Product Liability Bankruptcies Cheat Injury Victims

Product liability cases are hard to prove and very costly. This cost and complexity is already a significant barrier to entry that allows reckless and callous manufacturers to skirt accountability. Oftentimes class action lawsuits are the only way to handle these complex cases. Once a jury returns a positive verdict, what happens next? The Defendant can file an appeal which can stay the proceedings, ask the court for a new trial, or ask for remittitur of the jury’s decision. All of this takes time and deprives the victim of her jury award or potential for settlement. Perhaps the worst option, however, is a string of recent bankruptcy abuses in major product injury cases where Defendants were able to separate the personal injury liabilities from the rest of their business and file a limited bankruptcy just on those victims’ claims. This maneuver is sometimes referred to as the “Texas Two-Step” and amounts to nothing more than a technical loophole to abuse bankruptcy laws.

How Does It Work?

While it seems outrageous that a company could take personal injury liability and eliminate it in bankruptcy, it may actually be legal based on a technical loophole in some States. Normally, any transfers made with the intent to defraud, delay, or hinder an obligation of a debtor are illegal. If a company’s product causes injuries and they are liable to the victims, transferring these liabilities with the purpose to defraud, delay, or hinder those obligations should run afoul of 11 U.S.C. § 548. Here’s where the loophole comes in.

Under Texas business law, for example, when a company undergoes a “merger,” the leading case addressing this issue, TXO Production Co. v. M.D. Mark, Inc., stands for the proposition that “a merger does not constitute a transfer or assignment in the state of Texas.” The argument from corporate behemoths such as Johnson & Johnson, Georgia-Pacific, and others, is that since a merger is not a transfer, it cannot be a fraudulent transfer. No transfer has taken place so long as the merger happens in Texas (or another State with similar laws governing the rights and liabilities in corporate mergers).

Furthermore, this loophole supposedly applies to so-called “divisive mergers” under Texas law – essentially the exact opposite of a merger. The company splits into two entities, one of them housing the liability for the injuries their products caused and the other continuing on with “business as usual.” As injury lawyers, we have seen countless examples of how reckless manufacturers put dangerous and hazardous products into the stream of commerce and attempt to abuse bankruptcy law to shirk responsibility for the injuries they cause.

Johnson & Johnson Talc Liabilities

Tens of thousands of Plaintiffs have alleged that Johnson & Johnson’s talc powder contained asbestos and caused their cancer. Several of these Plaintiffs’ lawsuits have ended in trials with favorable verdicts. Rather than continue to litigate or settle these claims, Johnson & Johnson has attempted a “Texas Two Step” bankruptcy of their liability. On October 14th, 2021, Johnson and Johnson put it’s baby powder and other talc liabilities into bankruptcy court. In essence, it off-loaded thousands of these claims and put them into LTL Management LLC, a newly created entity.

LTL then filed for bankruptcy protection in North Carolina. At this time, J&J will halt these cases while LTL navigates the bankruptcy proceedings. LTL liabilities as established by the bankruptcy court will be funded by a $2 billion trust. It has also received specific royalty revenue streams with a present value of more than $350 million dollars. This fund will be used for legal costs.

BestWall's Asbestos Liabilities

BestWall Gypsum Company (acquired by Georgia-Pacific) faced thousands of asbestos related injury lawsuits related to its signature gypsum wallboard products. Around 2017, they created an entity called Bestwall LLC to transfer these asbestos injury liabilities and file bankruptcy. The entity has filed bankruptcy in the Western District of North Carolina. In a particularly egregious example of the bankruptcy abuse taking place, Georgia-Pacific moved its headquarters to Texas for a single day to conduct this corporate restructuring. On November, 2nd, 2017, Bestwall LLC filed for bankruptcy protection with more than 62,000 asbestos injury lawsuits pending against it.

Garlock Sealing Technologies

Garlock Sealing Technologies is a large manufacturer of gaskets that originally contained chrysotile asbestos. The asbestos is encased in a polymer-like substance. It’s product only releases asbestos fibers when cut, or struck heavily during removal. Asbestos is also released when the insulation covering is first removed. Over a thirty-five period, Garlock has been sued thousands of times. It has paid out close to $1.3 billion dollars. In 2010, it exhausted its insurance coverage.

In 2010, it filed for bankruptcy under a specific part of the bankruptcy code (Chapter 11. Section 524(g). This section was enacted by congress as many asbestos companies were facing bankruptcy due to several thousand asbestos claims. This federal statute allows a company to set aside funds in a trust to cover legitimate asbestos related claims. It allows the company to stay operational, healthy and profitable. These trust funds, however, usually lack sufficient funds to fully compensate victims. The average payment is about 25% of the value of the claim. This statute protected Garlock as it had no insurance to cover all of the additional claims. Garlock went further under section 524(g) and sought to limit its liability to current and future mesothelioma cases.