The Texas Two-Step: Johnson&Johnson Declares Bankruptcy

[pacman 7374]

Well, it's actually a newly formed subsidiary of J&J filed bankruptcy to avoid civil suits for its products.

https://www.npr.org/2022/04/02/1082871843/rich-companies-are-using-a-quiet-tactic-to-block-lawsuits-bankruptcy

 

 

[drt 640]

@THUJONE

Can you comment?

[TwiceHorn 31599]

Before we get too outraged, consider:

• J/J has 38,000 lawsuits pending.
• If each one resulted in a $1M verdict, that's $38B dollars, not including any costs of trial; and that is a very modest figure, the verdicts could easily be several multiples of that
• J/J has total assets of $182B (using the $400B market value of J/J is bullshit), but only less than $60B is cash equivalent, and another $81B is "intangibles" and "goodwill," which means difficult or impossible to turn into cash, so maybe about $100B potentially available to creditors
• Each lawsuit was filed at a different time, in many different courts, and each one will reach a final judgment at a different time

So, you have total assets, even if you liquidate the whole company, that are unlikely or barely able to compensate all of the claimants.  And you have a massive first-come, first-served problem where you have a "bank run" on the assets of the company and a goodly number of people may be left holding the bag.

Bankruptcies "stay" lawsuits for exactly this reason.  Even if you think a company should be liquidated out of existence, there's a fairness problem for the injured claimants.  Many economic types would argue that a company shouldn't likely be liquidated.  This is nothing new and nothing grotesquely unfair in many cases, especially when you consider that a state court jury may give a massive award that is never collected because of the bank run.

Bankruptcy for a company facing massive liability from a large number of claimants have been filing bankruptcy for decades, it's not new, it's part of the theory underlying bankruptcy.  So the focus of that article on "halting" lawsuits is kind of hysterical.  Bankruptcy imposes some order on the chaos of 40,000 lawsuits, and other debts.

But, there's an added thing here, and that is the formation of a subsidiary corporation to which all of the liability is assigned (I'm not sure what the "quirk in Texas law" is), but I think this kind of shit happens pretty frequently in a lot of jurisdictions. That way, only the subsidiary files bankruptcy and the parent is not "endangered" by it.  That seems a little extra gamey.

But, in the end, as part of the bankruptcy, J/J is going to have to put together a pretty massive fund to pay out to the claimants.  The question becomes would that be a better deal for the claimants than suing J/J out of existence.  And then there's the question whether the world is better off with or without a J/J, which employes 141,000 people worldwide.

I'm not defending Johnson and Johnson here.  I'm just providing some perspective that is lacking in the article.

@Chad Fuck is probably the authority round here on the intersection of mass torts and bankruptcy.  Although I think Thuj cut his teeth on asbestos lawsuits.  And, asbestos is kind of the ancient paradigm for bankruptcy and creating a fund to settle claims.  Johns-Manville filed bankruptcy in 1981 because of asbestos suits, and litigation continues to this very day.  https://mantrust.claimsres.com/

Edited April 3, 2022 by TwiceHorn

[TwiceHorn 31599]

Ok, figured out what the quirk in Texas law is.  It's called a "divisive merger," and that means that a corporation may be divided into two or more parts, and assets and liabilities of the parent may be apportioned among those parts without an "assignment" transaction.  The new entity is sort of a "quato."

An assignment transaction would be questionable as a "fraudulent transfer," because, ordinarily to take debt off your hands, you have to pay someone to do it, probably in an amount similar to the debt, maybe with a discount if the buyer thinks they can get away with not paying it dollar for dollar.  In the case of a divisive merger, the parent doesn't pay the new "quato" entity anything to take the debt, it just does it. If that was a traditional assignment, it could be undone as a fraudulent transfer.

I guess in theory the "divisive merger" isn't analyzed like an assignment or contract for sale of an asset or liability.  But there seems to be a movement afoot to apply the same type of fraudulent transfer analysis, so J&J would have to take the debt back and file its own bankruptcy.  Although that would subject J/J to the vagaries of being a debtor in bankruptcy, I'm not sure it changes the outcome a lot.

Edited April 3, 2022 by TwiceHorn

[ERhine 1909]

I'm not defending Johnson and Johnson here.  I'm just providing some perspective that is lacking in the article.

That’s exactly what you’re doing. You regularly comment on personal injury issues despite not actually practicing in the area. You’re providing excuses to support J&J being able to play games in order to sidestep liability and ultimately responsibility for their products. You’re providing excuses in favor of a bankruptcy framework which generally fucks over personal injury claimants who have been wronged. J&J didn’t do this to help or benefit those thousands of people who are bringing claims against the company. J&J did this to protect J&J.

[Dahobbs 17704]

1 hour ago, TwiceHorn said:

Before we get too outraged, consider:

• J/J has 38,000 lawsuits pending.
• If each one resulted in a $1M verdict, that's $38B dollars, not including any costs of trial; and that is a very modest figure, the verdicts could easily be several multiples of that
• J/J has total assets of $182B (using the $400B market value of J/J is bullshit), but only less than $60B is cash equivalent, and another $81B is "intangibles" and "goodwill," which means difficult or impossible to turn into cash, so maybe about $100B potentially available to creditors
• Each lawsuit was filed at a different time, in many different courts, and each one will reach a final judgment at a different time

So, you have total assets, even if you liquidate the whole company, that are unlikely or barely able to compensate all of the claimants.  And you have a massive first-come, first-served problem where you have a "bank run" on the assets of the company and a goodly number of people may be left holding the bag.

Bankruptcies "stay" lawsuits for exactly this reason.  Even if you think a company should be liquidated out of existence, there's a fairness problem for the injured claimants.  Many economic types would argue that a company shouldn't likely be liquidated.  This is nothing new and nothing grotesquely unfair in many cases, especially when you consider that a state court jury may give a massive award that is never collected because of the bank run.

Bankruptcy for a company facing massive liability from a large number of claimants have been filing bankruptcy for decades, it's not new, it's part of the theory underlying bankruptcy.  So the focus of that article on "halting" lawsuits is kind of hysterical.  Bankruptcy imposes some order on the chaos of 40,000 lawsuits, and other debts.

But, there's an added thing here, and that is the formation of a subsidiary corporation to which all of the liability is assigned (I'm not sure what the "quirk in Texas law" is), but I think this kind of shit happens pretty frequently in a lot of jurisdictions. That way, only the subsidiary files bankruptcy and the parent is not "endangered" by it.  That seems a little extra gamey.

But, in the end, as part of the bankruptcy, J/J is going to have to put together a pretty massive fund to pay out to the claimants.  The question becomes would that be a better deal for the claimants than suing J/J out of existence.  And then there's the question whether the world is better off with or without a J/J, which employes 141,000 people worldwide.

I'm not defending Johnson and Johnson here.  I'm just providing some perspective that is lacking in the article.

@Chad Fuck is probably the authority round here on the intersection of mass torts and bankruptcy.  Although I think Thuj cut his teeth on asbestos lawsuits.  And, asbestos is kind of the ancient paradigm for bankruptcy and creating a fund to settle claims.  Johns-Manville filed bankruptcy in 1981 because of asbestos suits, and litigation continues to this very day.  https://mantrust.claimsres.com/

This is all bullshit. Johnson and Johnson is taking advantage of a terrible Texas law to do an end around both civil liability and bankruptcy law. You're a good poster, but way the fuck out of limb on this one. J&J has plenty of money to pay its liabilities. It just would really prefer not to. 

[tx 3 putt 77595]

I’d be curious how this Texas came about. This is all a crock of shit

[pacman 7374]

https://www.creditslips.org/creditslips/2021/07/the-texas-two-step.html

https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.jw.com/wp-content/uploads/2016/09/574.pdf&ved=2ahUKEwiElprM2ff2AhX-g2oFHQe4AyAQFnoECCoQAQ&usg=AOvVaw15VBleyf8nUL_pI5o6tKZU

Answer: Lawyers

 

[TwiceHorn 31599]

6 hours ago, ERhine said:

 

That’s exactly what you’re doing. You regularly comment on personal injury issues despite not actually practicing in the area. You’re providing excuses to support J&J being able to play games in order to sidestep liability and ultimately responsibility for their products. You’re providing excuses in favor of a bankruptcy framework which generally fucks over personal injury claimants who have been wronged. J&J didn’t do this to help or benefit those thousands of people who are bringing claims against the company. J&J did this to protect J&J.

 

No, I am explaining the bankruptcy framework.   It's a constant topic of misinformation and bad reporting whether it's personal bankruptcy or business bankruptcy.

Whether it ought to be the way it is a different question.

Save your indignation for the courtroom.

[TwiceHorn 31599]

6 hours ago, Dahobbs said:

This is all bullshit. Johnson and Johnson is taking advantage of a terrible Texas law to do an end around both civil liability and bankruptcy law. You're a good poster, but way the fuck out of limb on this one. J&J has plenty of money to pay its liabilities. It just would really prefer not to. 

Nowhere did I say that I approve of what they're doing.  But this is how bankruptcy works and why it exists.  Whether you agree or disagree with the Bankruptcy Code, but that's a much larger question.

I think I probably do disagree that it can pay out on the current 38,000 lawsuits, plus the ones that will continue to come for the next 25-50 years or so and remain an ongoing business. 

Do you really think a corporation with a $400B market cap has $400B to pay out to plaintiffs?

I don't know that I approve or disapprove of J/J being an ongoing business.  They've fucked up quite a lot lately.

 

 

Edited April 3, 2022 by TwiceHorn

[TwiceHorn 31599]

4 hours ago, tx 3 putt said:

I’d be curious how this Texas came about. This is all a crock of shit

Don't know, wasn't even aware of it.  My first guess would be that this is an unintended consequence of the law.  It seems to have been enacted in 2006, and, unlike most corporate laws in Texas, wasn't following Delaware.  Delaware only has it for LLCs.

Also, without having dug into it, the Texas Fraudulent Transfer Act and the one built into the Bankruptcy Code are both super-broad in terms of the kinds of transfers of assets and liabilities that they cover.  I'm pretty surprised that this tactic avoids their provisions.

A simpler explanation of a fraudulent transfer is when you give your brother in law your Raptor and then file bankruptcy so you can get it back later.  That's a no-go. The law will consider the Raptor to still be yours and it can be sold to pay off a creditor.

This is a different spin on it, to be sure.

Edited April 3, 2022 by TwiceHorn

[Not a cat 5724]

12 minutes ago, TwiceHorn said:

 

Save your indignation for the courtroom.

Now imagine Johnson &Johnson is white.

[Blotto 23585]

2 minutes ago, TwiceHorn said:

Don't know, wasn't even aware of it.  My first guess would be that this is an unintended consequence of the law.

Also, without having dug into it, the Texas Fraudulent Transfer Act and the one built into the Bankruptcy Code are both super-broad in terms of the kinds of transfers of assets and liabilities that they cover.  I'm pretty surprised that this tactic avoids their provisions.

I dont know anything about the law, but my first guess is that this particular consequence is anything but unintended.

[TwiceHorn 31599]

So, here's a question.

Without the "Texas Two-Step," J/J would be entitled to file a Chapter 11 bankruptcy, or even a Chapter 7.  Both would halt all lawsuits.  In a Chapter 7, J/J would be liquidated in an orderly fashion and the proceeds distributed to the plaintiffs in the lawsuits and the other creditors.

In a Chapter 11, J/J would have to make some kind of provision for a trust fund or pool of money to pay out to these claimaints.

Does the formation of the quato entity actually reduce that amount?  It looks like this Texas two-step has only been done a few times, so I guess we don't really know.

[TwiceHorn 31599]

7 minutes ago, Blotto said:

I dont know anything about the law, but my first guess is that this particular consequence is anything but unintended.

I don't know either.  But it's just a corporate law about mergers/divestitures and tries to provide maximum flexibility for a Texas corporation.  I guess like most corporate laws, it's intended to encourage more people to incorporate in Texas with the things that brings.

[Captainant 27860]

Man, I wish I could incorporate myself so I could play fuck fuck games with my creditors and people I've wronged by absuing the law

[TwiceHorn 31599]

2 minutes ago, Captainant said:

Man, I wish I could incorporate myself so I could play fuck fuck games with my creditors and people I've wronged by absuing the law

Are you aware that pretty much every time someone incorporates, that is exactly what they're doing?

The first thing everyone thinks about when incorporating is limiting liability.

[ERhine 1909]

No, I am explaining the bankruptcy framework.   It's a constant topic of misinformation and bad reporting whether it's personal bankruptcy or business bankruptcy.
Whether it ought to be the way it is a different question.
Save your indignation for the courtroom.

Go reread your initial post. You literally claimed in support of this process that there is a fairness problem for injured claimants in justification of it. Setting aside that incorrect assertion, it’s pretty clear you’ve already decided the “ought to be” issue and are merely pretending otherwise.

[TwiceHorn 31599]

33 minutes ago, ERhine said:

Go reread your initial post. You literally claimed in support of this process that there is a fairness problem for injured claimants in justification of it. Setting aside that incorrect assertion, it’s pretty clear you’ve already decided the “ought to be” issue and are merely pretending otherwise.

That's the theory of bankruptcy.

Feel free to explain why there's not a problem for late-coming plaintiffs.  Or for any plaintiff that hasn't executed its judgment if and when J/J runs out of money.  Maybe they won't run out of money?

I have only represented individuals in bankruptcy, mostly liquidations, but even on that tiny scale, the multiplicity of creditors and the orderly disposition of assets is a real problem that the Bankruptcy Code deals with.  The equities are reversed there in terms of little guy debtor and big corp creditor, and the creditors take a bath.

You can certainly argue that the Bankruptcy Code is fucked up, particularly in the way that it protects big business at the expense of individuals and small businesses.  I'd totally buy that. BAPCPA on line 1.

Speaking of BAPCPA, maybe J/J ought to be forced to operate its business for the benefit of talc creditors for a certain period of time in a process like Chapter 13.  I would probably buy that, too.

Maybe you want to contend that the MDL solves a lot of these problems, I'd buy that, too.

I don't really have a dog in this hunt.  I get that plaintiffs get fucked over by bankruptcy, totally. But bankruptcy is there for the taking, for you, for me, for Johnson & Johnson.

Edited April 3, 2022 by TwiceHorn

[Surly Bevo 25222]

Dick drawer slept they company

[GhostOfTomJoad 9369]

Dupont and 3M are watching this very closely, no doubt.

[Rudiger 1169]

48 minutes ago, TwiceHorn said:

So, here's a question.

Without the "Texas Two-Step," J/J would be entitled to file a Chapter 11 bankruptcy, or even a Chapter 7.  Both would halt all lawsuits.  In a Chapter 7, J/J would be liquidated in an orderly fashion and the proceeds distributed to the plaintiffs in the lawsuits and the other creditors.

In a Chapter 11, J/J would have to make some kind of provision for a trust fund or pool of money to pay out to these claimaints.

Does the formation of the quato entity actually reduce that amount?  It looks like this Texas two-step has only been done a few times, so I guess we don't really know.

Here's the deal. If J&J filed a Chapter 11, the talc claimants could reject any plan that gave them less than they would get if the company were liquidated under Chapter 7 (since you've represented individuals in bankruptcy, I'm sure you're familiar with the requires for a cramdown). If the market value of J&J is $400B, or even half that, or even one-tenth of that, the market value number has already accounted for secured debt that would have priority over the talc claimants in a bankruptcy. Currently, unsecured claims against J&J are probably negligible compared with the talc claimants' claims, so ultimately a J&J Chapter 11 plan could be voted down if enough of the talc claimants didn't like the amount they were allocated.

The divisive merger process takes this off the table and allows J&J to dictate the terms of the settlement. J&J gave LTL an amount of money and all the talc-related liabilities, and theoretically, that's all that will ever be available to pay the talc claimants. And talc claimants can have the plan crammed down over their objection (voting to reject the plan would have no effect), because they will receive at least as much as they would receive if LTL were liquidated under Chapter 7. 

So the bottom line is the Texas Two-Step allows companies to settle cases by fiat. J&J has literally said "we're settling all these cases for this much. The end." Imagine a divorce proceeding where the other side said "I don't trust a jury to be fair, so I'm giving you this much, and you get to see the kids twice a year--once on this day and once on this day.--and there's nothing you can do about it." 

[TwiceHorn 31599]

20 minutes ago, Rudiger said:

Here's the deal. If J&J filed a Chapter 11, the talc claimants could reject any plan that gave them less than they would get if the company were liquidated under Chapter 7 (since you've represented individuals in bankruptcy, I'm sure you're familiar with the requires for a cramdown). If the market value of J&J is $400B, or even half that, or even one-tenth of that, the market value number has already accounted for secured debt that would have priority over the talc claimants in a bankruptcy. Currently, unsecured claims against J&J are probably negligible compared with the talc claimants' claims, so ultimately a J&J Chapter 11 plan could be voted down if enough of the talc claimants didn't like the amount they were allocated.

The divisive merger process takes this off the table and allows J&J to dictate the terms of the settlement. J&J gave LTL an amount of money and all the talc-related liabilities, and theoretically, that's all that will ever be available to pay the talc claimants. And talc claimants can have the plan crammed down over their objection (voting to reject the plan would have no effect), because they will receive at least as much as they would receive if LTL were liquidated under Chapter 7. 

So the bottom line is the Texas Two-Step allows companies to settle cases by fiat. J&J has literally said "we're settling all these cases for this much. The end." Imagine a divorce proceeding where the other side said "I don't trust a jury to be fair, so I'm giving you this much, and you get to see the kids twice a year--once on this day and once on this day.--and there's nothing you can do about it." 

Gotcha.  Great post, thanks.

LTL is the "quato" company, what does that stand for?

I was commenting on bankruptcy more generally than the divisive merger deal.  Is it at all settled that that is not a fraudulent transfer?  Or that the assets of the parent are completely out of consideration by some other device.

Also, in the real world, where does a liquidation value tend to come out relative to book value of a publicly traded corporation, using the public numbers?

There's two levels of fuckery, here.  First is bankruptcy, which is going to limit the pool of recovery to the current liquidation value of J/J.  Like it or dislike it, that's the law.

The second, the layering of the divisive merger to further limit the pool of recovery is a much bigger fuckjob.  If it works.  

 

Edited April 3, 2022 by TwiceHorn

[Wulaw Horn 19153]

What did J and J do wrong to get sued by however many people twice is worried about bankrupting them?

a lot of products?

one particular product?

[TwiceHorn 31599]

8 minutes ago, Wulaw Horn said:

What did J and J do wrong to get sued by however many people twice is worried about bankrupting them?

a lot of products?

one particular product?

Their baby powder contains asbestos, or is otherwise linked to cancer.

I'm not really worried about it.  I'm just trying to do a lawsplainer.  Whatever it is, it's not RICO, dammit. 

Edited April 3, 2022 by TwiceHorn

[Wulaw Horn 19153]

8 minutes ago, TwiceHorn said:

Their baby powder contains asbestos, or is otherwise linked to cancer.

I'm not really worried about it.  I'm just trying to do a lawsplainer.  Whatever it is, it's not RICO, dammit. 

Yikes. 
Was not a shot. 
Thanks. 

[Rudiger 1169]

26 minutes ago, TwiceHorn said:

Gotcha.  Great post, thanks.

LTL is the "quato" company, what does that stand for?

I was commenting on bankruptcy more generally than the divisive merger deal.  Is it at all settled that that is not a fraudulent transfer?  Or that the assets of the parent are completely out of consideration by some other device.

Also, in the real world, where does a liquidation value tend to come out relative to book value of a publicly traded corporation, using the public numbers?

Not familiar with the “quato” term—I’m used to good-co/bad-co or old-co/new-co. 

The starting point of the fraudulent transfer question is the Texas Business Organizations Code, which expressly states that a merger doesn’t result in a transfer or assignment having occurred. Conceivably, that pervades the analysis under the Texas Uniform Fraudulent Transfer Act and the provisions of the Bankruptcy Code that relate to fraudulent transfer. But because of the Supremacy Clause, maybe not.

Ultimately, it’s complicated, and a question that won’t be addressed for years and years if ever (there’s an interesting side note about why creditors don’t get to raise that issue during the bankruptcy proceeding, and why LTL “merged” in Texas then reincorporated immediately in North Carolina). By the time that legal question gets reached, many of the claimants will have died from cancer, so it puts pressure on claimants to reach a resolution within the LTL bankruptcy, even if it’s a shitty one. 

[TwiceHorn 31599]

10 minutes ago, Rudiger said:

Not familiar with the “quato” term—I’m used to good-co/bad-co or old-co/new-co. 

The starting point of the fraudulent transfer question is the Texas Business Organizations Code, which expressly states that a merger doesn’t result in a transfer or assignment having occurred. Conceivably, that pervades the analysis under the Texas Uniform Fraudulent Transfer Act and the provisions of the Bankruptcy Code that relate to fraudulent transfer. But because of the Supremacy Clause, maybe not.

Ultimately, it’s complicated, and a question that won’t be addressed for years and years if ever (there’s an interesting side note about why creditors don’t get to raise that issue during the bankruptcy proceeding, and why LTL “merged” in Texas then reincorporated immediately in North Carolina). By the time that legal question gets reached, many of the claimants will have died from cancer, so it puts pressure on claimants to reach a resolution within the LTL bankruptcy, even if it’s a shitty one. 

Haha, sorry.

Quato, or Cuato.

IIRC, thujone made frequent reference to the Quato, and because this is thujone-adjacent, used it to inject some levity.

[TwiceHorn 31599]

14 minutes ago, Rudiger said:

Not familiar with the “quato” term—I’m used to good-co/bad-co or old-co/new-co. 

The starting point of the fraudulent transfer question is the Texas Business Organizations Code, which expressly states that a merger doesn’t result in a transfer or assignment having occurred. Conceivably, that pervades the analysis under the Texas Uniform Fraudulent Transfer Act and the provisions of the Bankruptcy Code that relate to fraudulent transfer. But because of the Supremacy Clause, maybe not.

Ultimately, it’s complicated, and a question that won’t be addressed for years and years if ever (there’s an interesting side note about why creditors don’t get to raise that issue during the bankruptcy proceeding, and why LTL “merged” in Texas then reincorporated immediately in North Carolina). By the time that legal question gets reached, many of the claimants will have died from cancer, so it puts pressure on claimants to reach a resolution within the LTL bankruptcy, even if it’s a shitty one. 

Follow up.  I assume that it is clear that had J/J formed a conventional subsidiary and conventionally assigned the liability to it, maybe along with some money, that would be a fraudulent transfer and ignored?

[Dahobbs 17704]

2 hours ago, TwiceHorn said:

Nowhere did I say that I approve of what they're doing.  But this is how bankruptcy works and why it exists.  Whether you agree or disagree with the Bankruptcy Code, but that's a much larger question.

I think I probably do disagree that it can pay out on the current 38,000 lawsuits, plus the ones that will continue to come for the next 25-50 years or so and remain an ongoing business. 

Do you really think a corporation with a $400B market cap has $400B to pay out to plaintiffs?

I don't know that I approve or disapprove of J/J being an ongoing business.  They've fucked up quite a lot lately.

 

 

Let's be clear, this isn't bankruptcy. Bankruptcy law actually expressly doesn't allow what J&J is doing. This is a bad Texas law that allows an run around the usual bankruptcy protections for creditors. This is an abuse of the system, and a pretty fucking clear one of you actually take the time to look at what is happening. And, the money J&J pays out in lawsuits is a drop in the bucket for it's revenue. Those 38,000 lawsuits aren't a million each, so your premise on total liabilities is false. Under normal bankruptcy procedures, creditors would have protection from a debtor with significant assets trying to hide behind bankruptcy. J&J can not demonstrate that its liabilities exceed its assets. So, instead it'll create a separate company that has all the liabilities and just a small portion of the assets. That's fucked up and I can't believe you're defending this as just "bankruptcy". It fucking isn't. 

[Rudiger 1169]

5 minutes ago, TwiceHorn said:

Follow up.  I assume that it is clear that had J/J formed a conventional subsidiary and conventionally assigned the liability to it, maybe along with some money, that would be a fraudulent transfer and ignored?

Almost certainly. It would be a fraudulent transfer because it was undertaken with the purpose of delaying, hindering, or defrauding a creditor, and probably because the assignor did not receive reasonably equivalent value in return. 

[TwiceHorn 31599]

23 minutes ago, Dahobbs said:

Let's be clear, this isn't bankruptcy. Bankruptcy law actually expressly doesn't allow what J&J is doing. This is a bad Texas law that allows an run around the usual bankruptcy protections for creditors. This is an abuse of the system, and a pretty fucking clear one of you actually take the time to look at what is happening. And, the money J&J pays out in lawsuits is a drop in the bucket for it's revenue. Those 38,000 lawsuits aren't a million each, so your premise on total liabilities is false. Under normal bankruptcy procedures, creditors would have protection from a debtor with significant assets trying to hide behind bankruptcy. J&J can not demonstrate that its liabilities exceed its assets. So, instead it'll create a separate company that has all the liabilities and just a small portion of the assets. That's fucked up and I can't believe you're defending this as just "bankruptcy". It fucking isn't. 

I don't disagree.  I was essentially commenting on the operation of the Bankruptcy Code in a situation like this, using rough but semi-realistic numbers.

I freely admitted that I didn't know what the "quirk" was, in the form of the divisive merger, so at least implicitly, I couldn't have included that within my analysis.

People that don't understand the bankruptcy laws jump to all kinds of erroneous conclusions about its operation.  This particular situation does seem to be a fuck, but it also seems to be up in the air whether the fuck will work or not.

It is a bit of an oddity that debtors, of any size, get to escape their obligations.  But there are reasons we have bankruptcy, whether you like them in a particular situation, or not.

ETA: Also, the thrust of OPs article was that the plaintiff there had her lawsuit stayed.  That sucks, but it's totally conventional bankruptcy.  As is deprivation of a jury trial and reduction of a plaintiff's potential recovery, even if it isn't to the extent attempted by the "Texas Two-Step."

 

Edited April 3, 2022 by TwiceHorn

[Dahobbs 17704]

6 minutes ago, TwiceHorn said:

Follow up.  I assume that it is clear that had J/J formed a conventional subsidiary and conventionally assigned the liability to it, maybe along with some money, that would be a fraudulent transfer and ignored?

Correct, at least for any post debt transfers. It could have of course created a talc subsidiary from the very beginning when it first starting selling talc. But that didn't happen. J&J would not qualify for bankruptcy as is. So it had to use this funky Texas law to create an entity that would qualify. I think there are some good arguments that what J&J is trying to do isn't actually allowed under the law. But no one really knows how it is going to play out because nothing like this has been done before. However we do know that it'll ultimately result in J&J paying out a lot less than it normally would for this litigation, and hurt individuals getting a lot less. 

[Dahobbs 17704]

1 minute ago, TwiceHorn said:

I don't disagree.  I was essentially commenting on the operation of the Bankruptcy Code in a situation like this, using rough but semi-realistic numbers.

I freely admitted that I didn't know what the "quirk" was, in the form of the divisive merger, so at least implicitly, I couldn't have included that within my analysis.

People that don't understand the bankruptcy laws jump to all kinds of erroneous conclusions about its operation.  

It is a bit of an oddity that debtors, of any size, get to escape their obligations.  But there are reasons we have bankruptcy, whether you like them in a particular situation, or not.

 

I think our bankruptcy system is overall good. I'm a bit of a bankruptcy nerd actually. But it needs to be clear that what J&J is trying to do is exploit a potential loop hole created by Texas law. This is a Texas thing, not a bankruptcy thing. 

[TwiceHorn 31599]

1 minute ago, Dahobbs said:

J&J would not qualify for bankruptcy as is.

Wait a minute.  Is this correct?  Insolvency is not required to file bankruptcy.

I can see that it might be dismissed, but that's a complicated question.

[TwiceHorn 31599]

1 minute ago, Dahobbs said:

I think our bankruptcy system is overall good. I'm a bit of a bankruptcy nerd actually. But it needs to be clear that what J&J is trying to do is exploit a potential loop hole created by Texas law. This is a Texas thing, not a bankruptcy thing. 

Do you know anything about the history of the divisive merger?  Was it intended this way?

I was rather shocked to learn that it is pretty Texas-unique, as it seems the Bus, Org. Code historically trails Delaware but tends to mimic it.

Funny thing.  I went to work for a small, GP firm with a business orientation for a while.  As I had come from an IP shop, I was the ostensible "federal practice" guru, so I got stuck with doing the occasional bankruptcy and wound up doing several dozen of them, mostly 7s, a couple of 13s, no 11s..  That's weird enough.  But, I made the top grade in my Secured Credit class at UT, despite having no interest in debtor-creditor law.  I found it fascinating, though. So, I am a bit of a nerd about it myself, but have been completely out of the game, at any level, for a long time.

[Dahobbs 17704]

8 minutes ago, TwiceHorn said:

Wait a minute.  Is this correct?  Insolvency is not required to file bankruptcy.

I can see that it might be dismissed, but that's a complicated question.

I suppose I should say it wouldn't receive any real benefit by filing under chapter 11 because its assets well exceed any liabilities. It can do it, but there would be a lot of downsides and no upside. 

[Armybrat 40940]

2 hours ago, Not a cat said:

Now imagine Johnson &Johnson is white.

[TwiceHorn 31599]

10 minutes ago, Dahobbs said:

I suppose I should say it wouldn't receive any real benefit by filing under chapter 11 because its assets well exceed any liabilities. It can do it, but there would be a lot of downsides and no upside. 

Yeah, I assumed that it was simply to avoid the "hassle" of being a Chapter 11 debtor, as well as I suppose the potential for liquidation, beyond the ability to arbitrarily limit recovery of the plaintiffs.  And, the whole time, I was assuming that the liability limitation was something on the order of the liquidation value of the company, not fully understanding the divisive merger deal.

Edited April 3, 2022 by TwiceHorn

[Dahobbs 17704]

3 minutes ago, TwiceHorn said:

Yeah, I assumed that it was simply to avoid the "hassle" of being a Chapter 11 debtor, as well as I suppose the potential for liquidation, beyond the ability to arbitrarily limit recovery of the plaintiffs.

Yeah, that's why this becomes worth it for J&J. By creating this separate entity under Texas law, it can not only limit how much it pays for its legal liabilities, but it can also avoid the company wide disruption that would be caused by a full blown reorganization of the entire company  

[TwiceHorn 31599]

2 hours ago, TwiceHorn said:

I don't know either.  But it's just a corporate law about mergers/divestitures and tries to provide maximum flexibility for a Texas corporation.  I guess like most corporate laws, it's intended to encourage more people to incorporate in Texas with the things that brings.

One reason I am not initially cyincal about this divisive merger law is that, despite Texas' recent politics, and shit like SB 8, Texas' "workaday" statutes are by and large pretty, pretty good.  Meaning, its Family Code, Penal Code. etc. etc.  

This becomes apparent to a lawdog when examining other states' statutes, as in their criminal or other statutes.  Some of them are a real bloody mess by comparison.

[Ag with kids 581]

4 hours ago, TwiceHorn said:

Are you aware that pretty much every time someone incorporates, that is exactly what they're doing?

The first thing everyone thinks about when incorporating is limiting liability.

It's right there.  In the name...

[Ag with kids 581]

5 hours ago, TwiceHorn said:

So, here's a question.

Without the "Texas Two-Step," J/J would be entitled to file a Chapter 11 bankruptcy, or even a Chapter 7.  Both would halt all lawsuits.  In a Chapter 7, J/J would be liquidated in an orderly fashion and the proceeds distributed to the plaintiffs in the lawsuits and the other creditors.

In a Chapter 11, J/J would have to make some kind of provision for a trust fund or pool of money to pay out to these claimaints.

Does the formation of the quato entity actually reduce that amount?  It looks like this Texas two-step has only been done a few times, so I guess we don't really know.

I understand the concept of liquidating companies...But, I've always thought it ended up punishing a lot of people that don't deserve it - all those employees that lose their jobs/pensions/etc during the liquidation.  The VAST majority did nothing wrong.  They just went to work every day to earn a living and hopefully be able to retire.  Liquidating the company eliminates that for a large amount of them.

[TwiceHorn 31599]

5 minutes ago, Ag with kids said:

I understand the concept of liquidating companies...But, I've always thought it ended up punishing a lot of people that don't deserve it - all those employees that lose their jobs/pensions/etc during the liquidation.  The VAST majority did nothing wrong.  They just went to work every day to earn a living and hopefully be able to retire.  Liquidating the company eliminates that for a large amount of them.

That is one of the justifications for having a Bankruptcy Code.  

In a case like Purdue Pharma, the value of its continued existence is highly debatable.

In the case of the Boy Scouts, far less so, although while they are employing bankruptcy to "avoid" some liability, I don't think they went so far as to do this Texas two-step thing that is an extra horsefucking for plaintiffs.

And, of course, overarching all of this is the age-old debate over "just because you can do it doesn't mean you should."  Of course, the dominant corporate sentiment today is "Do unto others, then split."

 

Edited April 3, 2022 by TwiceHorn

[Captainant 27860]

4 hours ago, TwiceHorn said:

Are you aware that pretty much every time someone incorporates, that is exactly what they're doing?

The first thing everyone thinks about when incorporating is limiting liability.

I more meant gaining the privilege of changing your debts after incurring them without the consent of your creditors, not just merely the "LL" part of LLC. Seems ripe for abuse by cynical business interests that don't want to pay for their own fuckups and real damages (read: cancer) against actual physical people. 

Just now, Ag with kids said:

I understand the concept of liquidating companies...But, I've always thought it ended up punishing a lot of people that don't deserve it - all those employees that lose their jobs/pensions/etc during the liquidation.  The VAST majority did nothing wrong.  They just went to work every day to earn a living and hopefully be able to retire.  Liquidating the company eliminates that for a large amount of them.

I thought you were into free market forces, no? It sounds like you're advocating to save any business and pay for their failures, so long as they're holding a gun to enough people's livelihood.

Liquidation and failure is the table stakes for our capitalistic system, can't have it both ways. Unless you're too big fail I guess.

[TwiceHorn 31599]

1 minute ago, Captainant said:

I more meant gaining the privilege of changing your debts after incurring them without the consent of your creditors, not just merely the "LL" part of LLC. Seems ripe for abuse by cynical business interests that don't want to pay for their own fuckups and real damages (read: cancer) against actual physical people. 

I thought you were into free market forces, no? It sounds like you're advocating to save any business and pay for their failures, so long as they're holding a gun to enough people's livelihood.

Liquidation and failure is the table stakes for our capitalistic system, can't have it both ways. Unless you're too big fail I guess.

I was just giving you shit.

This two-step thing is beyond the pale, clearly.

But even plain ol' completely legal bankruptcy means a certain amount of horsefucking for plaintiffs in mass torts.

[Ag with kids 581]

3 minutes ago, Captainant said:

I more meant gaining the privilege of changing your debts after incurring them without the consent of your creditors, not just merely the "LL" part of LLC. Seems ripe for abuse by cynical business interests that don't want to pay for their own fuckups and real damages (read: cancer) against actual physical people. 

I thought you were into free market forces, no? It sounds like you're advocating to save any business and pay for their failures, so long as they're holding a gun to enough people's livelihood.

Liquidation and failure is the table stakes for our capitalistic system, can't have it both ways. Unless you're too big fail I guess.

I NEVER said anything like that.

A corporation that does bad things SHOULD face punishment and the people in the corporation that were deliberately party to those bad things should ALSO face punishment.

But, should Bob the janitor, Alice the Office Admin, Elizabeth the IT tech, Juan the midlevel Engineer, etc lose their jobs and retirement funds/pensions because of it?

[TwiceHorn 31599]

49 minutes ago, TwiceHorn said:

And, of course, overarching all of this is the age-old debate over "just because you can do it doesn't mean you should."  Of course, the dominant corporate sentiment today is "Do unto others, then split."

 

Sidenote on this.  My uncle was an ultimately successful "wildcatter" (he lost his ass multiple times) and had a drilling company and production company when he died prematurely in the late 70s.

My cousin was excluded from operation of the drilling operation by my uncle's will, at least until he got older.  He sued or threatened to, and acquired control of the drilling company and went kind of nuts acquiring several rigs and leases in the early 80s.  When things went to shit, he was deeply in debt and deeply in shit.

He refused to file bankruptcy and spent years "working out" the situation.  I always admired that.  He's a good dude.  He's also still rich as fuck.  I guess mostly from the revenue from the production company, I don't really know.  Maybe he would have lost that if he had filed BK, not sure.

[TwiceHorn 31599]

17 minutes ago, longhornmatt said:

I expect there will ultimately be case law that says you can’t use the Texas Two-Step to get around fraudulent transfer law.  

The argument people doing the Two Step try to make is that since it’s a merger there is no deemed transfer. They’re trying to stretch the actual reason for that provision in the TBOC - a concept that says you don’t have to get consents from every contract counterparty or transfer physical titles on every asset in order to merge (which would be a giant pain in the ass and give everyone you have contracts with an ability to hold up a merger) - into somehow meaning fraudulent transfer rules don’t apply.  That is ridiculous.  There’s a reason this hadn’t been tried often or until recently even though the divisive merger statute goes back to 2006.  They also are all apparently forum shopping in their bankruptcy cases for some court in North Carolina that I guess won’t call their bluff for whatever reason.

If you accept the Texas Two Step as valid, every entity would essentially be judgment proof and there would be chaos.  Eventually, it wouldn’t just screw the little guy, so I don’t even think there will be much appetite among big business or big finance to let this shit fly.

Also, the merger statute itself even has some perfunctory catch-all language that says it does not “abridge any right or rights of any creditor under existing laws.”  So, I really do think it was an unintended consequence.  Whoever first decided they should try to argue fraudulent transfer laws don’t apply under state law or the bankruptcy code because of this statute had some real chutzpah.

But, in the meantime until it’s fixed by case law or statute, it’s still a way to string out the process long enough that people will take lower settlements (or die if they’re terminally ill).  It’s shitty, it’s going to screw a lot of people who don’t have time to wait, but I wouldn’t bank on it being here to stay.

I’m curious about what the deal is with everyone trying this deciding to file bankruptcy in North Carolina.  Is there some bankruptcy judge there that doesn’t believe in torts or something?

 

Yeah, until I dug into it, I didn't realize it was an extra limitation of liability beyond what the Code provides.  I thought it was just a mechanism to avoid the Chapter 11 of the main company and the attendant "hassles" and stigma.

I was also shocked that such a thing avoids the fraudulent transfer provisions of state and bankruptcy law or some other mechanism that would charge the "quato" corporation with the assets of the parent.

It's some diabolical bullshit.  I wonder what devilish sumbitch came up with it.  It is probably not a coincidence that the originators of the whole thing are a Koch company.

Edited April 3, 2022 by TwiceHorn

[DefinitelyNotHollywoodColt 12301]

14 hours ago, TwiceHorn said:

Before we get too outraged...

 

20 minutes ago, TwiceHorn said:

It's some diabolical bullshit.  I wonder what devilish sumbitch came up with it.

well that was quite the 360