Kenneth Rogoff, chair of international economics at Harvard University. Former chief economist at the International Monetary Fund. Author of The Curse of Cash and This Time is Different.
Jean-Claude Trichet, former president of the European Central Bank and former of the Bank of France.
Garrie Dedman, owner of the TasteAmerica food store in Tunbridge in England.
ATKINS STOHR: Today, we’re talking about a controversial bankruptcy strategy known as the Texas two-step or divisive merger. It’s a legal tool that corporations facing massive litigation have been using recently to avoid liability. So many at this point might be wondering why is it called the Texas two-step?
Well, it’s because it’s a state statute in Texas. Texas is one of a handful of states that have similar divisive merger laws. And this one is particularly flexible, and that’s how it was designed. But it wasn’t intended to be used in bankruptcies. At least that’s according to Curtis Huff. Back in 1989, he was on the Texas State Bar and one of the primary drafters of the two-step provision.
CURTIS HUFF: It was not written to say, Here’s a way we can consolidate mass torts and put it in front of a bankruptcy court in a jurisdiction. … And it was intended to do something else.
ATKINS STOHR: And that something else was —
HUFF: To facilitate transactions that are often very complex when you do spin offs of companies or to buy companies and to really just utilize the merger statutes as a means to effect what could be done through a series of just basic assignment and transfer documents with respect to assets. So it was really just intended to be a simple way to effect divisions and spin offs.
ATKINS STOHR: So streamlining normal business transactions. But now that the law is being used in bankruptcies, Huff has a lot of questions.
HUFF: Are they utilizing it in good faith? And is this what is anticipated and appropriate under the bankruptcy laws, given the definitions and the overriding policies of the bankruptcy laws? When all these assets are moved, are they essentially trying to limit the availability of assets that are available to the estate? Are they essentially trying to delay the collection of rightful claims, or are they trying to do this in an efficient way to deal with the claims and pay all the claims? Those are questions that should be addressed.
ATKINS STOHR: And those questions, Huff said, fall on bankruptcy judges now. That was Curtis Huff. He’s one of the original drafters of the so-called Texas two-step statute.
And Mike, I want to talk specifically about the J & J case. That is the focus of this show. It’s one of the cases that has gotten a lot of attention for using the Texas two-step. Can you explain, Mike, what the arguments on each side here are?
SPECTOR: So Johnson & Johnson, for some time, has been facing a tidal wave of lawsuits, more than 38,000 lawsuits at this point, alleging that their baby powder and other cosmetic talc products contained asbestos and caused cancer, both ovarian cancer in women and mesothelioma, asbestos linked disease that is deadly.
And eventually, despite efforts to contend and show evidence that their talc products did not contain asbestos and were entirely safe, they just kept facing lawsuit after lawsuit after lawsuit, and eventually they got hit with a monster judgment in Saint Louis, $4.7 billion, which was reduced to more than $2.1 billion.
But at the end of the day, they paid about $2.5 billion for that judgment with interest, and they had some other adverse verdicts. They also won some cases, we should add, but there were too many lawsuits. They thought they were going to go on forever. You know, as you played from that clip of Greg Gordon, the Jones Day lawyer representing Johnson & Johnson earlier in the show, he’s extrapolating out that this just goes on forever and ever and ever. And you can only litigate ten cases a year, and there’s no end in sight.
So what Johnson & Johnson was worried about after the Supreme Court refused to hear their appeal of that large verdict I mentioned, is they said, look, we want to cap this thing. We want it to go away. So they decided to use the Texas statute, divide their talc business, their consumer business, and to create a new subsidiary, put all the lawsuits with that subsidiary, and then put it in bankruptcy.
And the main reason they want that thing in bankruptcy is because bankruptcy can shield not only the company that’s in bankruptcy, but related third parties who are outside of bankruptcy, like Johnson & Johnson. And they want that legal shield, which we should add, specifically caps liability for current and future claims. And the future claims is the key aspect here. Johnson & Johnson wants a global settlement, and right now they’ve offered $2 billion less than they paid on that one monster verdict.
It’s probable that that number will go up after they negotiate with talc plaintiffs, but they want to put a cap on this thing. It’s clear for what they view as a reasonable amount of money, so they never have to deal with it again.
So now that case was appealed and it’s now before the Third Circuit Court of Appeals and during oral arguments before the Third Circuit last month, one of the attorneys in the case representing J&J, Neal Katyal, argued that one of the main reasons for using the Texas two-step was for the plaintiff’s sake.
KATYAL: Our argument is that each of their tort lawsuits has tunnel vision. It examines only their individual case and delays future ones. It’s a homerun or a strikeout, and precious few get up to bat. The only way to get a system wide resolution that is comprehensive, that protects future claimants, is through bankruptcy.
ATKINS STOHR: Attorney Jeffrey Lamken, who represents the plaintiffs in the case, disagreed.
LAMKEN: So, your Honor, to the extent that sometimes people prevail before juries and sometimes they don’t. That’s a function of the system that the framers established 200 years ago. And we entrust the common man, 12 of them, to make these determinations and to find facts, make determinations. The notion that, well, bankruptcy might actually sort of even out the balance isn’t a way of indicting the tort system that 50 states have operated to compensate victims for 200 years.
ATKINS STOHR: So, Bob, as I’m listening to these arguments on both sides, they sound a bit familiar. Because I was a civil litigation attorney back in the ’90s when there was this big push for tort reform, making it more difficult to bring lawsuits, encouraging things like mediation or mandatory arbitration. And the same arguments were made by the companies who sought to reduce these lawsuits. Right. Saying, oh, this is an easier way. It’s more streamlined. So is this Texas two-step really an effort at tort reform in disguise?
RASMUSSEN: I think that is actually what they’re trying to do. J&J is not happy with the state law tort system. They’d much rather have it done in bankruptcy. And as a bankruptcy scholar, it kind of upsets me a little bit, in that bankruptcy is not a Swiss knife. It’s not something you can use. … It’s only something you can use when you think the companies are financial distress.
If Johnson & Johnson had filed for bankruptcy, if there had not been a divisive merger and we just had the consumer unit filed for bankruptcy, I think that would have been appropriate. I think what the problem is. The Consumer Union is saying, look, we’re not really a financial stress. We just want to use bankruptcy, not to resolve financial distress, but as an alternative to the state court tort system. And that’s not what bankruptcy was designed for. The predicate is a company that has financial distress.
ATKINS STOHR: And Mike, one of the main arguments we heard in favor of using this process to resolve lawsuits is efficiency. But a lot of these cases started years ago and they’re still ongoing. Is that really, as you see it, playing out? A justification that is actually being realized?
SPECTOR: Yeah, I think the efficiency argument only goes so far. These plaintiffs had rights. They have constitutional rights. Jury trial rights. And I think the important thing to understand is whether you love or hate the mass tort system in America. What happened here, and what happened in other cases, Johnson & Johnson and other Texas two0steps as plaintiffs were dragged into a bankruptcy court against their will that they didn’t choose to be in bankruptcy.
They’re in bankruptcy by virtue of the fact that Johnson & Johnson created a subsidiary shouldering all of these talc lawsuits that then filed for bankruptcy and brought the plaintiffs along with them. The plaintiffs have some leverage in bankruptcy. It’ll probably be a 75% vote of creditor creditors necessary to approve a plan, a global settlement. But to your point, you know, many of these Texas two-step cases you talked about, the first one filed in 2017, that’s still going on. There’s no end in sight to that case. You know, the mass tort system is not efficient either necessarily, and can take a long time.
But really what this boils down to, and this is I think what the professor is getting at, is what’s the proper use of the bankruptcy system and how is the American legal system supposed to work? And what’s happening here is a giant company like Johnson & Johnson is really trying to replace the tort system with bankruptcy and use bankruptcy to settle mass tort cases.
And that’s a new thing. That’s establishing a precedent. And we’ll see what the Third Circuit says. We’ll see if the Supreme Court at some point decides to weigh in on this. This is a major shift in the American legal landscape. It’s unprecedented in many ways.
ATKINS STOHR: And Bob, talk about how bankruptcy law stands. It’s this sort of hybrid between state laws that allows Texas to pass statutes like this and also federal law. Might federal laws somehow step in to prevent or at least change the way Texas is operating?
RASMUSSEN: Well, I think the bankruptcy court has the power currently to police its own jurisdiction. It really can’t change Texas law, but it can say, hey. You can’t use this maneuver under Texas law, which is designed for something else, a different situation, and use that to manufacture financial distress and income into bankruptcy.
So I think the court already has the tools not to prevent a divorce, a merger, but to say when you combine into this a merger, the only goal of which is to create financial distress, that’s out of balance. We’re not going to do that. It has the power to do that. Now, as Mike said, Judge Kaplan looked at it, said, no, we’re going to allow it. But you could imagine the Third Circuit coming out the other way. So the power is there to prevent this. The question is whether or not the court is going to actually say, hey, this just reeks too much.
ATKINS STOHR: And Bob, does this violate other legal principles? I am reaching back into my bankruptcy class. But can this be seen as something as a fraudulent conveyance, for example, or an improper way to try to forum shop, to go to Texas to start these companies so that they are judged under more amiable laws?
RASMUSSEN: Great questions. As the fraudulent conveyance aspect, that is an ongoing complaint in the case. If the case does go forward, we expect the claimants to make that argument.
ATKINS STOHR: Explain to us what that argument is.
RASMUSSEN: Before this divisive merger, we had claims against J&J, the consumer unit, saying you’ve thrown us into a subsidiary that only has this so-called funding agreement and other talc claims, that this was a transfer designed to … delay, hinder or defraud creditors. This was the delay. That’s the argument. Johnson & Johnson’s going to argue to be a fraudulent transfer, you need a transfer. And there wasn’t a transfer here.
We just cut things up. And indeed, Texas law says that a divisive merger is not a transfer. That’ll be a contested issue if the case goes forward. And there was clearly forum shopping here. Because remember, Johnson & Johnson Consumer, the subsidiary that was split in two, was not a Texas company. It just incorporated in Texas solely to do a divisive merger. It did the divisive merger.
Not in Texas, but in North Carolina, thinking that that would be a more hospitable form to it. Now, the North Carolina judge transferred it to New Jersey. But it’s clear that Johnson & Johnson was looking for a court that they thought was going to be amenable to.
Yeah. And Mike, we talked a little bit about how this is not and may not be the best forum for the playing of Sydney’s cases. Can you talk a little bit more about that? For example, there is no punitive damages and no juries in bankruptcy courts the way that there might be in a traditional trial court. How else might this may work against the plaintiffs being in bankruptcy court?
I think the main thing that works against plaintiffs here in bankruptcy court is time. Now, if they were outside of bankruptcy and angling for a jury trial, you know, you played that audio from Neal Katyal saying precious few get up to bat. And that’s not wrong. But for a company like Johnson & Johnson, bankruptcy provides a tremendous advantage, so long as they don’t have to file for bankruptcy themselves because they got the benefit of the automatic stay. A Judge Kaplan is suspended almost all of the talc litigation against Johnson and Johnson.
And so the clock has stopped for these plaintiffs and so they have rights in bankruptcy. I talked about a few of those earlier and some leverage. But, you know, the longer they refuse to settle this litigation and bankruptcy, the longer they go without being compensated. And it’s just worth mentioning, again, this Koch Industries company, Georgia-Pacific, that put the subsidiary best wall to deal with asbestos litigation into bankruptcy in 2017. You know, here we are five years later, it’s still going. So for a company like Johnson and Johnson, which is flush with cash, billions upon billions of dollars, they’re perfectly happy to just wait around.
ATKINS STOHR: A year ago, Johnson & Johnson created a subsidiary in Texas called LTL Management. Transferred all of their 38,000 lawsuits to it and then had LTL file for bankruptcy. So now all of those cases are frozen. Meanwhile, Johnson & Johnson can carry on business as usual.
BARBARA JACKSON: It’s like, you know, sweeping us up under a rug to make us go away for them to be able to start over new and go on with their lives. That’s that is pretty sad. In here we are mostly my adult life have had to deal with this and not be able to have the life that I really could have had.
ATKINS STOHR: That’s Barbara Jackson of Portland, Oregon. One of those 38,000 people who sued Johnson & Johnson. Her story begins 18 years ago when she began to feel unwell.
JACKSON: I know it had to be something because every month, you know, around my monthly, I would feel something. Is it just be a real bad pain. And I never really was one that have cramps that I would have my menstrual cycle. I never had cramps. But within the last year or so, between 2003, 2005, I was having real bad pain that would kept me from having to go to work. You know, I kept missing work and missing work.
ATKINS STOHR: At the time, she was working as a registered health information technician at a local hospital. A job she had for 21 years. And one she really loved. But after missing work so much – the hospital let her go.
At that point, she decided to figure out what was wrong so she went for some tests and took the results to her doctor.
JACKSON: Is this saying what I think it’s saying? And they ask, where did you get it from? I said, Well, I worked in the medical field, so I knew how to get my records and stuff. And they told me there, yes, you do have cancer. And yes, it is, you know, pretty far gone. And I was just shocked. I was shocked.
ATKINS STOHR: Barbara was diagnosed with ovarian cancer at the age of 42. She was at a loss. Barbara was one of 11 children, six girls, and the only one who had ever received such a diagnosis.
Shortly after, she had a double hysterectomy and underwent 8 months of chemo and lots and lots of doctor appointments. After two years Barbara was finally cancer free.
But she still didn’t know where her cancer came from until five years later in 2012.
JACKSON: I had a talk with my mom or something and she asked me, ‘You still use baby powder?’ I said, No, it’s been a while since I used it. ‘You know, I wonder if that had anything to do with it.’ And I said, ‘why would you say that?’ And she said, ‘Well, I think the article or something that Johnson & Johnson was known to put out, talc powder that cause cancer. I said, Really? So that’s when I started looking into it since no one in my family. None of the females had any type maybe this is the connection.
ATKINS STOHR: As early as 1971, Johnson & Johnson scientists had become aware of reports about asbestos in talc that could be cancerous. Around the time of Barbara’s diagnosis, the WHO and FDA had been warning about talc possibly being cancerous. And in 2008 a year after Barbara was officially cancer free, according to court filings, Johnson and Johnson executive Todd True, sent an email to colleagues asking: “Have we looked at replacing talc with cornstarch for our base powder as other brands have? What’s the value in maintaining talc under baby aside from cost?”
The talc ingredient remained in Johnson & Johnson’s products until 2020.
Barbara even remembers all the ads Johnson and Johnson put out for their baby products, aimed at Black women like herself.
JACKSON: Shower to shower staying fresh, sneaky clean or something like that (laughs).
And she listened. She put that baby powder on almost daily for 20+ years and even more, often during her period.
JACKSON: I really believe I would’ve had a totally better life than I have right now had I not had the cancer, you know? What they caused and what they knowingly caused is just not fair. It is just not fair.
ATKINS STOHR: Barbara filed her lawsuit against Johnson and Johnson nine years ago. And with her and the 38,000 plus cases frozen in the bankruptcy courts – she and many, many others will have to keep waiting.
We reached out to Johnson & Johnson and they say the usage of the Texas two-step process is fair and equitable. And say quote “While we continue to stand behind the safety of our products, we believe efficiently reaching a global resolution of this matter is in the best interest of all stakeholders.”
Now I want to introduce another guest to the program – Leigh O’Dell. She’s one lead attorneys in the multidistrict talc litigation against Johnson and Johnson that involves Barbara’s case along with 38,000 plus others. She’s joining us from Montgomery, Alabama. Welcome Leigh, to On Point.
LEIGH O’DELL: Hello. Thank you for having me.
ATKINS STOHR: So you’ve been representing clients for nine years in this litigation, and you’ve heard this argument from Johnson & Johnson that this Texas two-step process is best for everyone, including them. What do you think about it?
O’DELL: Well, obviously, we disagree for many reasons and some of which have been shared earlier in the program. But this fundamentally undermines the right of people like Barbara to their right to a trial by jury and to be able to present their claim in a court. And that Seventh Amendment, we believe, is something that should be protected. And further, it’s not efficient in the sense that it does cause extreme delay.
And we’ve been in bankruptcy for a year. Barbara and others have been prevented from moving forward. In fact, the only thing that’s happening in terms of the underlying talc claimant’s litigation is if a victim of ovarian cancer, mesothelioma gets near to the point of death, they can have their deposition taken to preserve their testimony. That’s all that can happen. And it’s heartbreaking to have women who have suffered through ovarian cancer, many of whom don’t have risk factors for ovarian cancer other than the general use of talc.
And then for them to be in a place where their rights are really infringed upon and not be able to go forward. And in a setting like bankruptcy, where the whole atmosphere, the whole setting is created to advantage the debtor, because typically in a good faith filing, you would have an unfortunate debtor who has real financial distress. And so the whole system is created to try to help that debtor reorganize in an exit from bankruptcy. But in this instance, where you have a what we believe is a bad faith filing and a sham company created solely for the purpose of capping or limiting the recovery of these deserving victims, it’s just very unfair.
ATKINS STOHR: And Bob, I want to talk a little bit about the process. You’re an expert in bankruptcy law. Very often, not only is bankruptcy law very complicated, very technical, but cases can, by their nature, last a long time. And I think a lot of people don’t pay attention to it because bankruptcy cases don’t often get a lot of attention.
But some have, for example, the litigation over opioids that involved the Sackler family that’s been going on for a long period of time. And it involves bankruptcy law. Or, years ago, at the Supreme Court, there was a case involving the estate of Anna Nicole Smith that went on so long that it outlived all of the actual claimants in that case. So talk about the fact that bankruptcy is not something that is by nature efficient.
RASMUSSEN: It certainly can be a long process. You know, as you know, Purdue is still going on. And as people have pointed out, this case was filed over ago and we’re still fighting over whether it is an appropriate case. If the Third Circuit affirms Judge Kaplan, we go back to bankruptcy court and we still don’t have a settlement.
And as Leigh said, Johnson & Johnson has said it will not pay any money. Until the bankruptcy case is over. So you can imagine the case going back to bankruptcy. More discussion about fraudulent conveyance. More discussion about what the Towle claims are worth. You can imagine these issues being appealed again. It is not hard to imagine this case going on for five years and during that period no money will be paid to the claimants.
Leigh, as somebody who’s deeply involved in these types of this type of litigation, what do you think about this solution? Do you think it’s unwarranted?
O’DELL: If this is allowed, it will engulf the entire civil justice system as it relates to victims. And we think that’s something that would be very unfortunate to victims because it would give them a very limited right to, you know, vindicate themselves when they’ve been injured by a product.