20 State Attorneys General Object to Georgia Pacific's Texas Two-Step to Avoid Asbestos Liabilities

If you follow our blog, you may recall our very first post last year discussing the infamous "Texas Two-Step." See The Texas Two Step: Avoiding Liability for Defective Products by Manipulating the Bankruptcy Code, April 2022. As we noted in that post, this tactic uses something called a divisive merger under Texas law to split a company up into two or more separate entities, a "bad" company that receives all of the original company's liabilities, and a "good" company that receives all of the original company's assets. In this way, the new, "bad" company is immediately bankrupt because it is loaded with all the liabilities of the prior company, and it is able to immediately file for bankruptcy protection. But the "good" company argues that it should have bankruptcy immunity as well. So a multi-billion dollar company that has unloaded its asbestos liabilities and is not in any financial distress gets all of the benefits of bankruptcy protection, without any of the obligations of a bankrupt entity. This maneuver is the brain child of the multi-national law firm, Jones Day, and they have used it to attempt to sidestep the asbestos liabilities of massive, solvent companies like Johnson & Johnson and Georgia Pacific.

In a favorable development for asbestos mesothelioma victims, however, twenty state attorneys generals and the attorney general for the District of Columbia have now filed an amicus, or friend of the court, brief asking the Fourth Circuit Court of Appeals to kill the Georgia Pacific bankruptcy. See https://www.law.com/dailyreportonline/2023/07/21/20-state-ags-ask-fourth-circuit-to-kill-jones-days-texas-two-step-tactic-in-georgia-pacific-case/

In the amicus brief, the AGs argue that the "scheme is designed to allow highly solvent

companies to improperly gain the benefits of the bankruptcy process without having to face its corresponding burdens." The amicus brief goes on to state:

willSpecifically, it allows wealthy companies to access the Bankruptcy Code’s coercive, nonconsensual tools for global resolution of mass tort liabilities—including injunctions against tort claims filed in state court—but remain free from the burdens of having their operations subject to bankruptcy court oversight.

. . .

This decision threatens States’ sovereign power to enforce their laws against corporate wrongdoers. It also violates the statutory bar on manufacturing federal jurisdiction as well as statutory limits on bankruptcy jurisdiction. This Court should grant rehearing en banc to reconsider these erroneous rulings.

As Michael Shepard, a partner at ShepardO’Donnell (https://shepardlawfirm.com) and a member of the asbestos claimants committee in the Georgia-Pacific case notes: “If the full panel of the Court of Appeals says the preliminary injunction can’t extend to the parent company—the good company—it would essentially do away with the Texas Two-Step.”

This new amicus brief in the GP bankruptcy follows another development in the Johnson & Johnson bankruptcy in March. There, J&J ran into a road blog when a unanimous panel of the Third Circuit Court of Appeals dismissed its bankruptcy after finding that the debtor was not in financial distress. According to the Third Circuit, "Chapter 11 is appropriate only for entities facing financial distress. This safeguard ensures that claimants' pre-bankruptcy remedies—here, the chance to prove to a jury of their peers injuries claimed to be caused by a consumer product—are disrupted only when necessary." In re LTL Mgmt., LLC, 64 F.4th 84, 111 (3d Cir. 2023). Unabashed, J&J refiled for bankruptcy the next day, and thousands of asbestos mesothelioma victims are still being denied their days in court.

Despite J&J's new bankruptcy and the litigation stay that came with it, there is one ray of sunshine. After repeated, persistent requests to the bankruptcy court to allow them to exempt a case from the bankruptcy stay and allow it to proceed to trial, Joe Satterley and Denyse Clancy of Kazen, Mcclain, Satterley & Greenwood, obtained an $18,800,000 verdict against J&J for a case involving a 24 year old asbestos mesothelioma victim. https://blog.cvn.com/breaking-jury-awards-18.8m-in-first-post-bankruptcy-johnson-johnson-talc-trial. This verdict illustrates the utter inadequacy and inequity of the bankruptcy system. Though J&J claims the bankruptcy process is more efficient and will put money in the hands of cancer victims sooner, the amount J&J proposes would have given this victim only a tiny fraction of the compensation awarded by a jury of his peers.

Harty Jewell, PLLC continues to represent asbestos and mesothelioma victims in Virginia and is dedicated to helping the injured obtain justice. In addition to being used in talcum powder products, asbestos was also commonly used in products utilized in the shipbuilding and ship repair industry, as well as in construction, automotive applications, manufacturing, power plants, refineries, paper mills and railroads. This means that workers at shipyards, both in new ship construction, ship repair and ship overhaul, as well as those who constructed and maintained equipment at manufacturing plants, power plants, refiners, paper mills, railroads, and other industrial sites are at risk for mesothelioma and other asbestos-related diseases such as asbestosis, lung cancer, and in some instances, other cancers. Family members of individuals who worked in these industries are also at risk for asbestos-related diseases like mesothelioma.