‘Texas Two-Step’ Bankruptcy Tactic Targeted Again by Lawmakers

A bipartisan group of lawmakers reintroduced legislation aimed at curbing the legal tactic known as the Texas Two-Step, a bankruptcy strategy used by some companies facing mass tort claims.

The legislation would instruct courts to find such bankruptcy filings were made in bad faith, making it easier for judges to dismiss them. It would also limit legal protections for affiliated entities, allowing lawsuits against non-bankrupt units to proceed.

The bills, S.4346 and H.R.8393, were reintroduced by Sens. Sheldon Whitehouse (D-R.I.), Josh Hawley (R-Mo.), and Dick Durbin (D-Ill.), as well as Reps. Emilia Sykes (D-Ohio) and Lance Gooden (R-Texas). Lawmakers tried to deter the Two-Step practice with a similar bill in 2024.

The Texas Two-Step is a maneuver that has been used by large companies looking to consolidate and halt mass injury lawsuits while continuing business as usual. US bankruptcy law provides an automatic stay, which prohibits most creditor actions against a company in bankruptcy.

The maneuver allows corporations to put their assets out of reach by creating affiliates. The company places assets in one entity and mass tort liabilities in another, then puts the liability-heavy entity in Chapter 11. Companies like Georgia-Pacific’s Bestwall LLC and Johnson & Johnson have tried this legal maneuver as a means of settling lawsuits alleging harm from asbestos contamination and talc-based products.

The bill has backing from consumer advocacy groups and follows a recent US Supreme Court filing by the lawmakers supporting asbestos claimants in litigation tied to the strategy.

The senators—Durbin, Whitehouse and Hawley—asked the US Supreme Court to review Bestwall’s bankruptcy, saying the manufacturer was financially healthy and was using the Texas Two-Step maneuver.