Emory Bankruptcy Developments Journal


Laura S. Rossi


The purpose of the bankruptcy system is to grant a “fresh start” to the honest but unfortunate debtor, while the purpose of the tort system is to make injured parties “whole” again. As a result, these systems inevitably clash when a business debtor files for bankruptcy while there are pending tort claims against it. The tension between these systems has reached a whole new level following the emergence of a new strategy deemed the “Texas Two-Step.”

A Texas statute leaves open a loophole for otherwise solvent companies to dodge mass tort liabilities and protect their assets, leaving injured plaintiffs with little hope of adequate recovery. The acceptance of such a maneuver into widespread bankruptcy practice will allow culpable companies to escape accountability and, more devastatingly, call into question the integrity of the bankruptcy and tort systems. Johnson & Johnson, a multinational conglomerate known for producing some of the most famous household products, is one of many companies using the Two-Step strategy to resolve injury claims related to its talc-based baby powder. Though many questions remain about the Two-Step’s durability, the Third Circuit issued an opinion in the J&J case which could prove detrimental for the Two-Step’s survival.

Because the Two-Step is a product of state law that engages with federal bankruptcy law, the solution requires striking a delicate balance between honoring state sovereignty while still effectively preventing putative debtors from seeking chapter 11 protection for reasons beyond the Code’s intent. This Comment proposes a combination of judicial and legislative reforms that would prevent the Texas Two-Step from becoming the “norm” for companies facing mass tort liability. More specifically, this Comment advocates for reform of state and federal laws that currently allow the Texas Two-Step to proceed, in addition to encouraging courts to follow the Third Circuit’s approach from In re LTL Management regarding bad faith.