The Texas Two-Step bankruptcy strategy faces renewed scrutiny and legislative challenges that could fundamentally reshape how corporations manage mass tort liabilities. Yes, the tactic continues to face obstacles from multiple fronts: federal courts have dismissed Johnson & Johnson’s three separate attempts to use it for talc litigation, bipartisan lawmakers have introduced legislation to ban it, and the Supreme Court may soon weigh in on whether the maneuver constitutes bad faith bankruptcy abuse. The strategy itself is straightforward—a company undergoes a divisive merger that isolates all mass tort liability into a newly created subsidiary, which then files Chapter 11 bankruptcy to halt ongoing litigation and channel claims through a settlement trust. But what appeared to be a clean legal solution has become deeply controversial, with courts, legislators, and tort claimants questioning whether financially healthy corporations are using the process to escape accountability.
The debate intensified throughout 2024 and 2025 as courts rejected high-profile attempts and lawmakers moved to ban the practice outright. Federal judges found that companies claiming financial distress actually had the resources to pay claims outside of bankruptcy protection. Simultaneously, mass tort victims, asbestos claimants, and talc injury plaintiffs watched their cases stall while corporations sought legal shelter. The outcome of these competing challenges will determine whether the Texas Two-Step survives as a legitimate corporate restructuring tool or becomes a banned tactic that opens companies to fraudulent transfer litigation.
Table of Contents
- Why Lawmakers Are Moving to Block the Texas Two-Step
- How the Texas Two-Step Actually Works and Why Courts Are Skeptical
- Johnson & Johnson’s Repeated Defeats and What They Signal
- The Supreme Court’s Emerging Involvement and Stakes
- The Bad Faith Debate and Judicial Skepticism
- The 100-Claim Threshold and Why It Matters
- The Current State of Play and Pending Challenges
Why Lawmakers Are Moving to Block the Texas Two-Step
Bipartisan opposition to the Texas Two-Step crystallized in July 2024 when Senators Sheldon Whitehouse (D-RI) and Josh Hawley (R-MO), along with Representatives Emilia Sykes (D-OH) and Lance Gooden (R-TX), introduced the Ending Corporate Bankruptcy Abuse Act of 2024 (ECBA). The proposal represents rare agreement on Capitol Hill about the dangers of allowing wealthy corporations to isolate tort liability through strategic restructuring. Rather than outright ban the practice, the ECBA creates a presumption of bad faith for bankruptcies showing Texas Two-Step hallmarks, and it limits litigation stays on non-bankrupt affiliates when a parent company has engaged in a Two-Step within the previous four years—but only for cases involving more than 100 tort claims. This 100-claim threshold was deliberately chosen to target only the largest, most damaging mass tort scenarios where hundreds or thousands of injured parties face delayed compensation.
The legislation’s sponsors have explicitly stated their concern: financially healthy corporations are using bankruptcy law as a sword rather than a shield, transferring genuine liabilities to shell entities to dodge accountability. When Georgia-Pacific created Bestwall LLC to absorb asbestos liabilities, for example, the parent company retained its other profitable divisions while the subsidiary faced the legal exposure. The legislation targets this exact splitting strategy by making it presumptively suspect in bankruptcy court, shifting the burden to defendants to prove legitimate business purposes rather than allowing courts to rubber-stamp the arrangement. Senators Durbin, Whitehouse, and Hawley specifically urged the Supreme Court to review Bestwall’s bankruptcy, arguing that the manufacturer was not financially distressed and should not have been permitted to use the maneuver at all.
How the Texas Two-Step Actually Works and Why Courts Are Skeptical
The mechanics of the Texas Two-Step are straightforward on paper: a parent corporation executes a divisive merger, allocating all mass tort liability—talc claims, asbestos exposure, pharmaceutical injuries, or defective product cases—to a newly created, separate entity. That subsidiary then files Chapter 11 bankruptcy immediately, which triggers an automatic stay halting all pending litigation. The stay stops the clock on discovery, depositions, and trial preparation, effectively freezing tort plaintiffs’ cases in place. In bankruptcy court, the subsidiary negotiates a settlement trust funded by the parent company, and the tort claims get channeled into that trust rather than proceeding individually or as class actions. From the parent’s perspective, this isolates the liability, caps the exposure, and allows the profitable core business to continue unimpeded.
The limitation of this approach—now recognized by courts—is that it only works if the subsidiary actually meets the legal definition of financial distress required for Chapter 11 protection. In March 2025, Federal Judge Kaplan dismissed Johnson & Johnson’s third bankruptcy attempt on precisely these grounds. The court found that LTL Management, the subsidiary J&J created to hold talc liabilities, did not meet the requisite standard of financial distress. J&J’s first two bankruptcy attempts were also dismissed as bad faith filings, meaning the company has now lost three separate times attempting to consolidate talc claims through the Texas Two-Step. The repeated dismissals signal that courts are now applying heightened scrutiny to these filings, no longer accepting surface-level claims of hardship without rigorous examination of the parent company’s actual financial position. When Bestwall LLC filed its own asbestos bankruptcy, claimants and their representatives were quick to file a certiorari petition arguing the same deficiency: Georgia-Pacific remains profitable; Bestwall was merely a legal construct to shield liability.
Johnson & Johnson’s Repeated Defeats and What They Signal
Johnson & J’s experience with the Texas Two-Step offers a cautionary case study in how courts are now approaching these filings. The company created LTL management specifically to consolidate talc litigation claims—claims arising from hundreds of thousands of people who alleged that talc-based products caused ovarian cancer and other injuries. J&J’s first attempt at a Two-Step bankruptcy was dismissed by the court as bad faith. The second attempt was also rejected. By the time the third filing arrived in 2024-2025, the company had lost all credibility with the judiciary. Judge Kaplan’s March 2025 dismissal was devastating not just because it rejected the bankruptcy on the merits, but because it explicitly found that the subsidiary lacked genuine financial distress.
J&J had the resources to settle claims outside of bankruptcy; the Texas Two-Step was merely a forum-shifting mechanism to avoid jury trials and tort damages. The significance of J&J’s three-time loss cannot be overstated. A major pharmaceutical corporation with resources to hire top bankruptcy counsel tried repeatedly to use a strategy that had worked for other companies in earlier years, only to be rebuffed each time by federal judges who saw through the maneuver. This signals a fundamental shift in judicial skepticism. Courts that may have accepted a Texas Two-Step filing at face value five or ten years ago now demand detailed proof of financial necessity. Talc claimants who had their cases frozen by automatic stays in earlier Two-Step attempts now had the stays lifted, allowing their litigation to move forward. The dismissals also mean that J&J remains exposed to ongoing jury trials and tort liability rather than the capped, bankruptcy-channeled resolution the company sought.
The Supreme Court’s Emerging Involvement and Stakes
The Supreme Court has not yet weighed in on the Texas Two-Step’s constitutionality or legality, but that may be about to change. The Official Committee of Asbestos Claimants filed a petition for certiorari regarding Bestwall LLC’s bankruptcy, and Senators Durbin, Whitehouse, and Hawley submitted public letters to the Court urging review of the case. These actions suggest that SCOTUS may soon decide whether the Texas Two-Step is a permissible bankruptcy strategy or an abuse of the Chapter 11 process. The oral arguments and decision, if the Court accepts the case, would establish binding national precedent affecting every future attempt to use the maneuver.
What’s at stake is not merely the outcome of individual bankruptcies but the framework for how corporations can manage mass tort liability going forward. If the Supreme Court rules that the Texas Two-Step constitutes bad faith bankruptcy, or that subsidiary companies created solely to isolate liability lack the requisite financial distress for Chapter 11 protection, the tactic becomes essentially unusable. Conversely, if SCOTUS upholds the strategy or sets a low bar for financial distress, companies facing asbestos, talc, opioid, and other mass tort claims would have a clear legal pathway to bankruptcy protection. The Bestwall case is particularly significant because asbestos bankruptcy has been ongoing since the 1970s, and there is deep litigation history about the standards for trust administration and claim resolution. A Supreme Court ruling could either validate or invalidate decades of asbestos bankruptcy practice.
The Bad Faith Debate and Judicial Skepticism
The core question in Texas Two-Step litigation is whether the bankruptcy filing constitutes bad faith under Chapter 11. Bad faith occurs when a debtor files not to obtain a fresh start or restructure operations, but to achieve some other goal—in this case, to isolate liability, halt litigation, and force claimants into a settlement structure the company controls. Federal courts have developed a multi-factor test for bad faith, examining factors like the debtor’s financial condition, the reason for filing, whether the debtor intends to operate as a going concern, and whether the filing is an abuse of bankruptcy process. When Judge Kaplan examined LTL Management in March 2025, he looked at J&J’s overall financial position, not just the subsidiary’s balance sheet. He found that J&J had the ability to pay claims without bankruptcy protection, making the filing presumptively suspect.
A warning for corporations considering the Texas Two-Step: courts have made clear they will scrutinize the parent company’s finances, not just the subsidiary’s. If the parent is profitable and only created the subsidiary to segregate liability, judges will likely find bad faith and dismiss the case. The limitation this imposes is significant: companies that actually need bankruptcy protection—those facing genuine insolvency across the organization—can still use traditional Chapter 11 to reorganize. But companies seeking to shield profitable operations from tort liability can no longer count on the automatic stay and bankruptcy channeling system to do so. This has created a chilling effect, with companies reconsidering Two-Step strategies knowing that federal courts are now far more willing to dismiss them.
The 100-Claim Threshold and Why It Matters
The Ending Corporate Bankruptcy Abuse Act of 2024 deliberately targets only mass tort cases involving more than 100 claims. This threshold was not arbitrary. A single product liability case or even a dozen asbestos claims can be handled through traditional bankruptcy procedures. But when a company faces 100, 500, or 5,000 claims simultaneously—as in the J&J talc litigation or the Bestwall asbestos bankruptcy—the scale fundamentally changes the dynamics.
The 100-claim threshold ensures that the legislation, if enacted, would focus on the largest, most damaging mass tort scenarios where the incentive to use the Texas Two-Step is highest. Smaller disputes would continue to be governed by existing bankruptcy law and principles. The threshold also reflects congressional recognition that mass tort bankruptcies involve different policy considerations than traditional insolvencies. A company in financial distress due to operational failure needs bankruptcy protection; a company facing existential mass tort liability that attempts to isolate that liability through the Texas Two-Step while remaining profitable presents different concerns about access to justice for thousands of injured parties.
The Current State of Play and Pending Challenges
As of 2026, the Texas Two-Step remains a contested strategy with multiple challenges still in litigation. The Bestwall asbestos bankruptcy petition is still pending before the Supreme Court, with a decision likely within the next year or two. The Ending Corporate Bankruptcy Abuse Act has been reintroduced in Congress but has not yet passed into law, leaving the tactic technically available but heavily scrutinized. J&J’s failed attempts have demonstrated that courts will not automatically accept Two-Step filings, but the strategy is not yet explicitly prohibited by statute.
This creates a legal gray zone where new attempts might still be filed, but the likelihood of success appears substantially diminished by recent judicial decisions and legislative opposition. The asbestos claimant committee’s petition in the Bestwall case noted that Georgia-Pacific remains a profitable company operating multiple divisions beyond Bestwall, yet the subsidiary bears all asbestos liability while the parent retains the benefits of the profitable business segments. This argument echoes the reasoning judges applied in the J&J dismissals. If the Supreme Court accepts the Bestwall petition and rules against the Texas Two-Step, it would effectively end the strategy across all mass tort categories. If the Court declines to hear the case or rules narrowly, the tactic would survive but only in circumstances where courts can verify genuine financial distress—a significantly higher hurdle than existed before 2024.