Two Steps Too Far: New Limitations on the Use of the Texas Two- Step to Resolve Mass Tort Liability in Bankruptcy

This paper explores the mechanisms by which companies have utilized corporate restructuring through divisive mergers in conjunction with the available protections and tools of the United States Bankruptcy Code to resolve mass tort liability without placing the entirety of the business under bankruptcy. Popularized in Texas, a divisive merger is a mechanism by which an existing business entity divides itself into two new entities, allocating all pre-existing assets and liabilities to each as they see fit. Although intended to be a means by which to easily sell assets of a business, it has been more popularly used to resolve mass tort liability burdening a business.

Known as the Texas Two-Step, this procedure requires two simple steps. First, a business undergoes a divisive merger and allocates all liability associated with its mass tort claims to a newly created entity. Second, the liability-burdened entity places itself under Chapter 11 bankruptcy, in order to enjoin further prosecution of claims and to resolve all current and future liability through the creation of a settlement trust administered by the bankruptcy court. In addition to presenting the mechanisms of the Texas Two-Step and a case study of its use, this paper will present the series of decisions culminating in the Third Circuit’s instruction to reject its use.

Republished with permission. The full article, "Two Steps Too Far: New Limitations on the Use of the Texas Two- Step to Resolve Mass Tort Liability in Bankruptcy," was published in University of Miami Business Law Review, Volume 32 Issue 3.