Johnson & Johnson, one of the wealthiest corporations in the world, attempted three times to use the federal bankruptcy system to limit its liability in the talcum powder litigation. The strategy, known as the “Texas Two-Step,” involved creating subsidiary companies, transferring talc-related liabilities to them, and then having those subsidiaries file for bankruptcy. All three attempts failed.
The repeated failure of this strategy means that more than 90,000 talcum powder lawsuits are proceeding through the courts. Individual trials are producing significant verdicts, and J&J faces increasing pressure to reach a genuine resolution.
The “Texas Two-Step” Strategy
The Texas Two-Step is a legal maneuver that allows a company to isolate its liabilities by:
- Restructuring under Texas law: Texas allows “divisive mergers,” where a company splits into two entities
- Liability transfer: One entity receives the assets (the “good” company), the other receives the liabilities (the “bad” company)
- Bankruptcy filing: The liability-holding entity files for Chapter 11 bankruptcy
- Automatic stay: The bankruptcy filing triggers an automatic stay, halting all litigation against the filing entity
The effect is to force thousands of plaintiffs into bankruptcy court, where claims are typically resolved for far less than jury verdicts would award, all while the parent company’s assets remain protected.
J&J’s total revenue exceeded $85 billion in 2024. The company has a AAA credit rating, one of only two U.S. corporations to hold that distinction. The argument that it needs bankruptcy protection to resolve talc liabilities has been met with skepticism by federal courts.
First Attempt: LTL Management (2021-2023)
What Happened
In October 2021, J&J executed the Texas Two-Step:
- Created LTL Management LLC through a divisive merger under Texas law
- Transferred all talc-related liabilities (but minimal assets) to LTL Management
- LTL Management filed for Chapter 11 bankruptcy in North Carolina
- J&J funded LTL with a $2 billion trust and a funding agreement, arguing this was sufficient to resolve all claims
The Litigation Pause
The bankruptcy filing triggered an automatic stay, halting approximately 38,000 talcum powder lawsuits. For more than a year, people with cancer who had filed claims were unable to proceed with their cases.
The Rejection
In January 2023, the Third Circuit Court of Appeals dismissed the LTL bankruptcy, ruling that:
- LTL Management was not in genuine financial distress
- The bankruptcy was filed in bad faith to gain a litigation advantage
- The filing was an abuse of the bankruptcy system
- Plaintiffs were denied their right to a jury trial
The court noted that LTL was a “newly created shell company” that existed solely to absorb liabilities and enter bankruptcy. The decision was a landmark ruling against the Texas Two-Step strategy.
Second Attempt: LTL Management Redux (2023-2024)
What Happened
Less than 24 hours after the Third Circuit dismissal, J&J had LTL Management file a second Chapter 11 petition in New Jersey. This time, J&J sweetened the settlement offer:
- Proposed a $8.9 billion settlement to resolve all talc claims
- Claimed to have obtained support from a majority of claimants through a pre-bankruptcy solicitation
- Argued that the larger settlement offer addressed the Third Circuit’s concerns
The Rejection
In July 2024, the Third Circuit again rejected the bankruptcy filing. The court found:
- The second filing suffered from the same fundamental problems as the first
- Creating a subsidiary specifically to file for bankruptcy was still an abuse of the system
- The solicitation process did not adequately represent the interests of all claimants
- Many claimants who “supported” the deal had not been provided with sufficient information
The court emphasized that the bankruptcy code was not designed to let profitable companies avoid the consequences of mass tort litigation.
Third Attempt: Red River Talc (2025)
What Happened
J&J tried a different approach with its third attempt. Instead of using LTL Management, the company:
- Created a new subsidiary called Red River Talc LLC
- Transferred talc liabilities to Red River Talc through a divisive merger
- Had Red River Talc file for Chapter 11 in Houston, Texas (a different jurisdiction)
- Proposed a $9 billion settlement to be paid over 25 years
- Claimed to have obtained support from approximately 83% of current claimants
The Rejection
In March 2025, the bankruptcy court rejected the Red River Talc filing:
- The court found the same fundamental problems as the previous two attempts
- The 25-year payment structure was criticized as insufficient for people with cancer who needed immediate compensation
- The support threshold was questioned, as many supporting claimants had signed on under different terms than what was ultimately proposed
- The court reiterated that creating subsidiaries to exploit bankruptcy protections is not a legitimate use of Chapter 11
With all three bankruptcy attempts rejected, J&J’s talc lawsuits are proceeding in courts across the country. Individual trials are scheduled throughout 2026, and there is no mechanism currently pausing the litigation.
What the Failed Bankruptcies Mean
For People with Cancer
The rejection of all three bankruptcy attempts means:
- Lawsuits proceed: The automatic stays that paused litigation have been lifted
- Jury trials continue: Cases are going to trial, and juries are awarding significant verdicts
- Individual justice: Rather than being forced into a one-size-fits-all bankruptcy settlement, plaintiffs can present their individual cases to juries
- No cap on recovery: Bankruptcy would have limited total payouts; court proceedings allow for full damages
For the Litigation
- Accelerated trial schedule: Courts are moving cases forward more aggressively after years of delays
- Mounting verdicts increase pressure: Each new verdict adds to J&J’s financial exposure
- Settlement negotiations: J&J may eventually negotiate a global settlement outside of bankruptcy, but it will likely need to offer significantly more than the $9 billion proposed in bankruptcy
- Legal precedent: The Third Circuit rulings have discouraged other companies from attempting the Texas Two-Step strategy
For Future Cases
The failed bankruptcy strategy has potential implications beyond talc litigation:
- Other companies considering the Texas Two-Step may be deterred by the three consecutive failures
- Courts have sent a clear signal that creating subsidiaries to exploit bankruptcy protections is not acceptable
- Legislative efforts to ban the Texas Two-Step strategy have gained momentum in Congress
Settlement Proposals vs. Actual Payouts
J&J’s proposed settlements through bankruptcy should be compared to what plaintiffs have actually won at trial:
| Metric | J&J’s Offers | Actual Trial Results |
|---|---|---|
| Total proposed | $6.5B to $9B | $2.5B+ (and growing) |
| Per-claimant (averaged) | ~$65,000 to $100,000 | $250K to $4.69B per case |
| Payment timeline | 25 years | Immediate (upon verdict) |
| Who decides | Bankruptcy judge | Jury of peers |
The disparity between J&J’s per-claimant settlement offers and actual jury verdicts is significant. Many legal observers believe a genuine resolution will require $10 billion or more.
What Comes Next
With the bankruptcy strategy exhausted, J&J faces several paths:
- Continue fighting individual cases: Costly and unpredictable, with each verdict adding to overall exposure
- Negotiate a global settlement: Outside of bankruptcy, likely requiring significantly more money than the $9 billion proposed
- Legislative relief: Lobbying Congress for tort reform or bankruptcy code changes (unlikely to succeed given the current political environment)
- Appeal: J&J could attempt to take the bankruptcy question to the U.S. Supreme Court, though the Court declined to review the Missouri verdict
Most legal analysts expect that mounting trial verdicts will eventually force J&J to negotiate a comprehensive settlement, though the timeline remains uncertain.
What is the Texas Two-Step?▼
The Texas Two-Step is a legal strategy where a company uses Texas divisive merger law to split itself into two entities: one that holds the assets and one that holds the liabilities. The liability entity then files for bankruptcy, forcing all claimants into bankruptcy court where recoveries are typically lower. J&J used this strategy three times, and all three attempts were rejected by federal courts.
Why did J&J use bankruptcy if the company is profitable?▼
J&J argued that the volume of talc lawsuits (90,000+) made a comprehensive resolution through individual trials impractical and that bankruptcy provided a fair mechanism to resolve all claims at once. Critics, and ultimately the courts, viewed the strategy as an abuse of the bankruptcy system by a highly profitable company seeking to limit its liability below what juries were awarding.
Does the bankruptcy failure mean I can still sue?▼
Yes. With all three bankruptcy attempts rejected, the automatic stays that paused litigation have been lifted. New lawsuits can be filed, and existing cases are proceeding to trial. If you have a potential claim, consult an attorney to discuss your options and applicable deadlines.
Could J&J try a fourth bankruptcy filing?▼
While not legally impossible, a fourth attempt is unlikely to succeed. Three consecutive federal court rejections have established strong precedent against the strategy. Any new filing would face immediate challenges and would likely be dismissed quickly. J&J is more likely to pursue a negotiated settlement or continue defending individual cases.
References
Third Circuit Court of Appeals. (2023-01). Third Circuit Dismisses LTL Management Bankruptcy.
https://www.ca3.uscourts.gov/
Third Circuit Court of Appeals. (2024-07). Third Circuit Rejects Second LTL Management Bankruptcy.
https://www.ca3.uscourts.gov/
Bloomberg Law. (2025-03). Red River Talc Bankruptcy Dismissed.
https://news.bloomberglaw.com/
Reuters Legal. (2023). J&J's Texas Two-Step Strategy Explained.
https://www.reuters.com/legal/
Law360. Johnson & Johnson Talc Bankruptcy: Three Failed Attempts.
https://www.law360.com/
U.S. Bankruptcy Court, Southern District of Texas. (2025-03). In Re Red River Talc LLC Bankruptcy Proceedings.
https://www.txs.uscourts.gov/