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 isolates liabilities in three moves. Under Texas law, a company can restructure through a “divisive merger” that splits it into two entities. One entity takes the assets (the “good” company), the other takes the liabilities (the “bad” company). That liability-holding entity then files for Chapter 11 bankruptcy, which triggers an automatic stay halting all litigation against it.
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)
How J&J Executed the First Filing
In October 2021, J&J ran the Texas Two-Step. The company created LTL Management LLC through a divisive merger under Texas law and transferred all talc-related liabilities (along with minimal assets) to the new subsidiary. LTL Management filed for Chapter 11 bankruptcy in North Carolina. J&J funded LTL with a $2 billion trust and a funding agreement, arguing the arrangement 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 could not proceed with their cases.
How the Third Circuit Ruled
In January 2023, the Third Circuit Court of Appeals dismissed the LTL bankruptcy. The court ruled that LTL Management was not in genuine financial distress, that the filing was made in bad faith to gain a litigation advantage, that it amounted to an abuse of the bankruptcy system, and that it denied plaintiffs their right to a jury trial. The court called LTL 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)
Refiling Less Than a Day Later
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 the company sweetened the terms, proposing an $8.9 billion settlement to resolve all talc claims and claiming to have obtained support from a majority of claimants through a pre-bankruptcy solicitation. J&J argued that the larger settlement offer addressed the Third Circuit’s concerns.
How the Court Rejected the Second Try
In July 2024, the Third Circuit again rejected the bankruptcy filing. The court found that 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 court also ruled that the solicitation process did not adequately represent the interests of all claimants, and that many claimants who “supported” the deal had not been provided with sufficient information. The Third Circuit 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)
A New Subsidiary, Same Playbook
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 through a divisive merger, and had Red River file for Chapter 11 in Houston, Texas, a different jurisdiction. The company proposed a $9 billion settlement to be paid over 25 years and claimed to have obtained support from roughly 83% of current claimants.
The Houston Court Rejected the Filing
In March 2025, the Houston bankruptcy court rejected the Red River Talc filing. The court identified the same fundamental problems as the previous two attempts. The 25-year payment structure drew criticism as insufficient for people with cancer who needed immediate compensation. The support threshold was challenged because many supporting claimants had signed on under terms different from 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 that the automatic stays which paused litigation have been lifted, so lawsuits can proceed. Jury trials are continuing, and juries are awarding significant verdicts. Plaintiffs can present their individual cases to juries rather than being folded into a one-size-fits-all bankruptcy settlement. Unlike bankruptcy, which would have capped total payouts, court proceedings allow juries to award full damages.
For the Litigation
Courts are moving cases forward more aggressively after years of delays. Each new verdict adds to J&J’s financial exposure and raises the pressure on the company. 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. The Third Circuit rulings have also 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. The company can continue fighting individual cases, a costly and unpredictable route in which each verdict adds to overall exposure. It can negotiate a global settlement outside of bankruptcy, which would likely require significantly more than the $9 billion proposed under Red River Talc. It could seek legislative relief by lobbying Congress for tort reform or bankruptcy code changes, though that is unlikely to succeed in the current political environment. Finally, J&J could try 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://www2.ca3.uscourts.gov/opinarch/232866p.pdf
Third Circuit Court of Appeals. (2024-07). Third Circuit Rejects Second LTL Management Bankruptcy.
https://digitalcommons.law.villanova.edu/cgi/viewcontent.cgi?article=1620&context=thirdcircuit_2024
Bloomberg Law. (2025-03). Red River Talc Bankruptcy Dismissed.
https://www.dentons.com/en/insights/alerts/2023/february/3/third-circuit-dismisses-ltl-mass-tort-bankruptcy-rejecting-johnson-and-johnsons-texas-two-step
Reuters Legal. (2023). J&J's Texas Two-Step Strategy Explained.
https://www.cnn.com/2025/10/08/business/johnson-and-johnson-liable-cancer-case-intl
Law360. Johnson & Johnson Talc Bankruptcy: Three Failed Attempts.
https://www.jnj.com/media-center/press-releases/johnson-johnson-subsidiary-to-appeal-bankruptcy-court-ruling-that-deprived-talc-claimants-of-an-equitable-and-efficient-resolution
U.S. Bankruptcy Court, Southern District of Texas. (2025-03). In Re Red River Talc LLC Bankruptcy Proceedings.
https://www.jpml.uscourts.gov/content/multidistrict-litigation