Shell Games:
The Texas Two-Step and the Corporate Escape

The Texas Two-Step turns corporate separation into litigation strategy: liabilities move into a bankruptcy-bound shell while the operating business stays outside court supervision. This article follows the doctrine, the case register, and the financial architecture behind the maneuver.

On October 14, 2021, a company called LTL Management LLC filed for Chapter 11 bankruptcy in Charlotte, North Carolina. LTL had no employees. It had no revenue. It manufactured nothing, sold nothing, and had existed for exactly two days. Its entire asset base consisted of roughly $6 million in cash and a contractual right to draw on Johnson & Johnson a company then worth approximately $430 billion — for up to $61.5 billion to satisfy tort claims. Its liabilities were, nominally, some 40,000 lawsuits alleging that J&J's talcum baby powder had caused ovarian cancer and mesothelioma.

LTL had been designed to go bankrupt. This was not a secret. Its own court filings said so. What was unusual — what had never been tried at quite this scale — was the theory underneath the filing: that a company created by one of the largest healthcare companies in the world, backed by a contractual funding right from that same corporation, and facing uncertain future liability rather than immediate insolvency, could legitimately invoke the protections of the United States Bankruptcy Code. That the automatic stay freezing all pending litigation, the channeling injunctions re-routing claims from juries to trust administrators, and the third-party releases permanently discharging the parent company from liability were all available to a solvent, thriving corporation that simply did not want to litigate anymore.

That theory — the Texas Two-Step — has now been tested in the major Bestwall, DBMP, Aldrich/Murray, LTL, and Red River Talc bankruptcy matters, with related mass-tort bankruptcy fights such as 3M/Aearo reinforcing the same doctrinal fault line. It has appeared before multiple federal courts of appeals, the Senate Judiciary Committee, major law reviews, and the earnings calls of publicly traded companies describing the financial benefit of freezing tort claims. Jones Day collected $107 million in court-approved fees across four Two-Step cases before a single claimant received a distribution. And in December 2025, after J&J's bankruptcy strategy failed for a third time, a Baltimore jury awarded more than $1.5 billion to a single talc plaintiff the largest single-plaintiff talc verdict reported to date.

The story of the Texas Two-Step is a story about what American law protects when corporate defendants have enough money to hire lawyers who can find the seams.

I. The Long Road Before the Two-Step: Mass Tort Bankruptcy in America

The Texas Two-Step did not emerge in a vacuum. It is the latest chapter in a four-decade experiment in using bankruptcy to manage mass personal injury claims — an experiment that began before "mass tort" became a standard legal category and that has repeatedly redrawn the boundary between corporate finance and civil liability.

The watershed was Johns-Manville. In August 1982, the Manville Corporation — then one of the largest building materials manufacturers in the United States and one of the most historically culpable asbestos producers in history — filed for Chapter 11 protection in the Southern District of New York. The filing was, at the time, audacious: Manville was not insolvent. It had revenues, employees, and operating assets. What it faced was an increasingly plausible prospect that asbestos liability could, over time, exhaust its net worth. The bankruptcy court allowed the case to proceed, and the resulting reorganization — consummated in 1988, six years after filing — established the asbestos channeling trust as the template for all subsequent mass-tort bankruptcies.4 Congress codified that template in 1994 by adding § 524(g) to the Bankruptcy Code.

Section 524(g) is worth understanding in technical detail, because it is the provision the Texas Two-Step is designed to reach — and also the provision whose spirit the Two-Step arguably inverts.5 The statute permits a bankruptcy court to issue a "channeling injunction" that bars all current and future claimants from asserting asbestos-related claims against the reorganized debtor and certain affiliated non-debtors. The injunction channels all claims to a trust funded for exactly that purpose. The requirements are strict: the trust must assume the debtor's asbestos liabilities in full; a legal representative must be appointed for future unknown claimants; seventy-five percent of current claimants must vote to approve the plan; and the trust must operate through distribution procedures that treat present and future claims equitably.6 The statute was, in short, a carefully negotiated congressional compromise that gave mass-tort defendants a path to global resolution while protecting claimants from having their claims quietly extinguished.

Three cases in the 1990s and 2000s tested the outer limits of that framework. Dow Corning — the silicone breast implant manufacturer — filed for Chapter 11 in 1995 under the weight of approximately 440,000 product liability claims.7 It was genuinely, not constructively, in financial distress. Owens Corning, the insulation manufacturer, filed in 2000 under crushing asbestos liability, as did Federal-Mogul Corporation, the auto parts maker whose subsidiaries had manufactured asbestos gaskets. All three were distressed companies that had put their entire operating businesses — employees, factories, balance sheets — into the jurisdiction of the bankruptcy court.8 All three ultimately confirmed plans that established asbestos trusts under § 524(g). These were the cases Judge Ambro had in mind when he wrote, in the LTL opinion, that genuinely distressed debtors had been "pushed to the brink."

The Texas Two-Step departs from that history. Its logic is to capture the output of § 524(g) — the channeling injunction, the global release, the freeze on litigation — without accepting the input those historical cases required: an operating company submitting its business, assets, and management decisions to bankruptcy oversight. The traditional § 524(g) trust required a debtor to put the enterprise before the court. The Two-Step asks the court to resolve the liabilities while the asset-rich affiliate stays outside.

A.H. Robins, the pharmaceutical company that manufactured the Dalkon Shield intrauterine device, provides the sharpest historical counterpoint. When Robins filed for Chapter 11 in August 1985, it faced thousands of lawsuits and the realistic prospect of liability that could bankrupt it.? Judge Robert Merhige eventually ordered a $2.48 billion trust to compensate nearly 200,000 women. The plan was imperfect: claim values varied widely, lawyers took their share, and the Robins family still emerged with value through the sale to American Home Products. But Robins filed as itself. It submitted its operating business — Robitussin, Chap Stick, the full portfolio — to the court's jurisdiction. It accepted that bankruptcy meant judicial supervision of the enterprise, not merely judicial supervision of the claimants.

The Texas Two-Step eliminates that submission. The parent company does not file. Its operating assets, cash flows, and equity remain outside the debtor's estate and outside ordinary Chapter 11 oversight. It can continue paying dividends to shareholders while the shell remains under bankruptcy protection. The liabilities go to bankruptcy court; the operating business stays in the boardroom.

II. The Mechanism Dissected: Legal Technicalities of the Two-Step

Understanding precisely why the Two-Step works — and why courts disagree about whether it should — requires mapping five interlocking legal doctrines: the Texas divisive merger statute, the fraudulent transfer defense, the automatic stay, the extension of that stay to non-debtor affiliates, and the § 524(g) channeling injunction.

The divisive merger. Texas Business Organizations Code § 10.003 permits a plan of merger that allocates property and liabilities among more than one surviving or new entity; § 10.008 then provides the key effect of that plan, including that allocated property vests "without any transfer or assignment having occurred." That phrase is the legal keystone of the Two-Step. Under ordinary fraudulent-transfer doctrine, a company that strips assets from one entity and leaves liabilities behind can face avoidance claims under state law and § 548 of the Bankruptcy Code. The Texas statute attempts to complicate that attack: if no transfer occurred as a matter of state merger law, the debtor can argue that no fraudulent transfer occurred.

Whether that sidestep actually works is the most unresolved question in the Two-Step's legal architecture. Adam Levitin, the Georgetown University bankruptcy professor who served as a consultant to certain LTL claimants, argued in a 2021 Credit Slips post — the earliest serious academic analysis of the Two-Step — that the "no transfer" provision is far from an airtight defense. Texas fraudulent transfer law does not necessarily defer to the Business Organizations Code's definition of a "transfer." The conversion of a non-Texas entity into a Texas entity prior to the divisive merger might itself constitute a transfer, and step-transaction doctrine could bundle the conversion and the division together as a single event. Delaware's LLC Act, for comparison, explicitly provides that if a division is later found to constitute a fraudulent transfer, each resulting company is jointly and severally liable — but Texas law contains no equivalent provision. This means that in the Texas Two-Step, GoodCo might escape fraudulent transfer liability entirely, or it might not — and the uncertainty itself is what makes the strategy valuable as a negotiating tool. Claimants who are theoretically entitled to attack the transaction face years of litigation to establish it, during which they receive nothing and may die.

The automatic stay and its extension. When the bad company files for Chapter 11, the automatic stay of § 362 immediately halts all litigation against it. That much is standard. The Two-Step goes further, seeking an injunction under § 105(a) extending the stay to the non-filing parent and its affiliates. Courts permit this when the debtor can demonstrate that continued litigation against the parent would "substantially harm" its reorganization — typically because the parent's funding agreement with the debtor creates an identity of interest between the two entities. This extension is both the most powerful feature of the Two-Step and its most controversial: it gives a solvent, non-bankrupt company the benefit of the automatic stay that Congress reserved for actual debtors.

The funding agreement. Every Two-Step includes a funding agreement under which the parent commits to cover the bad company's liabilities up to some specified amount. The agreement is designed to serve two functions. First, it demonstrates to the bankruptcy court that claimants will be paid — that the bad company, despite having no assets, has access to a deep-pocketed guarantor. Second, it allows the parent to make the argument that it need not itself file for bankruptcy, because the bad company's access to parent funding gives claimants everything they would have against the parent directly.

The funding agreement is also where the strategy became legally self-defeating in J&J's case. The $61.5 billion backstop that J&J provided to LTL was, as Judge Ambro put it, "not unlike an ATM disguised as a contract."4 The metaphor mattered because LTL could draw on the agreement up to the contractual cap without putting J&J itself into bankruptcy. A debtor with access to a parent-backed funding right that large did not look financially distressed. When J&J tried to fix that problem by replacing the first agreement with a smaller $30 billion backstop for the second filing, it invited the obvious inference that the distress had been engineered for litigation purposes; LTL's own counsel acknowledged that J&J had "agreed to shrink the funding agreement" specifically to respond to the Third Circuit's threshold.5

The § 524(g) channeling injunction as exit. If the bad company successfully navigates the bankruptcy, the intended endgame is confirmation of a plan establishing a § 524(g) trust. The trust permanently channels all present and future asbestos claims away from the debtor and its non-debtor affiliates. GoodCo receives a permanent injunction barring claims against it. This is the "global peace" that Two-Step proponents argue justifies the strategy: a single, court-supervised, fully funded mechanism for compensating all claimants, present and future, without the lottery of individual jury trials.

What no Two-Step case has yet produced is that outcome. As of May 2026, no Texas Two-Step bankruptcy has confirmed a plan of reorganization. Bestwall is in its ninth year, DBMP and Aldrich/Murray are in their seventh, and the J&J cases have failed repeatedly before reaching confirmation. The § 524(g) trust remains a theoretical destination, visible on the horizon but unreached.

III. The Case Register: Major Companies and Their Shells

Table 1. Selected Texas Two-Step and Related Mass-Tort Bankruptcy Filings, 2017–2025

Sources: Reuters; Justia, Bestwall LLC v. OCC, No. 24-1493 (4th Cir. 2025); Saint-Gobain press release, Jan. 23, 2020; Trane Technologies SEC filings; In re LTL Management, LLC, 64 F.4th 84 (3d Cir. 2023); In re Red River Talc LLC, No. 24-90505 (Bankr. S.D. Tex. Mar. 31, 2025); 3M/Aearo bankruptcy and settlement reporting.

Georgia-Pacific / Bestwall. Koch Industries purchased Georgia-Pacific in 2005 for $21 billion, inheriting a paper and building-products empire whose asbestos liability in gypsum and joint-compound products had been accumulating for decades. In 2017, Georgia-Pacific executed the first widely watched Texas Two-Step, creating Bestwall LLC through a divisive merger. The allocation was stark: the new Georgia-Pacific received the overwhelming bulk of the old company's operating business, while Bestwall received the asbestos liabilities, roughly $32 million in cash, asbestos-related contracts, certain real estate, a plaster-products subsidiary valued in court filings at about $145 million, and a funding agreement backed by Georgia-Pacific.6 Bestwall had no ordinary operating business of the kind Georgia-Pacific retained. Since the filing, Koch Industries has received more than $5 billion in dividends from New Georgia-Pacific — including nearly $2.5 billion in fiscal 2022, with a $2 billion special dividend — while Bestwall claimants received no distributions.7 Georgia-Pacific paid $1.84 billion in dividends to Koch in 2023 alone.8

CertainTeed / DBMP. France's Compagnie de Saint-Gobain — one of the world's largest building-materials manufacturers — acquired CertainTeed Corporation in 1988. By 2019, Reuters reported, CertainTeed had spent approximately $2 billion over seventeen years resolving more than 300,000 asbestos claims arising from products such as cement pipe, roofing, and insulation.? Saint-Gobain's internal response was code-named "Project Horizon." A former Saint-Gobain lawyer, Amiel Gross, later testified that the project had been conducted with knowledge and direction from the French parent's executives and lawyers and that contrary testimony had been "misleading" and "not truthful." In October 2019, the divisive merger was executed. DBMP LLC assumed CertainTeed's asbestos liabilities. Three months later, DBMP filed for Chapter 11 in Charlotte. Saint-Gobain said DBMP and its subsidiary would no longer be consolidated and that about €12 million in annual operating income would leave the group's operating income. The 2026 Fourth Circuit ruling in favor of DBMP did not vindicate the transaction as good policy; it held that, under Fourth Circuit standards, the automatic stay would remain in place.

Trane Technologies / Aldrich Pump & Murray Boiler. Trane Technologies, formerly Ingersoll-Rand, is an Irish-domiciled HVAC and industrial equipment manufacturer. Its predecessor companies manufactured asbestos-containing pumps, compressors, and boilers. In June 2020, Trane placed Aldrich Pump LLC and Murray Boiler LLC into bankruptcy in Charlotte after allocating asbestos liabilities from legacy manufacturing businesses to those entities. Trane continued operating outside bankruptcy. A bankruptcy judge declined to dismiss the cases in December 2023; the cases remain pending.

Johnson & Johnson / LTL Management and Red River Talc. J&J's sequence of three bankruptcy attempts — two through LTL Management and one through Red River Talc — is the most extensively litigated chapter of the Two-Step story and is addressed in detail below.

IV. The Financial Architecture: What the Two-Step Actually Protects

The Texas Two-Step is, at its core, a financial engineering instrument. Understanding what it does requires translating legal doctrine into capital structure terms.

Before the Two-Step, a corporation facing mass-tort liability carries that liability as a contingent obligation on its balance sheet. Under GAAP, the corporation must accrue a reserve for losses that are both probable and reasonably estimable, and disclose a range of reasonably possible losses even where no accrual is required. The liability floats — it grows with adverse verdicts, shrinks with favorable ones, and can create earnings volatility that equity and credit markets price. Analysts may discount the stock to reflect litigation uncertainty. Bond investors may demand compensation for tail risk. The company's access to capital, its credit rating, and its ability to pay dividends can all be affected by the liability.

The Two-Step attempts to sever this relationship between liability and equity. By transferring the liability to a shell company that immediately files for bankruptcy, the parent removes the liability from its own balance sheet — or at least from the range of outcomes that equity markets need to price in real time. Saint-Gobain's announcement of DBMP's filing was explicit: the deconsolidation of DBMP would remove €12 million in operating income from its financial statements, but the filing would also eliminate "cash flow volatility caused by the litigation." For a company that had been paying out $100 million or more per year in asbestos settlements, the prospect of freezing that outflow while maintaining dividend payments to shareholders was a straightforward financial gain.

Koch Industries, as a private company, does not have to disclose public-company financial statements. But the court record in Bestwall tells the story numerically. Koch received more than $5 billion in dividends from New Georgia-Pacific between 2017 and 2023 while Bestwall's asbestos claimants remained stayed.4 Chapter 11's priority logic normally puts creditor recoveries ahead of equity distributions when enterprise value is insufficient. The Two-Step changes the frame: the claimants are stayed in bankruptcy, while the non-debtor affiliate continues operating and paying its parent.

The market's reaction to J&J's iterations is instructive. When Judge Lopez dismissed Red River Talc's bankruptcy on March 31, 2025, J&J's shares fell 5.4% in early trading.5 J&J then said it would reverse about $7 billion of a reserve tied to the bankruptcy settlement and return to the tort system.6 In December 2025, a Baltimore jury awarded more than $1.5 billion to Cherie Craft, who alleged that asbestos in J&J talc caused her peritoneal mesothelioma; Reuters described it as the largest single-plaintiff talc award against J&J.7 The verdict did not establish the value of every talc claim, and J&J said it would appeal. But it showed why a capped bankruptcy trust had such financial value for the company: individual trial outcomes could be much larger, much more variable, and much harder to model.

What the Two-Step was trying to protect, in financial terms, was not merely the proposed settlement amount. It was optionality: the ability to cap liability, reduce exposure to extreme jury verdicts, and dampen future earnings volatility without exposing the operating business to bankruptcy oversight. The difference between settling tens of thousands of cancer claims through a prepackaged bankruptcy and litigating them individually is not just a forum choice. It can be a multibillion-dollar present-value difference, depending on the verdict distribution.

V. The Legal Map I: Third Circuit — Distress as the Gating Requirement

The Third Circuit's January 30, 2023 decision in In re LTL Management, LLC was written by Judge Thomas L. Ambro — one of the most respected bankruptcy jurists in the federal system, a former partner at Skadden Arps, and a judge who has spent two decades developing the Third Circuit's bankruptcy doctrine. His opinion is sixty pages long and operates on multiple levels simultaneously.8

At the statutory level, the ruling holds that a Chapter 11 petition filed without "good faith" under § 1112(b) of the Bankruptcy Code must be dismissed, and that good faith, in the Third Circuit, requires a showing of financial distress. The doctrine is not new — the Third Circuit has required it since at least In re Integrated Telecom Express, Inc., 384 F.3d 108 (3d Cir. 2004). What the LTL opinion does is apply the doctrine to a new fact pattern: a debtor that is not merely solvent but has affirmative contractual access to virtually unlimited financial resources through a parent that is among the largest and most creditworthy corporations in the world.

The "ATM disguised as a contract" characterization was analytically exact rather than merely rhetorical. LTL's own prior court filings had admitted that there was not "any imminent or even likely need" to invoke the funding agreement to its maximum amount. The agreement was backstop insurance, not emergency funding. Judge Ambro treated this admission as dispositive: a company that says it does not need its ATM is not in financial distress, no matter how large the ATM is.?

The Third Circuit did not, however, hold that the Two-Step could never work in the Third Circuit. The opinion explicitly declined to "lay down a rule that no nontraditional debtor could ever satisfy the Code's good-faith requirement," and noted that a Two-Step might survive a motion to dismiss if the debtor could demonstrate that "future insolvency is a realistic possibility based on meaningful evidence — not just the result of a highly speculative worst-case scenario." This language left a conceptual door open while slamming the actual door in J&J's face.

J&J's response — walking through that conceptual door by manufacturing the required financial distress — exposed the second, deeper problem with the doctrine. If a debtor can manufacture financial distress by voluntarily shrinking its funding agreement, then the financial distress requirement becomes a formality that any sophisticated corporate legal team can satisfy. The Third Circuit's July 2024 opinion dismissing LTL's second bankruptcy, also written by Judge Ambro, closed this escape route: an "attenuated possibility of insolvency far in the future" is not sufficient financial distress, even if the debtor has arranged its affairs to make that possibility slightly less attenuated.

Good intentions, Judge Ambro wrote in the first opinion, "such as to protect the J&J brand or comprehensively resolve litigation do not suffice alone. What counts to access the Bankruptcy Code's safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not. Thus we dismiss its petition."

VI. The Legal Map II: Fourth Circuit — A Safe Harbor in Charlotte

The Fourth Circuit has been more receptive to these cases than the Third Circuit. Rulings on jurisdiction, the automatic stay, and bad faith have made the Western District of North Carolina the most hospitable venue for the strategy, while Judge Robert Bruce King's repeated dissents have supplied the sharpest judicial critique of the framework.

The jurisdictional ruling in Bestwall LLC v. Official Committee of Asbestos Claimants, No. 24-1493 (4th Cir. Aug. 1, 2025) is the most consequential. The asbestos claimants committee argued that federal courts lack subject-matter jurisdiction over a Chapter 11 petition filed by a debtor that is not, and cannot be, insolvent — that the Constitution's Bankruptcy Clause requires a debtor to pose at least a credible risk of inability to pay its debts before it can invoke the federal bankruptcy power. This is not a frivolous argument. It derives from scholarship asserting that the Founding-era understanding of "bankruptcies" was limited to situations of genuine payment inability, and that allowing solvent corporations to invoke bankruptcy protection expands the federal judicial power beyond its constitutional limits.

The Fourth Circuit majority rejected this jurisdictional argument on narrow statutory grounds: because Bestwall's Chapter 11 petition was filed "under the laws of the United States," federal Article III courts have "arising under" jurisdiction over it, full stop. Whether the debtor is in financial distress goes to the merits of a potential § 1112(b) dismissal motion — a question that the claimants committee had raised and lost at the trial court level — not to the court's power to hear the case at all.4

Judge King, dissenting from the denial of en banc rehearing in October 2025, called the result "obscene — and unconstitutional." He described what had happened to Bestwall's parent: "Georgia-Pacific, Bestwall's parent company, sought to evade tort liability for harm caused by decades of manufacturing and selling dangerous products containing asbestos. Through a corporate sleight-of-hand maneuver known as the 'Texas Two-Step,' Georgia-Pacific restructured itself to isolate its asbestos liabilities into a newly created entity, Bestwall LLC. It then used that shell entity to file for Chapter 11 bankruptcy."5 The majority, King argued, was rubber-stamping "a financially-healthy and fully-solvent corporation" placing its liabilities "behind the firewall of bankruptcy protection" without "the scrutiny, transparency, and risk that a Chapter 11 bankruptcy petition should entail."

The February 2026 DBMP ruling added a second data point. Judge Paul Niemeyer, writing for the majority, affirmed the bankruptcy court's refusal to lift the automatic stay for three plaintiffs — including the estate of a deceased Air Force veteran who had developed mesothelioma from exposure to CertainTeed products — on the grounds that DBMP had filed with the "legitimate purpose of pursuing a § 524(g) plan" and had shown no bad faith.6 Judge King, dissenting again, described CertainTeed as "acting through its stooge subsidiary, the Debtor DBMP, and at the behest of its French parent, Saint-Gobain" and said the majority was continuing the court's "distressing march into being the 'safe harbor' for the 'big guys.'"7

The en banc vote in Bestwall was 8-6 to deny rehearing. By February 2026, the claimants' committee had filed a certiorari petition in the Supreme Court, docketed as No. 25-1013, asking whether Chapter 11 is available to a debtor that lacks financial distress.6

VII. The Fraudulent Transfer Time Bomb

Every Texas Two-Step case sits on an unexploded legal device: the fraudulent transfer claim.

The argument is straightforward. In a conventional divisive merger used for the Two-Step, GoodCo receives assets worth billions and assumes minimal liabilities. BadCo receives the full mass-tort liability and minimal assets. The transaction is structured to render BadCo insolvent — or, at minimum, to transfer value from the liability-holding entity to the asset-holding entity without fair equivalent consideration. Both the Bankruptcy Code (§ 548) and state fraudulent transfer law (in most jurisdictions following the Uniform Fraudulent Transfer Act) permit the avoidance of such transfers and the recovery of the transferred property or its value.

The Texas divisive merger statute complicates this argument by declaring that allocated property vests "without any transfer or assignment having occurred."8 But as Levitin and Mark Roe, writing with William Organek, have argued, a state-law label does not necessarily bind federal bankruptcy law. Section 548 defines a "transfer" broadly as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or an interest in property."? A court applying federal bankruptcy law to a Texas divisive merger could therefore look through the statutory label to the economic substance: assets separated from liabilities, with the benefit flowing to GoodCo and the burden to BadCo.

The Third Circuit flagged this issue explicitly in the LTL opinion, noting that J&J's decision to reduce LTL's rights under the funding agreement from $61.5 billion to $30 billion between the first and second bankruptcies raised potential fraudulent transfer concerns. A complaint on that subject — Love v. LLT Management, LLC — was pending before the New Jersey District Court as of mid-2024.4 In LTL's second bankruptcy, the Official Committee of Talc Claimants argued that J&J's termination of the original funding agreement constituted "the largest fraudulent transfer in United States history."4

The fraudulent transfer claim represents the long-term legal exposure that even successful Two-Steps may not fully eliminate. If a court in a future asbestos case concludes that GoodCo received the assets of the combined enterprise without paying fair value — using the economic substance of the transaction rather than Texas statutory language as the measure — then the entire architecture of asset protection collapses. GoodCo becomes jointly liable with BadCo for the mass-tort claims, exactly as if the divisive merger had never happened. This risk, unresolved in any completed case, hangs over every ongoing Two-Step proceeding.

VIII. Purdue's Shadow: Third-Party Releases and the Supreme Court

Any analysis of the Texas Two-Step that ignores Purdue Pharma is incomplete, because the Supreme Court's June 27, 2024 decision in Harrington v. Purdue Pharma, L.P. directly affects what the Two-Step can ultimately deliver.

Purdue Pharma, the OxyContin manufacturer, filed for Chapter 11 in 2019 after the Sackler family had withdrawn approximately $11 billion from the company in anticipation of litigation. The family proposed to contribute between $4.3 and $6 billion in exchange for what amounts were nonconsensual third-party releases: permanent injunctions barring opioid claimants from suing Sackler family members directly, even those claimants who had not consented to be bound.4 The Second Circuit approved the releases. The Supreme Court reversed, 5-4, with Justice Gorsuch writing for the majority: the Bankruptcy Code "does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seeks to discharge claims against a nondebtor without the consent of affected claimants."4

The relevance to the Two-Step is direct. The entire point of the Two-Step is to obtain a third-party release — specifically, a § 524(g) channeling injunction that bars all current and future claimants from suing GoodCo directly, even claimants who never consented. Section 524(g) authorizes exactly this kind of nonconsensual release, but only for asbestos claims and only under its specific statutory requirements. Harrington held that § 1123(b)(6)'s catch-all provision cannot be read to authorize equivalent releases for non-asbestos claims. For J&J's ovarian and gynecologic-cancer talc claims — which are not ordinary § 524(g) asbestos claims even though talc litigation also includes mesothelioma cases alleging asbestos exposure — this ruling complicated the path to a confirmed plan.44

Red River Talc's plan, dismissed in March 2025, included releases of claims against non-bankrupt entities that Judge Lopez found could not be approved as structured after Harrington. Reuters reported that the judge also faulted the vote solicitation process and the claimed level of claimant support. For future Two-Steps outside conventional asbestos § 524(g) cases, Harrington narrows the range of available exit strategies.

The deeper structural tension between Harrington and the Two-Step is this: the Two-Step's promise to claimants is that they will be compensated through a trust rather than through the tort system. But if the trust cannot provide a binding release of GoodCo — either because the claim is not technically an asbestos claim under § 524(g) or because Harrington has eliminated the nonconsensual release for non-asbestos claims — then the parent company can never achieve the "global peace" that was the ostensible rationale for the Two-Step in the first place. A trust that pays mesothelioma claimants but cannot stop ovarian cancer claimants from suing J&J directly is not the end of the talc litigation. It is an enormously expensive detour.

IX. The Human Ledger

The financial and legal analysis of the Texas Two-Step is conducted in a context that is easy to lose in the doctrinal complexity: the people waiting for the bankruptcy proceedings to resolve are dying.

Since Bestwall filed for Chapter 11 in November 2017, more than 25,000 asbestos claimants have died with their cases unresolved.45 Mesothelioma, the primary disease at issue in the asbestos cases, has a median survival time of approximately twelve to eighteen months from diagnosis. A person who filed a claim against Georgia-Pacific in 2019 and lived long enough to see the Fourth Circuit's 2025 Bestwall ruling has done so against the odds. Many have not. The proposed $1 billion trust for Bestwall claimants — offered as justification for the bankruptcy's legitimacy — has not been approved, funded, or distributed in eight years of proceedings.

The accounting of professional fees during this period is equally stark. Jones Day had collected $107 million in court-approved bankruptcy fees across four Two-Step cases by early 2023, with some partners billing at $1,450 per hour.46 Court-approved bankruptcy fees do not capture every dollar earned by lawyers and advisers in related litigation and restructuring work, but they reveal the asymmetry. As Adam Levitin of Georgetown observed, the most visible financial flow during the early years of the Two-Step ran from debtor estates to professionals, not to claimants.47 The claimants received delay; the professionals received fees.

This is not merely an efficiency critique. It reflects a structural asymmetry of urgency. The corporate executives managing the Two-Step have time. Their companies are profitable, their dividends are flowing, and their legal fees are coming from the bankruptcy estate rather than from operating cash. The claimants — people with mesothelioma, ovarian cancer, asbestosis — do not have time. Senator Whitehouse identified this asymmetry precisely: "Without the pressure of trials to focus the minds of executives, companies using these bankruptcy schemes can delay and engage in a breath-holding contest over settlements with claimants, many of whom, particularly in asbestos cases, are very sick."48 The Two-Step converts that asymmetry of urgency into a negotiating advantage for the party with the most money and the most time.

X. The Defense at Its Strongest

The strongest defense of the Two-Step starts with a real problem: mass-tort litigation often serves claimants badly.

Greg Gordon's critique of the mass-tort MDL system is not without foundation. The multidistrict litigation process, created by Congress in 1968, was designed for product liability cases of moderate scale. When applied to hundreds of thousands of asbestos claims, or 268,000 combat earplug cases, or 90,000 talc claims, it produces outcomes that serve no party well. Bellwether trials generate verdicts that range from zero to hundreds of millions of dollars, depending on the jurisdiction, the judge, the jury pool, and the expert witnesses available. Claimants with strong medical evidence and clear causal pathways often receive less than claimants with weaker cases who filed in plaintiff-friendly jurisdictions. The transaction costs — including the plaintiff attorneys' contingency fees, which routinely run to 40% of recoveries — consume a substantial portion of whatever the defendants eventually pay.

The bankruptcy trust mechanism, by contrast, is designed to solve exactly these problems. A well-designed § 524(g) trust provides a uniform, objectively administered process: claimants present evidence of exposure and disease, the trust evaluates claims under pre-established criteria, and payments are made on a predictable schedule. The Manville trust, established in 1988, has paid billions of dollars to asbestos victims over four decades. The Owens Corning and Federal-Mogul trusts, established in the 2000s, function similarly. Anthony Casey and Joshua Macey at Chicago Law argue that if the funding agreement genuinely guarantees that the trust will have enough money to pay all valid claims in full, then the Two-Step's only effect is to change the forum — from jury trials to an administrative trust — without reducing the ultimate recovery.4?

This argument has force, and it is worth identifying where it breaks down. It breaks down at the funding agreement. A funding agreement that can be replaced, reduced, or litigated over before a later filing — as happened when J&J moved from LTL's $61.5 billion agreement to a $30 billion agreement — is not the same as cash in a trust. It is a negotiating position embedded in a contract. Claimants who looked at the first backstop and concluded that full payment was possible were not irrational. The parent later changed the architecture.

The deeper problem is that the Two-Step as designed gives GoodCo a structural veto over how much the trust is funded. The parent guarantees the trust up to a cap it can negotiate. If the cap is too low to pay all valid claims, claimants receive fractional recovery. But the parent's negotiating leverage in setting the cap is the bankruptcy stay itself: claimants who want their claims resolved before they die have an urgent interest in settling for whatever the parent is willing to put into the trust. The trust mechanism that the Two-Step proposes is not the arms-length administrative process of the Manville trust. It is a coerced negotiation in which one side has unlimited time and the other has months to live.

XI. International Parallels: What Foreigners Do Instead

The Texas Two-Step is an American invention, in the precise sense that it depends on a peculiarity of Texas corporate law that has no exact equivalent elsewhere in the world. But the underlying problem — how does a multinational corporation manage catastrophic mass-tort liability while continuing to operate and pay dividends — is not peculiar to the United States. Other jurisdictions have developed different instruments for it.

The United Kingdom's Scheme of Arrangement under Part 26 of the Companies Act 2006, supplemented by the Part 26A Restructuring Plan introduced in the Corporate Insolvency and Governance Act 2020, permits a company to propose a binding compromise with its creditors — including, under the Restructuring Plan, a cross-class cram-down over objecting classes — without filing for insolvency.5 The critical difference is that the UK mechanisms are available to companies facing financial difficulties, with no requirement that insolvency be imminent, but the company must put its actual business — not a shell — before the court. There is no UK equivalent of the divisive merger that strips liabilities from a solvent parent and loads them onto a purpose-built entity. More fundamentally, UK schemes of arrangement are subject to a "no worse off" test: dissenting creditors must receive at least as much as they would in the relevant alternative (typically liquidation). This test provides a substantive floor on recovery that the Two-Step's funding agreement does not guarantee.

The Netherlands' Wet Homologatie Onderhands Akkoord (WHOA), which entered force on January 1, 2021, offers another model.5 Combining features of Chapter 11 and the UK Scheme of Arrangement, the WHOA allows a Dutch company to propose a restructuring plan outside formal insolvency, subject to court confirmation, including a cross-class cram-down if two-thirds of each class by value consents. The WHOA is available to companies for which it is "reasonably likely that the debtor cannot continue to pay its debts" — a forward-looking viability standard, not a current insolvency standard, but still a standard that requires genuine financial vulnerability.5 Critically, the WHOA cannot be used by a company to transfer liabilities to a purpose-built shell and then have the shell invoke the proceeding. The restructuring must address the company's actual debt structure.

The contrast with the Two-Step is revealing. Both the UK and Dutch frameworks attempt the same thing the Two-Step attempts: allowing a company to reach a comprehensive resolution of large liability claims without the full disruption of insolvency proceedings. But both require the actual debtor — with its actual assets, actual creditors, and actual business — to come before the court. Neither allows the asset-rich parent to stay outside the proceedings while the liability-poor shell invokes court protection. This distinction is not a technicality. It reflects a fundamental choice about who bears the risk of the restructuring process: in the UK and Dutch models, shareholders bear real economic risk because the company's equity is subject to the court's supervision; in the Two-Step, shareholders are insulated from that risk by design.

Saint-Gobain's use of the Two-Step for its American subsidiary is particularly illuminating in this context. As a French company subject to European insolvency law for its core operations, Saint-Gobain had no ability to execute a French equivalent of the Texas divisive merger for its French liabilities. What it had was an American subsidiary in a jurisdiction whose corporate law allowed the maneuver. The Two-Step was, in part, a form of regulatory arbitrage: a mechanism to apply U.S. bankruptcy law's most favorable features to a liability that a French court would have handled differently.

XII. Congress and the Regulation Gap

The legislative response to the Texas Two-Step has been bipartisan in aspiration and ineffectual in execution.

Senator Sheldon Whitehouse's Senate Judiciary Subcommittee hearing in 2022, titled "Abusing Chapter 11: Corporate Efforts to Side-Step Accountability Through Bankruptcy," generated extensive testimony and committee interest.5 Dick Durbin — as Chairman of the Senate Judiciary Committee — and Josh Hawley joined Whitehouse in filing a January 2024 amicus brief in the Bestwall proceedings at the Fourth Circuit. Bipartisan opposition to the Two-Step is symbolically significant. Bankruptcy reform is not a subject that typically produces cross-ideological consensus; the fact that a conservative Republican and two liberal Democrats were united in urging a federal appeals court to reject the strategy suggests that the public interest dimension of the issue has cut across the usual partisan alignments.

The Ending Corporate Bankruptcy Abuse Act of 2024, introduced in July 2024 and reintroduced in December 2024, would create a statutory presumption of bad faith when a bankruptcy filing follows a Texas Two-Step divisive merger, and would prohibit the extension of the automatic stay to non-debtor affiliates in such cases.54 The legislation, if enacted, would effectively make the Two-Step unusable as designed. But it has seen no floor action in either chamber. The history of bankruptcy reform in Congress is, with a few exceptions, a history of proposals that die in committee — not because there is active opposition, but because the relevant constituencies (primarily corporate debtors and their advisors) are well-organized and the affected parties (tort claimants) are not.

The administrative response has been marginally more active. The U.S. Trustee Program — the Department of Justice's bankruptcy watchdog — has actively intervened in each of the major Two-Step cases, arguing for dismissal on bad-faith grounds.55 U.S. Trustee Kevin Epstein filed a motion opposing Red River Talc's bankruptcy in October 2024, arguing that "J&J seeks to use the bankruptcy process to immunize itself from billions of dollars of personal injury liability without actually subjecting itself to bankruptcy."56 The UST's participation represents the executive branch's view that the Two-Step is an improper use of the bankruptcy system — a view that has been consistent across administrations.

XIII. The Circuit Split, the Supreme Court, and What Comes Next

The gap between the Third and Fourth Circuits is now sufficiently deep, and its financial consequences sufficiently large, that Supreme Court review has become a concrete possibility rather than an abstract forecast.

The Fourth Circuit's Bestwall ruling produced an 8-6 vote on en banc denial. That split — within a single circuit — mirrors the broader academic disagreement about the Two-Step's legitimacy. A bankruptcy court in the Seventh Circuit dismissed Aearo Technologies' bankruptcy before 3M's $6 billion earplug settlement overtook the appeal; the Western District of North Carolina, by contrast, has remained the most permissive venue for Texas Two-Step debtors.57 The result is a situation in which the same underlying corporate behavior — a divisive merger transferring mass-tort liability to a shell followed by an immediate Chapter 11 filing — produces entirely different outcomes depending on where the shell is incorporated and where it files.

Table 2. Circuit Approaches to the Texas Two-Step: Key Legal Standards

Sources: In re LTL Management, 64 F.4th 84 (3d Cir. 2023); Bestwall LLC v. OCC, No. 24-1493 (4th Cir. Aug. 2025); Herlihy v. DBMP, No. 24-2109 (4th Cir. Feb. 2026); In re Aearo Techs. dismissal, S.D. Ind. June 2023; In re Red River Talc, No. 24-90505 (Bankr. S.D. Tex. Mar. 31, 2025).

Three doctrinal questions remain open that the Supreme Court would eventually need to address if it accepts certiorari. First, the constitutional question: does the Bankruptcy Clause of Article I, § 8 require that a debtor face at least a credible risk of insolvency, such that a solvent company invoking Chapter 11 acts outside Congress's enumerated power? The Harvard Bankruptcy Roundtable's academic symposium on the Texas Two-Step identified this as the most profound unresolved question, with constitutional arguments from both sides drawing on Founding-era evidence.58 Second, the fraudulent transfer question: does the Texas divisive merger's "no transfer" language bind federal bankruptcy courts, or can they look through the state statutory label to the economic substance of the transaction? Third, the Harrington interaction: how does the Supreme Court's 2024 holding on nonconsensual third-party releases apply to § 524(g)'s explicit authorization of channeling injunctions in asbestos cases, particularly where the debtor is a purpose-built shell rather than an operating company?

For investors and corporate finance practitioners, the outcome of these questions is not abstract. If the Fourth Circuit's permissive framework prevails nationally, every corporation facing large-scale product liability — PFAS "forever chemical" manufacturers, opioid defendants, roundup claimants, future pharmaceutical mass-tort defendants — has a viable playbook. The asbestos cases are the proof of concept; the applications are not limited to asbestos. If the Third Circuit's framework prevails, corporations must either file their entire operating business for Chapter 11 — accepting the full costs of bankruptcy, including restricted dividends, court oversight of compensation and governance, and debtor-in-possession lending — or litigate their mass-tort exposure in the civil courts, case by case, verdict by verdict.

The financial difference between these two regimes is large. For a company like J&J, the difference between resolving tens of thousands of talc claims through a prepackaged bankruptcy and litigating them in individual trials could reach billions of dollars in present value. That spread is the financial stake of the circuit split.

XIV. The Reckoning

Four things are true about the Texas Two-Step. The argument only works if all four remain in view.

The mass-tort litigation system genuinely does not work well. Multidistrict litigation is slow, expensive, variable in its outcomes, and frequently results in most claimants receiving either nothing or a fraction of what a well-designed administrative process would provide. The Manville trust, the Dalkon Shield trust, and the dozens of § 524(g) trusts established in traditional mass-tort bankruptcies have, on balance, compensated more claimants more equitably than jury trials would have. The bankruptcy mechanism for resolving mass torts has a legitimate purpose and a genuine historical record.

The Texas Two-Step is not that mechanism. It is a structural modification of that mechanism designed to capture its benefits — the channeling injunction, the global release, the litigation freeze — while eliminating its costs. The cost that traditional mass-tort bankruptcy imposed on corporate defendants was submission: submitting the operating business to the court's jurisdiction, accepting restrictions on dividends and compensation, opening the balance sheet to creditor scrutiny, and accepting that the court — not the corporate board — had the final say on the value of the estate. The Two-Step eliminates all of this. GoodCo's board does not place the operating company into bankruptcy. GoodCo's dividends can continue flowing to shareholders. GoodCo's balance sheet is not subjected to the same bankruptcy-court control as a debtor's estate. Koch Industries received $5 billion from New Georgia-Pacific while Bestwall's asbestos victims waited in procedural limbo.

The funding agreement, in theory, solves the problem: if GoodCo guarantees adequate funding for the trust, claimants receive the same compensation they would have through a traditional § 524(g) process. In practice, the funding agreement is a contract negotiated and litigated by a party with money and time against claimants who often have neither. J&J reduced the apparent backstop by more than $30 billion between LTL's first and second filings. The commitment that was supposed to make the Two-Step fair to claimants was adjusted to make the parent's legal strategy more viable.

The financial market's verdict on the Two-Step is, in the end, more honest than any judicial opinion. When Red River Talc was dismissed and J&J announced it would reverse about $7 billion in reserves, the stock fell 5.4% in early trading.5? The market was pricing what the Two-Step was worth: not efficiency for claimants, but certainty for shareholders. The bankruptcy system was being used as a mechanism to transfer financial risk from equity to tort creditors — to lock in a below-market settlement, to cap the distribution, and to buy the parent corporation's way out of the uncertainty of civil litigation.

That is not what the Bankruptcy Code was written to do. It was written to provide a fresh start to the honest but unfortunate debtor — the company that has genuinely exhausted its options in the market and needs the collective orderly process that bankruptcy provides to give its creditors the best possible outcome. The Texas Two-Step inverts every element of this design. The debtor is not honest — it was created to file for bankruptcy. It is not unfortunate — its parent is among the wealthiest corporations in the world. Its creditors are not being given the best possible outcome — they are being given a coerced discount, structured to avoid the jury system that might have given them more.

In December 2025, a Baltimore jury gave one plaintiff more than $1.5 billion. That verdict may be reduced on appeal. It may be reversed on procedural grounds. But for now it is the tort system's answer to the question the Two-Step was designed to remove from juries: what is the value of an individual mass-tort claim when twelve people hear the full evidence?

The answer may be more than a capped trust would pay. It may be much more. That is why the Texas Two-Step matters: it is not only a bankruptcy doctrine. It is a way to decide who gets to price injury — juries, judges, claimants, or the corporations that designed the shell.