Supremes Will Not Touch the Texas Two-Step Bankruptcy Strategy

The Supreme Court passed on a case that tested the legal limits of a popular asbestos provider bankruptcy strategy.

The litigation shield is a core benefit of the Texas Two-Step, a legal strategy in which a company creates an artificial corporate entity, transfers liability to it, and places it into bankruptcy, thereby obtaining a pause on litigation. Johnson & Johnson has also attempted to use the maneuver to address widespread claims that its talc products caused cancer.

Asbestos claimants asked the U.S. Court of Appeals for the Fourth Circuit to deny bankruptcy protection to Georgia-Pacific, a defendant in a large asbestos exposure lawsuit. The Fourth Circuit rejected their arguments.

Claimants asked the Supreme Court to consider whether bankruptcy courts have the jurisdiction to grant litigation shields to companies, like Georgia-Pacific, that aren’t themselves bankrupt. They also asked the court to determine if bankruptcy courts have the authority to take action not specifically granted to them by the Bankruptcy Code.

Bankruptcy judges in the Western District of North Carolina, where multiple two-step cases are pending, have repeatedly asked higher courts to consider the unique legal questions raised by the strategy.

The Automatic Stay, which stops most forms of creditor harassment, including lawsuits, applies in both commercial and consumer bankruptcies. Distressed debtors, both companies and individuals, often file bankruptcy to stop lawsuits, home foreclosures, and other adverse creditor actions. There is nothing wrong with that.

However, courts have consistently held that bankruptcy is a shield, not a sword. Distressed debtors use bankruptcy to protect themselves from creditors, not as a way to prevent victims from obtaining the compensation they need and deserve.

This compensation usually includes money for economic losses, such as medical bills, and noneconomic losses, such as pain and suffering. A nationwide asbestos lawyer can usually obtain additional punitive damages in these cases as well.

Compensation in a wrongful death claim is different. Survivors are usually entitled to compensation for pecuniary losses, such as the decedent’s final expenses, including medical bills, lost future economic support, and lost future emotional support. Punitive damages may be available as well.

Bankruptcy may delay this compensation payment, but it almost never ends it. The Automatic Stay expires eventually. Additionally, asbestos exposure lawsuits often qualify for Section 362 exemptions. The judge gives special permission for the lawsuit to proceed, despite the bankruptcy. Alternatively, a nationwide asbestos lawyer can file a proof of claim, which the company must pay as a condition of bankruptcy.

Also as a condition of bankruptcy, federal judges often require asbestos providers to create a victim compensation fund, or contribute to an existing fund. That’s especially true if the company faces multiple asbestos exposure lawsuits.

Federal courts set up the first of these funds in the 1980s when the first wave of asbestos providers filed bankruptcy to avoid liability lawsuits. Today, some forty years later, these VCFs still contain some $30 billion.

As a general rule a bankruptcy VCF claim is easy to bring and hard to resolve, or at least hard to successfully resolve.

Since the defendant is bankrupt and, in most cases, no longer in business, no adverse attorney challenges the victim’s medical and other evidence. As a result, a bare-bones case is sufficient to prove a claim.

The non-court aspect of a bankruptcy VCF claim is a two-edged sword. An adverse lawyer does not challenge the victim’s evidence, and a judge does not supervise settlement negotiations. Since fund administrators do not have a duty to negotiate in good faith, settlement negotiations are often long and protracted in these matters.

Mesothelioma victims need and deserve significant compensation. For a free consultation with an experienced nationwide mesothelioma lawyer, contact the Throneberry Law Group. We have offices in Arizona and six other states from coast to coast.