Mass Tort Litigation, Chapter 11, and Good Faith: Let Not Perfect Be the Enemy of Pretty, Pretty Good

Soon after enactment of the current Bankruptcy Code, Chapter 11 emerged as the forum of choice for companies seeking to resolve the otherwise intractable problems associated with mass tort liability. In recent years, the enactment of state law divisive merger statutes opened a new era in the evolution of mass tort liability cases. Specifically, companies could create a new entity that would assume responsibility for all outstanding tort claims, thus keeping the parent firm out of bankruptcy entirely. This practice, colloquially referred to as the Texas Two-Step, gained widespread notoriety when Johnson & Johnson placed its new subsidiary, LTL Management, LLC, into Chapter 11 to aggregate and resolve tens of thousands of asbestos claims arising from the use of its Baby Powder product. The filing produced a firestorm of criticism along the lines that the tactic was being used to escape accountability and reduce payouts to tort victims. After the Third Circuit dismissed the case as a bad faith filing, Johnson & Johnson tried again, but to no avail. Refusing to throw in the towel, and perhaps testing the definition of insanity, the company filed yet a third case. This time, however, Johnson & Johnson, obtained in advance the support of about 83 percent of current tort claimants for its proposed bankruptcy plan. The case is now pending. In this Essay, I take the contrarian view that the Texas Two-Step is not inherently evil and might simply represent the latest development in the management of mass tort claims through the bankruptcy system. While the potential for abuse exists, as with any tactic, it has yet to manifest itself in the Texas Two-Step cases filed so far, and, if properly monitored and controlled by the court, the maneuver could produce more timely settlements and superior value for all concerned.