How the Texas Two-Step Changes How Plaintiffs Litigate Mass Torts

For the uninitiated, the Texas Two-Step is a bankruptcy process in which a solvent corporation spins off certain liabilities into a new and undercapitalized subsidiary and then has the subsidiary declare bankruptcy.

In the first step of a Texas Two-Step, the parent corporation creates a new subsidiary in Texas under that state's divisive merger statute in which the corporation splits off future liabilities from the solvent parent's assets. The parent corporation keeps control of the spun-off subsidiary through its board of directors. In the second step, the spun-off subsidiary declares Chapter 11 bankruptcy as a debtor-in-possession, securing an automatic stay on any litigation against the subsidiary or its parent corporation. The purpose of the Chapter 11 bankruptcy is to address the mass tort liabilities for present and future claims and obtain a third-party release for the parent company to prevent litigants from pursuing recoveries from the parent in perpetuity.