Debt End: The “Texas Two-Step” and the Constitution

The “Texas Two-Step” is a novel means of forcing a settlement agreement on mass-tort claimants. Corporations utilize the Two-Step bankruptcy strategy using a state law merger statute to split itself in two. One half of the corporation retains all the value, and the other half retains all the liabilities associated with the mass tort claims. The shell-company, which inherits the liabilities and then files a bankruptcy petition, uses the Bankruptcy Code’s powers to attempt a forced settlement on all current and future litigants and shield its financially healthy parent company in the process. Throughout this Note, I will survey the most significant Two-Step cases that have emerged in the last several years and argue that the Two-Step bankruptcy strategy is likely an unconstitutional use of the Bankruptcy Code. Eligibility for non-financially distressed, solvent debtors under section 109 of the Bankruptcy Code is likely unconstitutional as applied because it may (1) result in a regulatory taking; (2) deny mass tort claimants their due process rights under the Fifth Amendment; (3) qualify as a bad faith filing; and (4) exceed Congress’ power under the Bankruptcy Clause. I will also discuss how bankruptcy’s historical origins and the Framer’s intent may help inform what constitutes a bad faith bankruptcy filing. Along the way, the Note discusses the intricacies of the Bankruptcy Code in relation to these complex Two-Step bankruptcies and in relation to how bankruptcy law has changed over time.