Companies Use Division And Merger To Avoid Debts In Bankruptcy
In bankruptcy, there are few new or novel legal questions. However, drug manufacturer Johnson & Johnson is using a new bankruptcy tactic to try to restructure its company.
Lawsuits Hit Johnson and Johnson
Johnson and Johnson is an enormous, multi-billion dollar healthcare company. However, a series of personal injury lawsuits and verdicts entered against it, has the company testing a new maneuver that hasn’t yet been ruled on by the courts.
The cases started when a number of plaintiffs sued the company for damages related to using the company’s talcum powder. Many won large verdicts.
It would make no sense to file for Chapter 11 bankruptcy to avoid these verdicts, and there is even a chance that their Chapter 11 bankruptcy would be denied. The verdicts, though large, don’t come close to threatening the existence of a company like Johnson & Johnson.
Divide and Transfer
So the company is trying a new bankruptcy strategy: it is using what has been called a “Texas Two-Step.” The company is creating a subsidiary—a second company, related to, but different than, the main Johnson & Johnson company. It then assigns the liabilities for the verdicts to the new subsidiary, and puts the subsidiary into bankruptcy. The assets remain in the main Johnson and Johnson company.
This has the effect of discharging or at least lowering the amount that has to be paid on the verdicts, without all of Johnson & Johnson having to go into bankruptcy and restructure all of their debts.
Once the bankruptcy cases are filed, the automatic stay goes into effect, so there is the added benefit of stalling any pending lawsuits against it where a verdict has not yet been entered.
Nobody actually knows if this strategy will work or if it is even legal. In many states, splitting into two companies, and putting assets and liabilities separately to avoid having to lose assets to pay on those liabilities, would be fraudulent, and not allowed. But the strategy is only legal in Texas and Delaware.
Large Companies Using Chapter 11 More and More
But the case illustrates how many large companies are using bankruptcy to get rid of or lower personal injury awards against them—or at the very least, to pressure consumers to settle with companies for less than what is owed to them under existing verdicts, as, if the bankruptcy is successful, most verdicts would be wiped out or paid just on pennies on the dollar.
Some companies are seeking out federal districts that may be favorable to companies, to file their bankruptcy cases, in attempts to discharge or restructure personal injury verdicts.
Fearing bad public relations, many companies deny that they are using bankruptcy to avoid paying personal injury verdicts. Still, if the strategy Johnson & Johnson is using is found to be legal, it could catch on, creating a loophole for companies looking to avoid paying verdicts to consumers.