J&J's Texas Two-Step: 3 Failed Attempts

Between 2021 and 2024, Johnson & Johnson attempted three times to use a controversial bankruptcy maneuver known as the “Texas Two-Step” to resolve tens of thousands of lawsuits alleging its talc-based baby powder caused cancer. All three attempts failed, with courts ruling that one of the world’s most profitable companies could not use bankruptcy protections designed for financially distressed entities.

What Is the Texas Two-Step?

The “Texas Two-Step” is a legal strategy that exploits Texas state law to isolate liabilities from assets:

1. Step One: A company uses a Texas divisional merger to split into two entities, one holding valuable assets and operations, the other holding all legal liabilities
2. Step Two: The liability-holding company files for bankruptcy, automatically freezing all lawsuits against it

The strategy allows profitable companies to seek bankruptcy protection for their liabilities while continuing normal business operations. Critics call it an abuse of the bankruptcy system, which was designed to help genuinely distressed companies reorganize.

The First Attempt: LTL Management (2021)

Background

By late 2021, Johnson & Johnson faced approximately 38,000 ovarian cancer lawsuits and over 400 mesothelioma lawsuits related to claims that its talc products contained asbestos. The company had already lost several major jury verdicts, including a $4.69 billion judgment in St. Louis in 2018.

The Maneuver

In October 2021, J&J executed the Texas Two-Step:

1. Created a new subsidiary called LTL Management LLC
2. Transferred all talc-related liabilities to LTL
3. Retained all operating assets and profits in “New Consumer”
4. Had LTL file for Chapter 11 bankruptcy in North Carolina

J&J also entered a funding agreement promising to cover LTL’s expenses up to $61.5 billion, a figure meant to demonstrate the subsidiary could pay claims while signaling the scale of potential liability.

Court Rejection (January 2023)

The Third Circuit Court of Appeals dismissed LTL’s bankruptcy filing in January 2023, ruling it was not made in “good faith.” The court noted:

“LTL was created specifically to file for bankruptcy and was backstopped by Johnson & Johnson, one of the most profitable companies in the world.”

The court found that LTL faced no genuine financial distress, the core requirement for bankruptcy protection.

The Second Attempt (April 2023)

Just months after the first dismissal, J&J tried again. In April 2023, LTL filed a second bankruptcy petition, this time in New Jersey federal court.

The company argued it had restructured the funding agreement to address the court’s concerns. However, in July 2023, the bankruptcy court again dismissed the case, finding that the fundamental problem remained: J&J itself was not in financial distress.

The Third Attempt: Red River Talc (September 2024)

In September 2024, J&J made a third attempt using a new subsidiary called Red River Talc LLC, filing in U.S. Bankruptcy Court for the Southern District of Texas.

This attempt included a proposed settlement offering approximately $8 billion to resolve all current and future talc claims. However, critics argued the amount was insufficient given the scale of injuries alleged.

As of early 2025, this third bankruptcy attempt remained pending but faced significant legal challenges.

Impact on Mesothelioma Patients

The bankruptcy maneuvers had significant consequences for mesothelioma patients:

Automatic Stay

Each bankruptcy filing triggered an “automatic stay” that immediately halted all pending lawsuits. For mesothelioma patients with limited life expectancy, these delays could mean dying before their cases were resolved.

Uncertainty

The repeated filings created years of uncertainty for patients who had already waited years for their cases to proceed through the courts.

Potential Settlement Limitations

If a bankruptcy-based settlement is ultimately approved, individual payouts could be significantly lower than jury verdicts, which have exceeded $100 million in some talc-mesothelioma cases.

Legal and Ethical Debate

The J&J case sparked broader debate about corporate use of bankruptcy:

Critics Argue:

• Bankruptcy was designed to help financially distressed companies, not shield profitable ones from liability
• The strategy delays justice for sick and dying plaintiffs
• It sets a dangerous precedent allowing any company to avoid accountability

J&J’s Position:

• A global settlement through bankruptcy could resolve all claims fairly and efficiently
• Individual jury verdicts are unpredictable and can result in widely varying outcomes
• The company maintains its talc products are safe

Congressional Response

The controversy led to proposed legislation, including the FAIR Act, which would limit companies’ ability to use divisional mergers to isolate tort liabilities before filing bankruptcy.

Timeline of Key Events

What Happens Next

Litigation continues on multiple fronts:

1. Red River Talc bankruptcy proceedings in Texas
2. Individual lawsuits that resumed after previous bankruptcy dismissals
3. Ongoing verdicts, including multiple billion-dollar judgments in 2025
4. Potential legislation to address the Texas Two-Step strategy

For mesothelioma patients and their families, the path forward remains uncertain. Those with talc exposure claims should consult with experienced attorneys to understand their options regardless of the bankruptcy proceedings.