LTL Management & the Texas Two-Step: Mass Tort Bankruptcy Under Scrutiny

LTL Management & the Texas Two-Step: Mass Tort Bankruptcy Under Scrutiny

Case: In re LTL Management, LLC
Filed: October 2021 (initial), Refiled April 2023 (District of New Jersey)
Key Issue: Validity of the Texas Two-Step strategy for mass tort liability containment

Background

Johnson & Johnson (J&J), facing over 40,000 lawsuits related to alleged harm caused by its talc-based baby powder, executed a corporate maneuver known as the "Texas Two-Step." The “Texas Two-Step” is a controversial bankruptcy maneuver that allows a company to split itself into two entities—one that retains the valuable assets and another that absorbs the legal liabilities—and then puts the liability-holding entity into bankruptcy.

The tactic here involved creating a new entity—LTL Management—to assume J&J’s talc liabilities, while the original operating entity retained all operating assets. Immediately after the spin-off, LTL filed for Chapter 11 protection.

This strategy drew immediate legal challenges. Plaintiffs and state attorneys general decried the move as a bad-faith abuse of the bankruptcy system. After a dismissal in early 2023 by the Third Circuit, LTL refiled in April 2023 with the support of a proposed $8.9 billion settlement, covering roughly 70,000 claimants.

The Courts Weigh In

The strategy has triggered ongoing litigation and intense scrutiny. In its January 2023 decision, the Third Circuit Court of Appeals dismissed LTL’s first bankruptcy, ruling that the entity was not in genuine financial distress:

"Good intentions—such as to protect the J&J brand or comprehensively resolve litigation—do not justify a bankruptcy if there is no immediate financial crisis."

The court emphasized that LTL had access to a $61.5 billion funding agreement from J&J and thus was not eligible for Chapter 11 protection under the Bankruptcy Code.

LTL’s second filing, backed by a broader settlement and more comprehensive claimant support, remains active as of early 2025. The court’s ultimate decision on whether the case will proceed will set a precedent for how companies can—or cannot—use bankruptcy to manage large-scale tort liabilities.

Broader Implications

1. Limitations on the Texas Two-Step
The Third Circuit ruling sharply curtailed the ability of solvent parent companies to use divisive mergers and subsidiary bankruptcies to shield themselves from liability.

2. Increased Focus on Good Faith Filing Standards
Courts are showing less tolerance for strategic filings unaccompanied by genuine financial distress. This raises the bar for corporations seeking bankruptcy protection for liability management.

3. Settlement Leverage Shifts
With increased judicial scrutiny, companies may find their leverage diminished in negotiating mass tort resolutions through bankruptcy alone.

Key Figures

• $8.9 billion – Proposed global settlement for talc claimants in LTL’s second bankruptcy

• 40,000+ – Number of personal injury suits originally filed against J&J

• $61.5 billion – Funding support available to LTL from J&J (as noted by the Third Circuit)

Strategic Insight from White Knight Restructuring

The evolving LTL saga illustrates the limits of bankruptcy as a tool for corporate risk isolation. For companies facing systemic liability exposure, timing, financial posture, and structure matter.

White Knight Restructuring advises clients on:

• When and how liability segregation strategies may face legal resistance

• Structuring settlements that can survive judicial scrutiny

• Navigating Chapter 11 in high-stakes, high-visibility litigation environments

We also support creditor groups evaluating the fairness and feasibility of proposed mass tort plans—ensuring victims' interests remain at the forefront.

The Texas Two-Step may still have legs—but only if the courts believe the dance is done in good faith.