‘Texas Two-Step’ Under Fire as Whitehouse Seeks Bankruptcy Change

Sen. Sheldon Whitehouse (D-R.I.) plans to pursue bankruptcy law changes to rein in a corporate bankruptcy strategy used by Johnson & Johnson that he called an abuse of Chapter 11.

Whitehouse, who chairs the Senate Judiciary Subcommittee on Federal Courts, Oversight, Agency Action, and Federal Rights, slammed the technique known as the “Texas two-step” during a hearing Tuesday, calling it a “blot” on the legal system.

The legal strategy, based on Texas law, allows corporations to split off a subsidiary in a “reverse merger,” transfer mass tort or other liabilities to that subsidiary, and then place the unit into bankruptcy. ...