are rejecting the Texas Two-Step when used by financially stable companies. Courts are emphasizing that eligibility for bankruptcy protection depends on actual financial distress—not a desire to cap liability.
In addition to judicial scrutiny, public backlash and negative media coverage are forcing corporations to rethink this strategy.
Congress Responds: A Push for Reform
The legal controversy has caught the attention of lawmakers. In mid-2024, a bipartisan bill was introduced in the U.S. Senate to limit or ban the use of the Texas Two-Step by solvent corporations. The proposed law would prevent companies from using the federal bankruptcy system when using divisive mergers and strategic bankruptcies to avoid liability.
📰 Reuters: Senate Bill Targets Texas Two-Step Bankruptcies
Is the Texas Two-Step Strategy on Its Way Out?
The Texas Two-Step is still legal—but its future looks increasingly uncertain. With mounting court decisions, political momentum, and public outrage, corporations using this tactic may face more legal risk than reward going forward.
If legislative reform succeeds, the loophole could close entirely, restoring fairness to the legal system and strengthening victims’ rights.
For those harmed by defective products, toxic exposure, or corporate negligence, the rise of the Texas Two-Step was deeply frustrating. But recent rulings—including the Supreme Court’s decision on Purdue Pharma—have shifted momentum back in favor of plaintiffs.
Courts and lawmakers are now sending a clear message: bankruptcy laws were never meant to be tools for profit protection. They were meant to offer relief to the truly distressed—and justice to those harmed.
