Sykes, Gooden, Whitehouse, Hawley Introduce Bipartisan Legislation to Deter ‘Texas Two-Step’ Bankruptcy Trick
The Ending Corporate Bankruptcy Abuse Act would prevent an abusive bankruptcy maneuver used by big corporations to avoid compensating Americans they have hurt
WASHINGTON, D.C. – U.S. Representative Emilia Sykes (OH-13) today joined Rep. Lance Gooden (TX-05) and Senators Sheldon Whitehouse (D-RI) and Josh Hawley (R-MO) to introduce the Ending Corporate Bankruptcy Abuse Act (ECBA). This new bipartisan legislation aims to stamp out the growing trend of corporations using a bankruptcy maneuver known as the “Texas Two-Step” to try to evade responsibility for injuries they caused, bog down consumers in bankruptcy proceedings, and delay justice for Americans hurt by corporate malfeasance.
“For too long, greedy corporations have used shady bankruptcy tactics like the Texas Two-Step to avoid compensating innocent Americans they have hurt. The Ending Corporate Bankruptcy Abuse Act will help prevent this bankruptcy abuse and finally hold corporations accountable for their actions. This legislation is an important step in cracking down on corporate greed and ensuring consumers in Ohio’s 13th District and across the country get the justice they deserve,” said Rep. Sykes.
“The Texas Two-Step has mired tens of thousands of injured Americans in protracted proceedings, while the mega-corporations that harmed them continue making money and avoiding penalties,” said Sen. Whitehouse, who in 2022 chaired the first Senate hearing on the Texas Two-Step in his Judiciary Subcommittee on Federal Courts, Oversight, Agency Action, and Federal Rights. “Our bipartisan bill would end abuse of the bankruptcy process to ensure that victims get the day in court that our constitution entitles them to.”
“For too long, corporations have used dirty back-room deals to shield themselves from liability for corporate misconduct. This bipartisan bill will put an end to it,” said Sen. Hawley.
“Bad corporate actors shouldn't be able to dodge accountability by using bankruptcy tricks like the Texas Two-Step, which has been exploited by large corporations to sidestep responsibility for the harms they've caused. Our bipartisan bill will stop these abuses and ensure victims get their day in court,” said Rep. Gooden.
The Ending Corporate Bankruptcy Abuse Act is cosponsored by Senate Majority Whip Dick Durbin (D-IL) and Representative Jerrold Nadler (NY-12).
“Corporations have side stepped accountability through dishonest bankruptcy maneuvers for far too long. Maneuvers like the Texas Two-Step allow big corporations to avoid taking responsibility for the harms their products inflict on Americans, which we’ve seen with asbestos in Georgia-Pacific drywall, cancer-causing Johnson & Johnson baby powder, and more. It’s time for our bipartisan bill to curb this bankruptcy trick and give victims their day in court,” said Sen. Durbin, Chair of the Senate Judiciary Committee.
“The Texas Two-Step is an egregious abuse of the bankruptcy system that allows corporations to escape accountability at the expense of those they hurt. Corporations create shell companies that assume bankrupting loads of liability to dodge responsibility for harmful actions like medical practices that killed loved ones, or products that contain asbestos and cause cancer. By shifting liability to these shell companies, corporations like YesCare can evade accountability and leave victims without recourse. This fraudulent tactic undermines the bankruptcy system’s fundamental principle of fairness and epitomizes corporate contempt for victims. I am proud to be a supporter of the Ending Corporate Bankruptcy Abuse Act to end this abusive practice,” said Rep. Nadler, Ranking Member of the House Judiciary Committee.
The Texas Two-Step is an abusive bankruptcy maneuver used by corporations to avoid paying out massive injury claims. The maneuver allows corporations to put their assets out of reach while miring injury victims in bankruptcy proceedings that drag out for years. Most prominently, Johnson & Johnson employed this tactic to try to cap its liability in lawsuits claiming its talc powder caused cancer.
In 2022, Whitehouse led the Senate Judiciary Subcommittee on Federal Courts, Oversight, Agency Action, and Federal Rights in a hearing first examining the Texas Two-Step. The subcommittee heard wrenching testimony from a witness battling terminal mesothelioma, Ms. Kimberly Ann Naranjo, who had sued Johnson & Johnson for tort damages.
“It took every ounce of strength for me to be here before you today, but I am here today because I am a voice for the thousands of people that Johnson & Johnson harmed, and we have a right to be heard. I am so grateful that you have listened to me, I wish that Johnson and Johnson would listen too, but they took away that right from me and thousands of other people who have their own stories, families, and lives that also deserve a right to be heard by a jury,” said Ms. Naranjo, who passed away from cancer in early 2023 before having her day in court.
The Texas Two-Step works as follows:
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A corporation with a lot of injury liabilities transforms into a Texas corporate entity.
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The new Texas entity then undertakes a “divisive merger” that splits the corporation into two companies, one saddled with tort liabilities and containing few assets and the other one containing almost all of the assets and no tort liabilities.
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The company saddled with the claims immediately files for bankruptcy as a separate entity, but gets an automatic stay for both itself and the company containing most of the assets, stopping all pending litigation against them both.
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Injury victims now have to spend years challenging the claims-saddled company’s bankruptcy while the company with the assets goes about business as usual.
The Ending Corporate Bankruptcy Abuse Act of 2024 would deter the Texas Two-Step and ensure injury victims have a chance to be heard in court. First, the ECBA would instruct courts to presume a bankruptcy has been filed in bad faith if it appears to be a Texas Two-Step bankruptcy. This would also standardize a rule for dismissing a bankruptcy across federal circuit courts.
Second, the legislation would prohibit stays of litigation against a debtor’s non-bankrupt affiliates when the debtor engaged in a Texas Two-Step maneuver within the previous four years. By carving out an exception to the statutory stay and prohibiting injunctions in Texas Two-Step cases, the ECBA deters corporations from abusing bankruptcy protections and ensures that injury victims can get their day in court.
The legislation is also endorsed by the American Association for Justice, National Association of Consumer Bankruptcy Attorneys, and National Association of Consumer Advocates.
“Profitable corporations are filing sham bankruptcies to evade accountability to the Americans they’ve hurt using a legal tactic known as the ‘Texas Two-Step,’” said American Association for Justice CEO Linda Lipsen. “These mega-corporations manipulate the legal system to dodge responsibility for inflicting widespread harm. I applaud Senators Whitehouse, Durbin, Hawley, and Representatives Sykes, Gooden, and Nadler for championing this legislation to reign in this abuse of corporate power.”
The text of the bill can be found here, and a one-page summary can be found here.